Should You Consider Investing in Emerging Markets?

Developing countries, also known as emerging markets, may be an appealing investment option to certain investors.

The four largest emerging markets by gross domestic product are the so-called BRIC countries: Brazil, Russia, India, and China. However, there are other large emerging markets, including Mexico, Indonesia, Turkey, and Saudi Arabia.

In the past few years, emerging markets have disappointed investors; stocks have been restrained by a number of factors, including weak commodity prices and political disruptions. However, in 2016, this trend reversed. Now investors seeking international diversification in their portfolios are wondering if they should look again at emerging markets. There may be solid reasons why they should.

A number of factors support positive emerging-market performance. The Chinese economy has stabilized as a result of early 2016 stimulus. Commodity prices are more supportive than they have been in the past. And in many emerging markets, developing middle classes are driving growth.

On the other hand, the potential impact of rising interest rates and a stronger U.S. dollar is a big concern for those considering investments in emerging markets, although in many previous rate-hike cycles, the U.S. dollar has rallied through first interest-rate hikes, then sold off. Certainly, risks must be monitored. For any lasting recovery to occur, there will need to be a stabilization of corporate earnings in emerging market countries.

On balance, however, emerging markets may be back as an interesting investment option for suitable investors.