Recently, Gina Sanchez, CEO of Chantico Global said, “Emerging markets are still the fastest-growing segment of the economic world, and they will continue to be.”
She made this remark on the heels of several of these markets growing by double-digits in the past few weeks.
As a savvy investor you may be wondering exactly what these emerging markets are, and if owning some of the stocks from this asset category makes sense for your portfolio.
So first of all, what are they?
An emerging market economy is one in which a country is moving towards developed nation status, as shown by liquidity measures in local debt and equity markets, and the existence of some form of market exchange and regulatory body.
One of the implied risks of emerging markets is that they don’t have the same level of market efficiency, strict accounting standards, and securities regulation found in advanced economies such as the U.S., Europe, and Japan.
But the potential upside is that if an emerging economy continues to move toward developed status, they tend to have favorable demographic trends and expectations of relatively high economic growth rates.
Brazil, Russia, India, and China are considered to be the four largest emerging markets and are often called the BRIC countries. Other major emerging markets include Mexico, Indonesia, and South Africa.
Should You Be Investing In Emerging Markets?
While emerging markets have a lot of potential, their lack of regulation can make it tougher to conduct an appropriate level of analysis to evaluate potential investments. They also tend to experience a lot of price volatility—the more efficient a market, the less likely it is to soar and fall on each new piece of information.
The double-digit gains we just mentioned were only after recent drops to 52-week lows. Turkey and Brazil are working through currency issues. China’s economy, despite its huge size, is still heavily controlled by the government and so has far to go in both efficiency and transparency.
Some investors looking at emerging markets in the short term recently may have found themselves wondering why they’re included in our strategy. Compared to US Large Growth stocks recently, emerging markets look like they’re nothing but a drag on performance.
Like all stock investing, the goal of being rewarded for assuming the inherent risks in emerging markets requires maintaining a disciplined, long-term approach. Prudent investing means knowing in advance you’ll endure periods where portions of your portfolio experience price declines. One potential benefit of consistent portfolio rebalancing is the opportunity to buy asset categories when they’re “out of favor” compared to asset categories that are outperforming.
Diversification means owning a broad array of stocks with the expectations some portion of the portfolio will be moving in a different direction than other parts. As a standalone asset category, emerging markets stocks price swings can be scary. Even so, a disciplined, methodical approach to pursing global stock returns includes small allocations to emerging markets, depending on your risk profile.
Because speculating among individual company stocks can be very risky, prudent investors look to participate in their potential growth through broadly based funds that can own hundreds of stocks among multiple countries. That approach makes their tendency to move independently of the U.S. market an attractive potential diversifying component in a globally-diversified strategy.
So, as always, be wary of both the hype and the doomsayers on emerging markets. We can show you how they can play an important role in your long-term investing strategy.