Emerging markets present growth opportunities for those who are looking to diversify their portfolio. Investing in these markets won’t be as costly as putting money in stocks that belong to well-developed nations, and investors can capitalize on this fact.
However, despite the growth that these markets offer, they also come with risks that come from business cycles (the long-term trend of upward and downward movements of GDP). Business cycles of emerging markets tend to be more volatile than the ones used by developed markets. By studying and understanding these cycles, investors should be able to increase their chances of becoming successful in investing in emerging markets.
Spotting emerging markets
Emerging markets have seen a surge in volatility in recent years, especially in emerging market equities. In June 2017, for example, the iShares MSCI Emerging Markets Index ETF has a recorded coefficient of 1.26. That means that particular index is around 26% more volatile than the S&P 500 Index.
This kind of volatility is familiar to those who purchased stocks a decade ago. The fluctuating prices create an opportunity for investors to buy stocks when the prices are low and sell when they’re high. The only problem that investors have to be wary of is identifying when to buy or sell assets from emerging markets.
Here are three important factors to check when spotting for emerging markets:
Current political climate
Emerging markets are driven by political changes. That’s because a change in leadership often means changes in budget, monetary policy, geopolitical landscape, and fiscal policy. Investors always keep their eyes peeled for any changes in the political arena because it can have a significant impact on their assets.
Interest Rates
Many emerging markets’ debt is dollar-denominated. This means that the cost of their debt depends on the USD’s denomination against their currency. FXCM states that if the interest rates of a major global currency increase, the currencies of emerging markets are likely to experience a short-term volatility. That’s because higher interest rates mean a stronger dollar, making dollar-denominated debt more expensive.
External Economic Factors
The business cycles of emerging markets are influenced by many economic factors such as demand in exports, consumer price index, etc. Foreign investors consider these when searching for emerging markets because they have significant impact on economic growth.
Global Emerging Markets
Investors from all over the world have been putting their money in emerging markets. Below are examples of emerging markets ranked by Business Insider according to their financial-market statistic, IMF forecasts, and GDP growth.
Pakistan
Primary sector: Agribusiness, oil
Key exports: Textiles, rice
2015 GDP growth: 4.2%
Philippines
Primary sector: N/A
Key exports: Semiconductors and electronic products, transport equipment
2015 GDP growth: 5.8%
Vietnam
Primary sector: Agribusiness, oil refining
Key exports: Clothes, shoes, electronics
2015 GDP growth: 6.7%
Benefits of investing in emerging markets
People who invest in emerging markets have an opportunity to grow their stocks’ value for a short period of time. Emerging markets present a better opportunity for finding value than developed markets, and recent historical data backs this claim. Stock markets in emerging economies are more volatile, making it easier to buy stocks that are cheap relative to cash flow.
On October 2017, Reuters reported that emerging equities rose to a 1-week high, following strong U.S. activity data. In addition, the MSCI’s benchmark emerging stocks index rose by 0.8% in the same time frame, with global equities climbing to an all-time high.
Hong Kong’s stocks also surged by 2.2%, led by Chinese banks and insurers after China cut its reserve ratios. Indian stocks, on the other hand, increased by 0.6% after manufacturing in the country strengthened for two straight months.
Like any other market, emerging markets present some risks to investors. However, based on their performance in recent time, experts believe that they are good investments to anyone’s portfolio.