Emerging markets offer huge growth potential – they are by definition economies en route to maturity – but the challenge for investors is to predict which emerging markets will reach their full value the fastest, if they do so at all.
Problems start to present themselves when emerging markets stall, and if you’re unlucky enough to invest substantially at that point, you could be left with a stagnating portfolio and the dilemma over whether to wait and see, or pull out and start again.
A recent example of this are the so-called BRIC economies of Brazil, Russia, India and China, which were among the fastest growing economies of the early 21st century.
For nearly the first decade of the new millennium they lived up to expectations, accounting for a growing proportion of global GDP, and investors who put their faith in the BRIC countries during that time were able to reap the returns of doing so.
But as the global financial crisis began to bite in 2008 and onwards, not even the rapidly growing BRIC nations were immune to its effects, and the four split into two pairs.
The more prosperous pair consisted of China and India, economies moving towards post-industrialisation and with a mix of thriving sectors from manufacturing to services.
For Brazil and Russia, the 2010s have been less of a success story, with both economies relying heavily on commodities for economic growth, at a time when spending on those commodities has been subdued from mature markets elsewhere in the world.
Even the relative success of China must be couched in the context of the global recession, and many Chinese funds and markets remain below their pre-recession value, much to the chagrin of those who invested heavily in the country pre-2008.
What affects the value of emerging markets?
There are a number of factors that can combine to keep the real-terms value of emerging markets lower than it might otherwise be:
- Trade wars with mature and powerful economies, such as the tariffs imposed on China by the USA under President Trump.
- Currency exchange rates, especially a strong dollar which can compound the national debt of emerging nations.
- A lack of foreign investment and/or low commodity prices as mentioned above.
Of course for investors, it is not the total GDP of a country that matters, but how quickly its GDP is growing – an indication of how fast your investment in that country’s economy might also grow.
Because of this, it can be sensible to invest in a smaller but faster growing emerging market, rather than one that is big in value but relatively low in current growth.
A ‘good’ growth rate is anywhere around 2-4% GDP per year, and there are several emerging markets where it is fairly easy to find such a growth rate, such as Brazil, Mexico, and Thailand which is on the upper border of that range.
A ‘great’ growth rate is up around 5-7% or even higher, and in 2019 this still includes China, India, and others like Indonesia which is benefiting from positive market sentiment this year.
Why invest in emerging markets?
Generally speaking, it makes sense to invest in emerging markets. Following a decade of turbulent economic waters worldwide, these countries are still posting year upon year of positive growth – something many other investments have failed to do.
The best performers are seeing GDP growth far higher than the UK’s rate of inflation, making them a worthy investment in real terms for British investors.
And all signs point to emerging markets as the continued source of global growth in the years ahead, while developed economies are expected to continue to tread water.
But as always, it also makes sense not to put all your eggs in one basket, so you may wish to consider investing in multiple markets to make sure you have access to the growth achieved by each one.
You can do this yourself, but alternatively you could choose to invest in an emerging markets fund or in an equivalent ETF, and allow the fund manager to make the decision of which countries to invest in as conditions change in the future.
By doing so, you gain broad coverage of emerging markets and benefit from the expertise of the fund manager to make sure the capital you invest returns as much profit as possible.