How to Invest in Emerging Markets

In the ever-changing global economy, emerging markets attract investors with the allure of potentially high returns. These vibrant economies, often overshadowed by their developed counterparts, are the hidden gems of the investment world. 

But how do you navigate the complexities and tap into their potential? This article will help you overcome the challenges of investing in emerging markets and unearth strategies that could position you at the forefront of the next big financial breakthrough.

What Are Emerging Markets?

Emerging markets, also referred to as developing markets, are countries undergoing rapid industrialization and experiencing higher-than-average growth rates. Emerging markets sit between developed markets — like the United States, United Kingdom or Japan — and frontier markets, which are in the early stages of economic development.

Key characteristics of emerging markets include:

• Rapid economic growth
• Market volatility
• Increasing urbanization 
• Commodity dependence

Understanding the finer details of emerging markets is crucial for investors aiming to maximize returns while managing risks. 

Types of Investments in Emerging Markets

Now that you understand the basics of emerging markets, take a look at the types of investments you can make. 

Emerging Market Stocks

Emerging market stocks refer to shares of companies that are based in emerging economies around the world. These stocks represent ownership in businesses that operate in countries transitioning from low-income to middle-income status and are experiencing rapid industrialization and market liberalization. This is one of the most common ways to invest in emerging markets. 

Emerging Bond Market

The emerging bond market is debt securities issued by governments, municipalities or corporations of emerging economies. The bonds can either be issued in the local currency of the country or in major global currencies like the U.S. dollar or euro.

Emerging Market Mutual Funds and ETFs

Emerging market mutual funds and exchange-traded funds (ETFs) are investment vehicles that pool together money from numerous investors to buy a diversified selection of assets in emerging markets. While mutual funds are typically actively managed by a professional aiming to outperform the market, ETFs usually track a specific index passively, replicating its performance.

Private Equity Markets

Private equity (PE) involves investing in nonpublic companies, covering activities like buyouts, venture capital and mature business investments. PE investors, mainly firms or funds, aim for control, long-term value and profitable exits.

4 Steps for Getting Started in Emerging Markets Investing

If you decide to invest in emerging markets, here are four steps you can take to get started.

Open a Brokerage Account

To get started with emerging markets investing, the first step is to open a brokerage account. 

A brokerage account allows you to buy and sell various financial instruments, including stocks, bonds, mutual funds and ETFs. Think of it as a gateway that bridges you, the investor, with the global financial markets.

Purpose of a Brokerage Account

• Access to markets: A brokerage account grants you access to both domestic and international exchanges. 
• Safekeeping and custody: Once you purchase securities, they are held in electronic form in your brokerage account. 
• Consolidated view: Brokerage accounts offer a unified view of your investments, making it easier to track, analyze and make informed decisions.

Special Considerations for Investing in Emerging Markets

• Global access: Not all brokerage firms offer access to every international market. Ensure that your broker covers the specific regions or countries you’re interested in.
• Fees and commissions: Trading in international markets might attract higher fees than domestic trades. 
• Research and tools: Some brokers provide comprehensive research, analysis and tools tailored for emerging markets. 
• Currency conversion: Investing in emerging markets might necessitate dealing with foreign currencies. Understand how your broker manages currency conversion, associated fees and potential risks.
• Regulation and protection: Ensure that your chosen brokerage is regulated by reputable financial authorities, as this can provide an added layer of safety for your investments.

Researching Emerging Markets

Investing in emerging markets requires thorough research. The dynamics of these markets differ vastly from developed markets, and the challenges, while real, can pave the way for exciting growth opportunities. 

Below are some critical areas to consider as you dive into researching emerging markets.

• Economic indicators: Before investing, evaluate the macroeconomic indicators of a potential emerging market. Factors such as gross domestic product (GDP) growth rates, inflation rates, trade balances and foreign reserve levels can provide insights into the health and potential of an economy.
• Market infrastructure: Consider the robustness of the financial market infrastructure. This includes the presence of major stock exchanges, regulatory bodies and the overall ease of doing business.
• Sectors in focus: Different emerging markets may have strengths in specific sectors, be it technology, agriculture, manufacturing or services. Identify where the potential lies.

