Are You Missing Out on Emerging Market Investments?

The world is a big place with potentially good investments almost everywhere. The world’s emerging markets account for about 38% of global domestic product and about a fourth of stock market value. Many times over the years markets around the world rise as US stocks fall (and vice versa). Perhaps the best argument for investing in emerging markets is that they have a lot more room to grow than those in North America, Europe, or Japan. There are also lots of potential pitfalls when investing offshore. So, are you missing out on emerging markets or are you best off simply ignoring them.

What Are Emerging Market Investments?

In this case we are not talking about foreign direct investment like we discussed years ago. Rather we are looking at how the normal retail investor can allocate part of their portfolio to areas that are likely to outpace the USA and growth over the next years and decades. North Americans can invest in emerging markets via funds that include stocks from throughout the world. And, one can invest in foreign stocks with ADRs or American Depositary Receipts. Either way you don’t need to deal with a foreign stock broker, speak a foreign language, or deal directly with foreign currency exchange rates.

What Are the Emerging Markets?

Forty years ago economists talked about developed economies when describing the USA, Canada, the UK, Germany, France, Italy, and Japan. Sometimes Taiwan, South Korea, and Israel were added to the mix. Others were less-developed. This seemed condescending and when someone suggested emerging markets as an alternative everyone adopted the label. However, not all “emerging markets” are always emerging. A prime example would be Venezuela which went from being an economic leader in South America to an economic basket case under Chavez and now Maduro. The best way to think of emerging markets are those countries with development potential and thus the potential for your investments there to make money. As time goes by countries will move into the “emerged” market category or fall off the bottom list.

The Biggest Emerging Markets	Next Level of Emerging Markets
China	Vietnam
India	South Africa
Brazil	Egypt
Russia	Nigeria
Indonesia	Bulgaria
Mexico	Czech Republic
Argentina	Colombia
Saudi Arabia	Thailand
Turkey	Chile

Are Emerging Market Investments Safe?

The answer is no, many are not. Two of the top ones for investing opportunities, China and Russia, are prime examples of the risks when investing in emerging markets. Russia might invade Ukraine and end up with crippling economic sanctions and China’s political issues could lead to all sorts of issues with the rest of the world, not to mention a pivot away from Wall Street and delisting of many of their stocks on US exchanges. In both cases, shareholder rights are pretty much non-existent. Turkey is suffering from crippling inflation and its president insists on cutting interest rates making the problems worse. Investors discovered years ago that when you put all of your investment eggs in one foreign basket that country’s government could nationalize the company and you lose everything. One of the ways around this is to invest via a fund that does the research and hands-on investing for you.

Funds for Emerging Market Investing

People invest in emerging markets because they think that over time those investments will outpace investments made at home. Unfortunately, issues like those with China, Russia, and other countries can make it difficult. And, then there are issues like China using forced labor in factories in its Western region. A useful approach in selecting profitable emerging market investments that are not risky, don’t get you in bed with tyrants or murderers, and the like, is to go with a fund that follows ESG policies in selecting stocks. This gives you some assurance that governance is OK, social policies are acceptable, and that they are not going to trash the environment on the way to making you a profit.

The following funds were listed in an informative article about emerging market investing in The New York Times.

iShares ESG Aware MSCI EM ETF
SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF
Vanguard ESG International Stock ETF

Actively managed funds include these.

GS ESG Emerging Markets Equity Fund, Goldman Sachs
JPMorgan Funds-Emerging Markets Sustainable Equity Fund

Many experts are suggesting that you avoid emerging market investments in the coming years as Covid variants raise havoc with economies far and wide. We think this is an ideal time to consider the intrinsic value of such investments over the long haul and invest while prices are cheap and dollar is strong as the Fed raises rates.

Are You Missing Out on Emerging Market Investments? – Slideshare Version