Emerging markets have faced significant criticism over the past decade. A stronger dollar, declining commodity prices, and sluggish corporate income growth were key factors driving this scepticism. As a result, investments in these markets have delivered disappointing returns compared to the performance of large-cap stocks. In light of a more volatile global economy, investment strategies focused on emerging markets have also evolved.
Despite past struggles, emerging markets still hold immense potential. Recent developments, such as prospective Fed rate cuts and a potential rise in commodity prices, offer renewed optimism. This suggests that the situation for emerging markets could potentially see a positive shift.
Previously, the BRICS nations—Brazil, Russia, India, China, and South Africa—dominated investor interest in emerging markets. However, the landscape has shifted considerably. China, for instance, has grown to become the second-largest economy in the world, making it less fitting to label it an “emerging market” in the traditional sense.
Currently, other regions are drawing more attention from investors. Emerging markets like Mexico, Brazil, Saudi Arabia, and Eastern European nations, such as Poland, have gained prominence. Additionally, India has rapidly risen as a key player in the emerging market landscape. India’s economic development has been exceptional, transforming the country into a global financial force. Its strategic location, skilled labour force, and active involvement in international trade have made India highly attractive to investors. By 2050, India is expected to become the world’s second-largest economy, which only enhances its appeal.
As new markets join the global stage, the approach to investing in emerging economies is changing. While a BRICS-focused investment strategy once offered stability, investors today are better served by considering each country or region individually. The differences among emerging markets have become too pronounced to treat them as a single entity. A more prudent approach involves evaluating each country or grouping regions for a broader perspective—rather than viewing Brazil and Poland separately, it’s more effective to analyse Latin America and Eastern Europe as distinct investment regions.
This distinction can help mitigate risks associated with the specific characteristics of different areas. For instance, Latin America has struggled with a lack of predictability in long-term forecasting due to volatile political climates, making it difficult for investors to anticipate future changes confidently.
While emerging markets have presented challenges, they still offer advantages that outweigh the drawbacks. These markets provide the potential for higher returns, particularly compared to the opportunities available in the US or European countries. That said, higher returns also come with higher risks, which investors must be prepared to navigate. In the case of emerging markets, these risks can often be justified due to the prospects of substantial returns during times of low interest rates.
Another benefit of investing in developing economies is the chance to diversify one’s portfolio. Investing in emerging markets differs significantly from investments shaped by geopolitical developments. It involves buying into tangible businesses. For example, purchasing shares in Indian pharmaceutical companies grants exposure to a market of 1.5 billion people—an entirely different proposition from speculating on future Federal Reserve decisions.
Of course, there are obstacles as well. Markets like India and Brazil can be difficult to access directly. It is not always straightforward to make specific investments or acquire individual company shares, often requiring investors to rely on professional asset managers or invest in exchange-traded funds (ETFs). These funds incorporate potential profits from these markets while being comparatively less risky, and the growing variety of ETFs makes them a more accessible option for investors.
Ultimately, investing in emerging markets may offer more opportunities than risks, particularly as upcoming Fed rate cuts could further highlight these advantages by making certain investments more profitable in a low-rate environment. The key to success lies in understanding the particularities of each region and selecting where to invest wisely. To reduce risks even further, investors should consider ETFs, which are designed by professionals to maximise returns while minimising risks.
Emerging markets present a complex but promising investment landscape. While challenges remain, opportunities abound for those willing to take a nuanced approach, consider regional dynamics, and use diversified tools like ETFs to navigate the risks.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
