By Lee Sherman
Investing in emerging markets may appear unwise at first. After all, shouldn’t you know everything you can about the companies you are going to invest in, especially when some of these companies could be stealing tech secrets or even worse, like recent concerns about the Chinese company Huawei spying on the US in service of a hostile foreign power? Investing in foreign markets is definitely risky. But it can also be extremely lucrative, especially if your portfolio is in the hands of an experienced financial advisor and if you are playing the long game (taking a passive investing approach) when it comes to your portfolio.
For investing in emerging markets for example, China, or countries who were part of the former Soviet Union, two big advantages come to mind. The first is diversification. A balanced portfolio that includes multiple types of assets, as well as assets in different industries, and in different countries, can help protect you against the vagaries of the markets. It also means that you can benefit from rising economies such as China’s while mitigating the risk of a decline in the value of the US Dollar or the British Pound (perhaps as a result of the UK’s withdrawal from the European Union or by the recent Tariff Wars). Not only will you be able to better diversify your portfolio, but you’ll also gain access to investing in a variety of upstart companies that are taking advantage of market realities in their own countries to spur rapid growth.
You may also want to consider investing in emerging markets if your interests lie in a particular industry. For example, Southeast Asia is a hotbed of ride-sharing technology and home to some of the most important companies, such as Grab, Gojek, Ryde, and others. Revenue in this segment is expected to show an annual growth rate (CAGR 2018-2022) of 18.1%, resulting in a market volume of US$62,433m by 2022, according to the statistics portal Statista.
Investing in emerging markets is not without risk. By definition, these economies tend to be less developed than those in the west (for example the United States or the Euro Zone). Securities in these countries tend to be much more speculative than those here at home and subject to different rules and regulations, some of which are not at all favorable to the individual investor. They are often propped up by government subsidies and supported by things like tariffs that could disappear at a moment’s notice. In addition, corruption runs rampant in some emerging markets, particularly those in South America or the African continent where governments change hand regularly, often through bloody revolution rather than democratic reforms.
Even when regime change comes merely as a result of shifting public tastes, the constant ebbs and flows can make for rocky seas. Even relatively stable currencies such as those of Greece or Turkey are in danger of failing. In addition, the very thing that makes a company like Gojek exciting, it’s newness, make it a risky investment. If you’re interested in investing in emerging markets, it’s important to keep in mind that equity stocks of small and mid-cap companies carry much greater risk than those of larger, more established companies.
A portfolio made up entirely of funds in emerging markets doesn’t make sense for the majority of US investors due to the risks, both economic and political, involved as well as the difficulty in obtaining knowledge about the companies involved. However, as one piece of a well-rounded investment strategy, investing in emerging markets may, in fact, make sense as a means of diversification, a hedge against inflation at home, and if you are lucky, a means of corralling the next big unicorn. It’s never been truer that many of the world’s biggest developments in such fields as genomics, artificial intelligence, chip fabrication are happening outside the US, and far beyond Silicon Valley in such places as Israel, China, India, Malaysia, Ireland, and Mexico. It may be time to give the idea of investing in emerging markets some serious thought.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.
