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Created on 24.10.2018

From Brazil to China – invest in emerging markets

Investments can be made anywhere in the world. There is a vast range of investment products focusing on various attractive sectors, themes, companies or countries. Emerging markets provide extremely exciting investment opportunities. But what exactly are these emerging markets? And what traits can investors identify them by? We explore these matters in depth.

Emerging markets are developing countries. Examples include Brazil, Mexico, Russia and some Eastern European countries. These markets present additional opportunities for investors, but also entail greater risks than investment in First World countries.

Anyone seeking to invest in this area and wishing to include securities from emerging countries in their portfolio should firstly gain a full understanding of the situation. The easiest way to do this is by taking a look at the MSCI Emerging Markets Index. This is a share index which tracks developments on the stock exchanges of 24 different developing countries. It is a good way of finding out exactly which countries are classified as emerging economies and how their markets are performing.

Strong economic growth as an opportunity

Emerging markets are up-and-coming economies which have surpassed the developing country stage but are still on the way to establishing themselves as modern industrialized nations. Their economy generally achieves very strong growth compared to industrialized countries. Their population is also increasing. This means there is a sufficiently large workforce to keep wage costs low. This allows companies to manufacture cost-effectively and to generate high profits. Population growth also boosts domestic consumption. This does not just benefit companies producing consumer goods. As the number of domestic consumers grows, so too does the country’s economy. This in turn has a positive impact on exports and the improvement of infrastructure.

The risks: political instability and foreign currencies

However, investment in emerging markets also entails a certain degree of (increased) risk. Political uncertainty and less stable currencies lead to greater volatility on the stock market. As the national currency concerned can quickly lose value, there is also a higher currency risk. Developments in other countries also play a major role here: national currencies in emerging markets are often heavily dependent on the US dollar rate. As a result, interest rate changes by the US central bank also have repercussions in emerging markets. Foreign policy decisions by the global powers can also have an impact on national currencies in emerging markets to varying degrees.

There is also the risk of companies being nationalized in emerging economies. Further risks include the relatively low level of market transparency and obscure and unfavourable accounting standards. Market regulation is only effective to an extent or is only amended at a slow pace and intellectual property receives little protection – these factors also influence the economic and financial development of emerging markets.

Invest in emerging markets through funds and ETFs

Which opportunities are available for investment in emerging markets? The MSCI Emerging Markets Index is a good indicator for this area of investment, at least as far as shares are concerned. Exchange traded funds (ETFs) are a cost-effective way of investing in entire markets. However, there are also specific funds which focus on individual or several emerging markets.

In general terms, emerging markets provide investors, who do not just wish to put their money into established industrialized countries, with the prospect of attractive returns and the opportunity to benefit from the growth of a region or emerging economies worldwide. However those investing in emerging economies should also be aware of the risks involved and need to keep track of developments in these countries.

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