How to invest in Emerging Markets

In this article, we will discuss

• What are Emerging Markets?
• Characteristics of an Emerging Market
• Advantages of Investing in Emerging Markets
• Disadvantages of Investing in Emerging Markets
• The 5 Major Emerging Markets to Know About

Investing is what everyone seeks as a great opportunity to gain a high growth rate in their money. While investing involves a lot of technicalities, it becomes important to know the basics of the market so as to make great returns from your investments. In such a case, core investors seek a great opportunity to invest in emerging markets and make huge profits out of it. While emerging markets have been in talks for a very long time, people find it interesting to invest in emerging markets and grow their money and profit rates rapidly. It was in the early 2000s when the term emerging market came to light, and since then, it has been a prime target of investors. But everything has its own gains and losses. Similar is the case with emerging markets. While they might seem to be appealing at first sight, investing in them requires an extremely hardcore study of the market’s ups and downs. Along with this, they also involve a lot of risk factors which, if not looked upon seriously, might lead you to unwanted losses.  <style="font-weight: 400;">Contrary to the above points, emerging markets can also yield you a heavy profit if you hit the right fund. In this article, we will do a thorough study of emerging markets, what they are, whether you should invest in them or not, and much more. In the end, you will also be able to make a clear decision about whether these markets are a suitable choice for you or not.

What are Emerging Markets?

Before looking to invest in emerging markets, it is really important to understand how they work. Emerging markets can be defined as the markets or economies of nations that are still in the developing state. This also indicates nations that are not yet completely developed but rather are in a phase of development. Such economies constantly record rapid growth in their markets; therefore, investors find it a great opportunity to yield higher returns through them.  But on the other hand, these economies are also highly volatile; therefore, there is a high chance that you may end up losing a lot of money if not invested wisely. This is why the decision to invest in emerging markets must be taken by keeping all the factors in mind and getting ready to bear a loss in the worst case. As of 2023, the nations that lie under the emerging market economies include India, Saudi Arabia, Mexico, and Pakistan. While these are prime examples of emerging markets, there are a lot of other nations that fall in the category of developing nations and can therefore be a great choice to invest into.

Characteristics of an Emerging Market

Emerging markets include a list of those nations whose economies have seen rapid growth in the last few years. This growth can be calculated as almost 80% to 85% of the economy rose in the past two decades. While there is no particular definition to describe emerging markets, there are certain characteristics that can be used to identify whether a market is an emerging market or not. Here is a list of them all.

1. Highly Volatile Market

Emerging markets generally have a very high volatility rate. This is because a major portion of these countries’ economies depend on exports, and therefore, there is a high chance that the market would experience its graph rapidly going up and falling at any point in time. This also creates a risk factor for investors who invest in emerging markets to face heavy losses or, on the contrary, might also get high benefits from the market’s nature. Such markets are, therefore, unpredictable, and no one can predict correctly what the market might experience in the coming days. 

2. High Growth Rate of Economy

Another important characteristic of an emerging market is its high growth rate of the economy. A country having an emerging market will be recording a high growth rate in its economy for the past 1 or 2 decades. It is likely to be experiencing industrialization and giving up commodity-based exports. The country's GDP will be rapidly growing and would have experienced a growth of around 3% but would remain still in the developing phase.  For example, India has experienced a GDP growth rate of around 7% for the year 2022 to 2023. Therefore the country can definitely be regarded as having an emerging market that has a high investment potential as well.

3. Majorly Young Population

Quite unnoticed, yet an important characteristic of an emerging market is that the nation has its major population lying under the teenage group. This can be said because such nations have a high labor force and produce a huge amount of goods and services through their young population. Moreover, such countries also expect a rise in their younger population in the days to come. <style="font-weight: 400;">Once again, a potential example of this characteristic can be India, which has its major population lying under the adult group. Approximately 50% of India's population is below the age of 25, while more than 65% of it is below the age of 35.

4. Strong Investment Potential

A country having an emerging market is likely to be having a strong investment potential as well. This is because such countries produce goods and services at a very low rate of manufacturing and might also change their policies regularly according to the international market to attract foreign clients. Therefore investors are likely to consider such countries as a strong investment opportunity, and thus, their market would ultimately experience rapid growth.

Advantages of Investing in Emerging Markets

Emerging markets bring with them many advantages that would help you yield high-profit rates through investing in them. Since the country has an emerging market that is experiencing rapid growth in its economy, it becomes a better opportunity for people to make the most out of it. Here are some advantages of investing in emerging markets.

