Ways To Invest In Emerging Markets In 2021 – As some people look for ways to diversify their portfolios, emergent markets are regaining investors’ attention.
While the United States has the world’s largest economy, other economies are expanding at a much faster rate.
An emerging market is a fast-growing economic economy but still has scope for growth, meaning that its full economic potential as a developed economy is not fully realized.
Including Brazil, Chile, China, Colombia, the Czech Republic, Egypt, and Greece, 27 different EMEAs are listed in the MSCI Emergent Märkte Index. The index contains over 1,300 assets of different industry sizes. Regarding weightings, China accounts for nearly 40% of the index, and Taiwan, South Korea, India, and Brazil.
Since December 2000, the annualized return of the index is almost 10%. Emerging-market shares are up about 3.85 percent year today, with annualized revenues of about 36 percent over a year, even though the pandemic has affected domestic and foreign investment.
With investors worried about the possibility of overvaluing the U.S. stock market, emerging market stocks could have trade or room in which firms could grow on this market.
Jeremy Schwartz, Executive Vice President and world head of research at WisdomTree Asset Management, said, “The emerging markets are selling multiples at a reduced price to U.S. markets, but maybe short-term benefits linked to global growth from the pandemic.
Schwartz says faster growth at a discount in the United States is a good combination. Emerging markets are not immune to risks, and this is an attractive year for emerging-market equity: vaccine roll-outs, steady economic recoveries, and low interest rates.
- Risks of investing in emerging markets.
- Benefits of investing in emerging markets.
- Emerging-market opportunities.
What Are the Risks of Investing in Emerging Markets
Investors don’t take a look at what is happening on the ground in an emerging market country.
This can lead to transparency issues where official documentation related to an enterprise’s finances or initiatives can be challenging to find. Quality and reliable information may be difficult to detect, as public reporting regulatory requirements in emerging market countries are not as robust as they are in the United States.
This inaccessibility could be a challenge for investors looking for a thorough analysis and due diligence on future international investment compared to the publicly traded firms of the U.S. that require public filings by the Securities & Exchange Commission.
In an emerging-market economy, political risk is also a reality. Unstable leadership can have economic impacts that can harm businesses in the country or the region, leading to less than anticipated shareholder returns. The intermingling of politics and industry can lead to a blow to a company. This can affect a company’s reputation and transparency and lead to shareholders losing their confidence in corporate governance.
The currency of a country is linked to economic performance.
“Currency risk is the main difference between domestic and emerging markets investing,” says Eric Leve, Bailard’s CEO, San Mateo, California.
The currency can increase in value if an economy increases. The opposite could occur as well, which could lead to currency risk. Your investment returns can fluctuate depending on the value of the emerging market currency.
“Emerging markets rarely exceed American equities if they do not have a currency strength tailwind,” explains Leve.
“Fiscal or monetary maladministration, shrinking demand for primary exports of the nation, political turmoil or rising interest rates in the United States can be the consequence of the weakness of emerging markets, which can impair many new emerging markets’ ability to support debt-funded growth,” she continues.
There may also be several challenges to an emerging market economy, such as insufficient resources and material goods, delaying production, and impeding business growth. Faulty monetary policies or fiscal practices that lead to weak economies or insufficient regulatory practices also constitute risks. These financial risks could lead to a volatile portfolio of investments.
What Are the Benefits of Investing in Emerging Markets
It can be found in emerging-market equities for investors looking for diversity.
“Overall, emerging-market shares offer a broader range of exposures as their opportunities includes wide differences in geographical areas, which often have little or no in common,” says Jared Leonard, Hartford Funds investment specialist in Philadelphia.
Leonard continues that diversification provides exposure to differentiated companies and geographies and local economies not as accessible to foreign companies.
Emerging markets are attractive investment opportunities because of the increasing economies of these countries. More people move out of poverty, and the middle class is growing. This new consumer cohort drives economic growth and could offer companies opportunities for innovation and prosperity.
The pace of economic growth is another important advantage of investing in emerging markets. The World Economic Outlook (WEO), which dates back to January 2021, shows growth forecasts for emerging and developing economies at 6.3% in 2021 compared with advanced economies’ growth projections of 4.3% in 2021.
The characteristics of emerging markets, which attract long-term growth, are described by Charlie Wilson, portfolio manager and managing director, Thornburg Investment Management in Santa Fe, New Mexico.
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Wilson says that these countries represent 13 to 15 percent of global market capitalization among 27 emerging markets in the MSCI Emerging Markets Index. “But nearly 50% of the global gross domestic product and about 60% of the global population live on emerging markets so that their contribution to the world economy is significantly below the market cap,” he explains.
That said, this market cap has plenty of room to increase.
By the end of this decade, Wilson says that about 80 percent of the world’s middle class will live in developing markets.
“In India, Korea, and China, you are beginning to see the emerging consumer markets rise,” he said.
Also, Wilson observes, investment opportunities have improved. “Four of the top 10 companies worldwide live by market capital in emerging markets. That reflects the fact that the emerging markets generate considerable profit power,” he says.
Emerging Market Opportunities
Experts encourage investors to research economics and policy governance in any emerging market economy.
“China is the world’s second-largest economy and rebuilding faster than certain other markets,” said Harry Broadman, Executive Director and President, Practice for Emerging Markets at the Berkeley Research Group in the Columbia District.
Though China is increasing, Broadman says there are many risks because the government rules over China.
“When all big companies are state-owned, and if the state changes its policies, it’s striking,” he explains.
By accessing the prospectus of a mutual fund, retail investors can examine emerging market investments. See how individual country and sector allocations are broken up and weighted. The expectations of investment results as well as risks and growth opportunities of fund managers can be found here.
Advising retail investors to Broadman would focus on specific regions when investing in emerging markets such as Latin America, Asia, or Europe.
“Reducing investments to a group of countries in a specific region will give you a certain degree of regional coherence,” says Broadman. This enables you to reduce the risk of a large country influencing the direction of fund performance.
Investors can use funds to expose themselves to emerging economies. One example is the World Development Fund in Thornburg (ticker: THDAX) which has a total annual return of almost 23% by 2020.
Because of its focus on quality businesses in the emerging assets class, THDAX can be responsible for its strong performance. Wilson points out that the Fund focuses on strong companies that can successfully navigate difficult times for a solid performance of the Fund.
“We stockpiled on our portfolio in an optimistic and negative scenario for each holding, reassessing their outlook for each firm,” says Wilson. “This led us to shift capital from emerging markets, which made it difficult to put the views of those companies into markets, in which we felt that their perspective was dim and unclear.”
The VanEck Emerging Markets Fund (EMRZX) has 89 investments with its top three positions: the Tencent holding, Alibaba Group Holding (BABA), and HDFC Bank (HDB).
EMRZX concentrates on small to large companies with a potential for growth in different sectors. China weighs approximately 38% of the country’s index fund, followed by India and Taiwan. Some of the heavily weighted sectors include the discretionary consumers, finance, and I.T. sector. To date, the Fund has returned around 5%, and its overall return for one year is around 30%.
There is a lot of volatility in emerging markets. That said, there are risks and rewards to investing in those countries. Access for investors seeking higher yields, growth, and diversification can offer exposure to several countries.
As every MSCI EM country grows at its speed, it can be challenging to identify this market’s prospects. But experts say it can grow much faster this year than advanced markets.