The term ‘emerging markets equities’ is used to denote the shares of companies listed in or primarily active in the world’s fastest growing developing economies. The largest of these economies are Brazil, Russia, India and China, which are collectively often referred to as the ‘BRIC’ economies.
Access to emerging markets equities can be provided via investment in funds. Given the complexities of these markets and the need for local knowledge, the case for using a fund manager rather than investing directly in a limited number of shares is very strong.
Emerging markets offer investors the potential to make significant returns. However, there is also great potential for losses.
Advantages of emerging markets equities
- These are the world’s fastest growing economies and some believe this translates into booming equity markets.
- In time it is likely that emerging markets will make up a larger share of the world’s overall equity market.
- Emerging markets equities may improve diversification within a portfolio.
Disadvantages of emerging markets equities
- There is no guarantee that a booming economy will translate into a successful stock market.
- Rapidly growing economies can be prone to extreme investment bubbles and busts. Speculation by western investors can make matters worse.
- Many emerging stock markets do not have the same regulatory controls as those common in the west.
- Corruption may be more prevalent in some countries, which can in turn adversely affect profits.
- Government intervention could curtail profits.
- Political risk is significant and in extreme scenarios has the potential to wipe out the value of investments in a country.
Investing in emerging markets
Investment funds offer the investor a great variety of emerging markets. Which countries are defined as emerging markets varies from fund to fund. Some emerging market funds still contain shares listed in countries such as South Korea and Singapore, while other analysts consider these countries to be developed economies, rather than emerging ones. As discussed the largest emerging markets are Brazil, Russia, India and China, and some funds will choose to focus purely on these economies. Other areas for investment by emerging markets funds can include Eastern European, Latin America, Asia and occasionally Africa.
Emerging markets can usefully form a small part of a medium or a medium-high risk portfolio. They should form a significant part of high risk portfolios. Ideally, investment should not be in a single emerging market, such as India or China, but in a spread of emerging economies. Investors who include emerging markets as more than a small portion of their portfolio should be prepared for increased volatility, and a long-run time horizon is preferable.