1. High Growth Rate

Since emerging markets are highly volatile markets, there are chances that they might take a long jump at any point in time. Therefore, investing in emerging markets can be one of the best opportunities for you to yield a high growth rate and high return on your investments.  <style="font-weight: 400;">As compared to the economies of developed nations, the economy of developing nations boosts rapidly, and therefore investing in them can be much more profitable as compared to a developed economy. Thus, emerging markets can act as a boon for you and might change the entire course of your investment journey at a rapid rate.

2. Diversifies Your Investment Portfolio

Making investments in emerging markets will create a lot of new varieties of investments in your investment portfolio. Therefore, investors see it as an opportunity to diversify their portfolios and increase their worth to a great extent. Not only will an investment in emerging markets yield high return rates, but it will also boost their profile for a longer time period. Therefore, investors might see the emerging markets as a win-win situation for them and therefore invest in them.

Disadvantages of Investing in Emerging Markets

Although emerging markets might seem very appealing and attractive from a distance, they have their own downsides. Since they might not always go in favor of the investors, here are a few disadvantages of investing in emerging markets.

1. High-Risk Factors

While investing in emerging markets can yield you a high return rate and a lot of profit on your investment, the scenario might sometimes go the opposite as well. Since these emerging markets are highly volatile in nature, it cannot be predicted when the market might fall at a rapid rate. <style="font-weight: 400;">In such a case, if you invest in emerging markets, there is a 50-50 chance that you might encounter a profit or loss. Therefore, investing in emerging markets can be a very risky process, especially if you are not experienced enough.  

2. Devaluation of Currency

The currency of developing nations is often low compared to that of a developed nation. This is another major disadvantage that comes in the way of investing in emerging markets. Since it cannot be said when the currency of a developing nation might fall or get highly devalued as compared to the currency of a developed nation.  For example, the dollar is a currency of a developed nation, and it cannot be predicted when the currency of a developing nation, say India, might fall highly compared to it. In such a case, the profit rate of the investor will be highly degraded if the currency goes down significantly. 

The 5 Major Emerging Markets to Know About

While there are a lot of nations that fall under the developing category, 5 out of the bunch of such nations are sorted out. These nations possess a great capability for investments and have emerging markets that are known to be the best among the other developing nations. The major 5 types of emerging markets are the markets from the BRICS nations. These include Brazil, Russia, India, China, and South Africa. Let us know about these markets in detail ahead.

Brazil

Brazil is a rapidly developing nation whose economy has seen a boost of around 7.5% per year since 2010. This makes the Brazilian economy one of the best-emerging markets among the developing nations. Although moving ahead in time, the growth rate of Brazil slowed down due to certain political issues in 2016, but the nation still competes well among the BRICS nations.  Looking at the growth of Brazil, the future of the nation looks bright, and therefore, its market can be a great opportunity for investors seeking to invest in emerging markets. Although, it still comes with all the risks involved in investing in an emerging market.

Russia

Although Russia falls under the list of developing nations, it is one of the greatest competitors to the United Nations. Being a developing nation, the emerging market of Russia can be a good opportunity to invest in. But looking at the latest scenarios of the Russian-Ukraine war, investing in the Russian emerging market might be a bit too risky. Although, since the Russian economy has gone down to a great extent, it brings with it an advantage to invest when the market touches its lowest levels. Although, it is a highly risky game to play.

India

The Indian emerging market came to light after 1991. Since then, India has shown a constant graph of rapid progress each year. The Indian economy has recorded a new growth of around 7.5% per annum for a very long time. This gives a great opportunity for investors to invest in emerging markets. Though there were some fluctuations seen in the market, it is not as risky as the Russian market to invest in at this time. Therefore, investing in the Indian market can be a better choice to consider though there are some risks involved in it.

China

Being ahead of the Indian economy, China records a growth rate of around 10% each year. This makes its emerging market an even better opportunity to invest in. Although, the Chinese market constantly poses a risk due to its political issues going within the country. Still, you can consider investing in its emerging market and expect some profit from it. However, the per capita income of the country is quite low. Therefore, certain risks also come in hand if you decide to invest in emerging markets of China.

South Africa

Lastly, the South African emerging markets are another great option to consider investing in. Although the risk factors in this market are very high. This is because of the financial crisis that the country went through in 2008. This slowed down the progress rate of the country. Therefore, investing in emerging markets of South Africa can be a very risky step to take. On the other hand, the country is known throughout the globe for its excellent export quality, which has led to an increase in its per capita income in the last few years.

Conclusion

To conclude, investing in emerging markets demands taking risks. While such markets might yield you heavy rates, they can also lead you to great losses. Therefore, you must research well before you invest in emerging markets. In order to start your investment journey, you will need a demat account to invest in markets and maintain an investment portfolio. Instantly open a demat account with Samco and start your investment journey today.