Decide Where to Invest in Emerging Markets

After completing the research phase and gaining an understanding of the emerging markets landscape, there’s a big decision to make: where to make investments. This decision isn't one-size-fits-all as it should be shaped by individual financial goals and a well-defined risk tolerance.

Here are some areas of focus. 

Aligning with Financial Goals

• Short-term versus long-term: Determine your investment horizon. 
• Income versus growth: Do you seek regular income, like the yield from emerging market bonds, or are you more inclined toward capital appreciation, as seen with equities?
• Diversification strategy: Depending on your goals, you may opt for diversified emerging market mutual funds or ETFs, or you might choose to pick individual stocks or bonds for a more concentrated approach.

Assessing Risk Tolerance

• Volatility comfort level: Emerging markets can be more volatile than their developed counterparts. 
• Capital preservation versus growth: How important is it for you to preserve the initial capital? If it’s a priority, you might lean toward less risky assets in emerging markets.
• Liquidity needs: Some emerging market investments can be less liquid than others. 
• Currency risks: Investing in foreign markets introduces currency risk, and the fluctuations in exchange rates can impact returns. 

Make Your First Investment

After meticulously researching and aligning your decisions with your financial goals and risk tolerance, the stage is set for the most exciting step: making your first investment in emerging markets. 

With the groundwork in place, it’s time to commit and tap into the growth potential of these economies. 

Advantages of Investing in Emerging Markets

Emerging markets present a variety of investment opportunities that differ from traditional developed markets. These economies, fueled by innovation, demographic shifts and evolving consumer landscapes, have become increasingly attractive to investors seeking diversification and robust returns. 

Here are some advantages that underscore the allure of investing in emerging markets:

• High growth potential: Emerging markets often have faster economic growth rates compared to developed markets, leading to potentially higher returns on investments.
• Diversification: Investing in emerging markets provides an opportunity to diversify a portfolio beyond traditional markets, potentially reducing risk.
• Demographic dividends: Many emerging markets have youthful populations, which can drive long-term economic growth as these populations enter the workforce and increase consumption.
• Increasing global influence: As emerging markets develop, their global economic and political influence is on the rise, creating numerous investment opportunities.
• Attractive valuations: Emerging market assets can sometimes be undervalued compared to similar assets in developed markets, providing potential buying opportunities.
• Benefit from technological leapfrogging: Emerging markets often adopt and adapt new technologies rapidly, bypassing older technologies and creating unique growth opportunities.
• Currency appreciation: Investment returns can be boosted if the currency of the emerging market appreciates against the investor’s home currency.

Risks of Investing in Emerging Markets

While emerging markets offer growth prospects, they also come with their own set of challenges and uncertainties. Investors venturing into these territories should be aware of the risks accompanying the potential rewards.

• Political instability: Rapid political shifts or unrest can introduce volatility and unpredictability in the investment climate.
• Economic vulnerability: Many emerging markets can be more susceptible to global economic downturns or shifts in commodity prices.
• Currency fluctuations: Exchange rate volatility can impact returns, especially if the local currency depreciates against the investor's home currency.
• Regulatory hurdles: Inconsistent or unpredictable regulatory environments can pose challenges for foreign investors.
• Liquidity concerns: Some emerging market assets may lack liquidity, making it challenging to enter or exit positions.
• Infrastructure and technological limitations: Inadequate infrastructure or lagging technological adoption can impede economic growth and limit investment potential.

The Time to Invest in Emerging Markets is Now

Emerging markets provide a captivating and potentially lucrative investment arena. The allure of high growth and diversification is balanced by the intricacies of political, economic and regulatory landscapes. 

For those willing to take on risks with diligence and insight, the rewards can be substantial. As with any investment, informed decisions, a long-term perspective and a sound understanding of risks and rewards are pivotal to success.

Frequently Asked Questions