Investing in emerging markets (EM) is one of the most lucrative opportunities available to retail investors right now. With global markets having pulled back significantly in the wake of the pandemic, emerging markets are offering attractive returns to investors. This article examines why retail investors should back emerging markets and offers tips on how to navigate EM investing.
What is an Emerging Market?
The term “emerging markets” refers to countries that are less-developed and are relatively new to the process of economic development. Economies included in this group generally have a less mature capital market, with smaller stock markets and a lack of tradable debt instruments.
Emerging markets are typically more volatile than developed markets, and the opportunity for greater growth makes them attractive to investors interested in higher returns. The International Monetary Fund (IMF) publishes a list of countries that can be considered emerging markets.
Why Should Retail Investors Back Emerging Markets?
Retail investors should consider investing in emerging markets as they offer a number of advantages compared to established markets. These advantages include:
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Higher Return Potential: Emerging markets typically have higher return potential than developed markets. This is due to the lack of diversification, which can lead to higher fluctuations in stock prices and therefore an opportunity for higher returns.
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Lower Risk: Despite the higher return potential, emerging markets are actually lower risk than developed markets. This is due to the lower cost of entry into emerging markets. Because these markets are smaller, investors can start investing for a much lower initial investment than required for developed markets.
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Diversification: Investing in emerging markets can provide a much needed diversification to a portfolio. With emerging markets being less correlated to established markets, they can provide protection when other markets are in decline.
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Potential for Long-Term Growth: Many emerging markets have the potential for long-term growth. This is due to the fact that their economies and companies are often in the early stages of development, leading to more potential for growth than firms in a more mature economy.
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Attractive Valuations: Emerging markets often have lower valuations than developed markets. This is due to the high levels of volatility associated with these markets, and the relative lack of liquidity. Investors can often find attractive valuations in emerging markets, which can lead to higher long-term returns.
How to Invest in Emerging Markets
The key to successfully investing in emerging markets is to have a clear strategy and to follow it. Here are some tips to help you navigate investing in emerging markets:
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Educate Yourself: Before investing in any market, it is important to educate yourself on the risks and rewards of investing. Take the time to research the countries and regions you are interested in and make sure you understand the trends in the economy and potential risks.
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Diversify: Diversification is key for successful EM investing. Make sure you spread your investments across countries, sectors and asset classes to reduce risk.
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Have an Exit Strategy: Before investing, it is important to have an exit strategy. This can help you manage risk and protect your capital if things don’t go as planned.
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Set Limits: Set limits on your investments and stick to them. This will help you stay disciplined and on track with your investment strategy.
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Use a Financial Advisor: If you are new to investing in emerging markets, it is a good idea to enlist the help of a financial advisor to help you navigate the often unexpected twists and turns of EM investing.
Overall, investing in emerging markets can be a highly rewarding but also risky experience for retail investors. However, with a clear strategy and the tips outlined in this article, investors can position themselves to capitalize on the potential rewards of investing in EMs. If you are seeking higher returns in the current market, EMs may be the right choice for you.