Investors are on track to invest $1 trillion in emerging markets in 2017. Emerging market investments allow investors to try to capture higher investment returns in exchange for higher risks… sometimes significantly higher risks.
Investing in rapid growth
As emerging markets transition to free market economies, they can offer potentially greater economic growth (as measured by gross domestic product (GDP)) than developed countries. GDP growth is being driven by the migration of rural populations to cities where they need housing, retail goods, energy, and other goods and services. Stimulated by the growing middle class, Chinese consumption grew at a compound annual growth rate of about 9 percent over the last decade. The increasingly prosperous Chinese consumer seems to be propelling continued growth.
The world’s largest emerging economies India and China are among the fastest growing. As these countries become more prosperous, they require foreign investment to develop their living and social standards to the level of Western economies.
Diversification
Foreign investors look to benefit from the potential of higher emerging market investment returns. Due to the higher risk of investing in emerging markets, it’s reasonable to diversify within these markets, in order to lower the overall risk of your investment portfolio. For example, in the first half of 2017, while Russia lost money after two consecutive years of double-digit growth, BRICS (Brazil, Russia, India, China, and South Africa) sector returns are positive owing to good performance in the other regions. Since past performance is no guarantee of future returns, though, don’t count on a repeat performance.
Risk vs. Return
Investors must be willing to take on the higher risk of emerging markets if they want to swing for these potential homeruns. Major risks include:
- political instability,
- currency risk, and
- weak regulatory regimes.
Consider using mutual funds or exchange traded funds to spread the risk among many different positions in the world of emerging markets, but make sure to read their prospectuses before investing. To find out how diversification across emerging markets may strengthen your investment portfolio, read my blog.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published December 11, 2017.