What is an emerging market?
The term “emerging market” was created by economists in the 1980s to define investments made in developing countries. Despite it being widely used, there is no concrete definition that has been agreed upon.
Generally, most experts will agree that the phrase represents countries with developing economies that are undergoing fast economic growth. Such status can be discerned with a formula that uses GDP and GDP per capita as its variables.
Some recent examples of countries still in an early stage of development while experiencing rapid economic growth are Brazil, Russia, India, and China.
So, emerging market stocks are public companies that are on the stock market in countries that meet the “emerging” criteria. These could be hard to access for individual investors, so some investment firms offer funds that track the performance of them.
It’s important to remember that having an emerging market doesn’t mean the country is poor – South Korea, for example, is an emerging market but has a large number of consumers and a wealthy economy.
Are emerging market funds a good investment?
Whether emerging market funds are a good investment or not will be different for each investor, depending on their risk appetite and investment goals.
Investing in the global emerging markets sector can often carry greater risk than traditional funds. That said, it is possible that they could provide higher returns on your investments in return for this greater risk.
Emerging markets can be riskier than those of developed nations, like the UK or the United States, for a variety of reasons. For example, some developing economies can be prone to political instability, resulting in drastic changes to domestic policies or finance laws that could put portfolios at risk.
So, it depends on whether you can stomach the risk or not. If you know that you don’t handle risk very well, perhaps funds in developed economies could be a better investment for you.
Meanwhile, if you can tolerate the risk, emerging market funds could be a good way to gain exposure to an even wider range of international stocks.
Regardless, it’s important not to think of any investment as good or bad until you have considered it in line with your investment strategy or your personal circumstances.
Remember: never invest all your money or more than you can afford to lose – you are not guaranteed returns. You should consider calculating your own risk tolerance as part of your investment process.
Are emerging markets high-risk?
While all investments carry some degree of risk, buying stocks in emerging markets can often be argued to carry greater risk than more mainstream methods of investment, like companies in developed markets.
This is mainly because of the political, economic, and currency risks that countries with developing economies face.
For example, political instability or volatile leadership can cause unpredictable circumstances that are hard for investors to react to. This could cause your portfolio to lose value due to events that are simply unpredictable.
Other risks such as economic weaknesses can also be more prevalent in developing countries. These could be risks regarding insufficient labour and raw materials, high inflation or deflation, a lack of regulation, and impractical monetary policies.
Currency risk is another factor that could present a danger to your investments. Countries with developing economies are more likely to have volatile currencies compared to global ones such as the dollar or pound – currencies you may be likely to take profit in.
This means that your gains could be offset by volatile currency price action or, on the other hand, your losses could be worsened.
It is the responsibility of each investor to navigate their own risk management as part of their investment process and figure out whether they can a) sustain the risk and whether they b) see the rewards as worthwhile.
Are emerging markets a good investment for 2022?
Some emerging markets have had strong results in the past decade, such as those that are exposed to Chinese stocks. However, it’s important to remember that past performance is not a reliable indicator of future results.
This means that, just because a fund has performed well up to the point you invest, it doesn’t indicate that this will continue.
2022 has largely been a year of significant market volatility – UK markets especially. As a result of the pound’s recent fluctuation and turbulent price movements in October 2022, emerging markets could present a more attractive opportunity for UK investors.
Similarly, some economists speculate whether higher interest rates will cause the GDPs of developed markets to slow somewhat. This might offer competitive advantages to emerging markets, presenting an opportunity for growth with these strong market positions compared to developed economies.
Despite this, you should always consider how your investments could affect your own financial situation before making decisions.
Seeking advice from a financial advisor is often a sensible way to assess your risk relative to your own position before making an investment decision.
