Five Most Important Things To Consider When Investing In Emerging Markets

by Hank Coleman

Emerging markets have attracted a huge amount of interest from investors worldwide as a source of high return investments. While interest rates on money markets are hovering around 0% and stocks remain on a roller coaster, many investors are turning anywhere they can to squeeze out extra percentage points in the rates of returns on their investments. That is one reason that Lending Club is such a great investment. But, many investors are now turning to emerging markets to be the savior of their returns. Many industries in the emerging markets are growing at rates much faster than the developed world and riding high on the growth. Investors in America have plowed a huge amount of money into the stock of countries at breakneck speed.

Main Countries. BRIC (pronounced like brick) has become all the rage and one of the new buzz words in Wall Street’s lexicon over the past couple of years. The BRIC (Brazil, Russia, India, and China) countries are the focus of the most attention and provide a wide array of investment opportunities in the manufacturing and services sectors for foreign investors. The size of these economies, the value of its human capital, the scope of their domestic markets, and the potential for growth are the primary reasons that these countries are on top of the list.

However, not every opportunity within these countries is profitable, and proper analysis and research are needed to choose the right investments for your portfolio. Here are some factors to look at when choosing an emerging market to consider investing in.

Political Stability. With governments running the show in many developing countries, it is pertinent to see how stable their reign is. It is a no brainer that we would not invest in a company in a country with a leader that is unstable such as North Korea, Venezuela, or Ira. But, would you invest in a country where the leadership may one day wake up and decide to nationalize the country’s sole cell phone carrier? We do not think about these type of topics in everyday American society, but these are one of the many the real concerns when investing overseas in new or emerging markets. In countries which have constantly changing governments and weak regimes, investments are even more risky because a shift of power leaves the economy distressed and the economic policies unimplemented.

Trade Balance. Another good indicator of a country’s performance as an economy is its balance of trade payments. Many emerging markets take their strength from strong exports which indicate a strong domestic industry. This feature points towards a variety of things such as good infrastructure, technological advancement, and government support.

Investor Friendly Policies. Does the government encourage foreign investment? Many countries do not appreciate or encourage foreigners to purchase companies or large stakes in companies. Other countries and their leadership have a mild attitude towards foreign investment to encourage internal growth. And, some open the floodgates and go all out to bring in foreign investment by giving rebates and incentives.

Infrastructure. A very important factor that applies across the board in terms of localities, industries and businesses is their access to substantial infrastructure. Access to roads, internet, phone and electricity are factors taken for granted in the West but these are variables in developing countries. For example, a major part of India is only linked with dirt roads to other parts of the country. Another example is Pakistan, where the government can only satisfy around 50-60% of the country’s demand for electricity.

Investing in emerging markets is like a pioneer of the old days. You are a trailblazer! You are going where no man or woman has gone before. You are investing in countries and companies that a lot of people on the street may not have even heard of before. So, why do it? We should invest in emerging markets because there is an excellent chance for growth and profit. And, emerging markets provide an excellent means to diversify our investments around the world.

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{ 2 comments… read them below or add one }

jason June 17, 2010 at 5:22 am

so much to consider when it comes to investing its enough to make my head spin

Kristine September 16, 2010 at 11:48 am

True. Investing deals with a lot of things but when you get used to it you might even swing and dance. Investing is really management intensive it will indeed make your head spin but in return you will benefit from it and you will develop more confidence on yourself.

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