The risks and rewards of investing in emerging markets

As far as investing goes, there is one thing that’s certain – the ultimate goal of every investor is to make a profit. While there undoubtedly are some who aim to simply stay afloat with their portfolios, deep down they, too, look for breakthrough opportunities that could increase their profit by multitudes.

As for these opportunities to multiply one’s wealth by investing – they are few and far between. However, they’re there – especially if you know where to look. And those who know where to look often look towards emerging markets.

An emerging market can sometimes be best described by a single word – mayhem. Because an emerging market is an occurrence linked to developing countries, it harbours in itself every association one could have with a developing country: unclaimed niches or lesser competition, favourable tax laws, growth in buying power, chaos and, most importantly, opportunity.

It is of the utmost importance, however, to understand the major risks of investing in emerging markets, before looking to reap the rewards.

Nothing good ever comes for free

For an investor, there is rarely anything more frightful than uncertainty. Being unsure about how to act or react and the potentially devastating effect that could have on one’s investment portfolio can certainly induce feverish nightmares. That’s why uncertainty is among the top risks in investing. Definitely for investing in emerging markets. Not having enough or valid information can add to overall risk and distress.

Uncertainty in emerging markets can and sometimes does include almost everything. Starting with political and governance uncertainty, which plays a much larger role in emerging markets than in developed ones. As the political situation in a developing country or region can sometimes be unstable, it’s fair to assume that the laws and regulations or, in fact, the whole system currently in place can change overnight. Naturally, rapid changes rarely bode well for existing investments.

There’s financial uncertainty as well. It usually means that, for one reason or another, it may be difficult to:

● Raise capital for your enterprise;
● Find and maintain the necessary level of labour;
● Liquidate your assets;
● Have the same set of rules for all involved parties;
● And many more…

Another major setback an investor may face is the forex uncertainty. If the developing country faces any political or economic turmoil, your investment may likely lose some or even most of its value due to the rapid loss of value in the local currency. There are many precedents of this happening, with Zimbabwe and Venezuela perhaps being the most prominent.

Of course, there are many other risks involved with investing in emerging markets, however, the former are typically the main ones with uncertainty being the common denominator.

It’s not all ‘doom and gloom’

Without risk, there is no reward. And there’s at least some form of risk connected to investing. Then, what are the rewards?

Well, for one – most developed countries have markets that are usually already saturated and do not possess the ability for rapid growth. That is directly opposite of what emerging markets offer investors – immense potential for, often, rapid growth in addition to a ‘vacant niche’ economy. In essence, emerging markets can offer returns on investment that developed markets simply cannot. Thus, an investment portfolio that allocates at least a portion of itself to emerging market investments can grow more substantially over a shorter time frame.

There’s another important benefit, though. To those who check in on this blog from time to time, it will come as no revelation that portfolio diversification is a must-have! You can, of course, diversify your portfolio strictly with domestic investments, and no harm will come from it. And, diversifying your portfolio with overseas investments has the potential to increase the overall risk of the portfolio. Yet, think of it as a tool to increase your portfolio’s profitability. You have all of your safe, familiar investments at home – why not add something a little more profitable, albeit – more volatile?

The takeaway.

The purpose of this blog has never been to persuade the reader or endorse one type of investment over the other. It goes for all – emerging market investments, too. The analysis here is superficial and performs as a tool for familiarisation rather than preparing you in depth for investing in the asset or market. That being said…

With all their flaws and strengths, emerging markets should always be considered, carefully, as an investment option. For, at the very least, it can grant you some additional portfolio diversification, while still investing in the same asset class that you do at home. In the best-case scenario, not only will you gain additional diversity, but you will also increase the profitability of your portfolio significantly.

Like with any other investment venture, try and perform your due diligence in researching what you can. That way you’ll prepare yourself as much as you can, and perhaps it could save you some heartbreak and money down the road. Or help you earn more on your investment!