Should we Still Invest in Emerging Markets?

Posted on October 22, 2013 by John Schmoll in Money Management

It’s not so long ago that emerging market investments were hailed as “the next big thing.” Before the 2008 financial crisis, growth was strong and investor confidence was at an all-time high. Emerging markets outperformed their developed world counterparts and a lot of people made a great return on their investments.

Once the financial turmoil began in 2008, the effect was magnified in emerging markets. While global markets are now rising, emerging markets are still falling. So the question is – is there still a place in your portfolio for emerging market investments?

Why have we seen such a Marked Downturn in Emerging Markets?

There are numerous reasons why an emerging market investment cannot yield the returns we were seeing a few years ago.

• The first reason is growth. With developed countries regrouping and rebuilding after the recent financial crisis, this doesn’t leave as much money for buying emerging market exports. This has led to a huge downturn in growth for emerging market economies including those in China, India and Brazil.
• Liquidity is another issue – with quantitative easing (QE) and low interest rates prevailing in the US this has hit emerging markets hard. However, there is now talk of tapering, or weaning the US economy off of QE. This could make matters worse in the short-term ; already some emerging market economies including Brazil and India have been forced to raise interest rates to support their weakening currencies.
• The excessive short-term growth observed in some emerging markets led to unsustainable levels of debt – profits were not invested wisely. Budget deficits that didn’t seem as serious when money was pouring into the emerging world are now starting to look insurmountable.  There are also political issues including expensive food and fuel subsidies to buy votes and excessive debt – both government and private.

A Move from BRICS to MINTS

Historically, BRICS (Brazil, Russia, India and China) tracker funds were performing well and yielding excellent returns for investors. For the reasons mentioned above, that is not the case any more. So where should you look to for your emerging market investments now?

Investment fund managers are discovering opportunities in Mexico, Indonesia, Nigeria and Turkey (MINTS). Click here to see the risk management software used by professional asset managers. Mexico has benefited from the US recovery and its proximity to the US is a great advantage as transportation costs rise. Nigeria has a dynamic consumer sector with a high growth rate. Indonesia has issues with its current account deficit but is still seen as an up-and-coming investment opportunity. Turkey connects these Asian economies to Europe and is definitely one to watch.

We are seeing some African countries benefiting from urbanization and consumption growth, similar to that observed in China’s boom years. Frontier markets including a number of African economies may be the next big thing when it comes to emerging market investments.

Is it Wise to Invest in Emerging Markets Now?

There is still value to be found in an emerging market investment but you will need to do your homework using data such as that provided by Sungard.com/APT. Long gone are the days where you could invest in a BRIC-themed fund and watch the profits roll in. Instead you need to do your research and target the right emerging market economies. So the question should really be “which emerging markets should I invest in now?” The type of fund youd invest in is also dependent on your risk tolerance and overall investing goal.