Given their potential volatility, emerging markets aren’t for fainthearted investors, and many people avoid them. But emerging markets aren’t the vast unknown they used to be.
What are they? Emerging markets are countries that are still developing, usually by means of rapid industrialization. It may surprise you to hear that some economic powerhouses – such as China – fall into this category. Others, such as Thailand and Indonesia, are less surprising.
The primary reasons to consider emerging markets are diversification and growth potential. Emerging-market stocks may perform well when developed-market stocks are performing poorly. And in some cases, emerging markets offer unique growth opportunities. For example, China is transitioning from an industrial economy into a digitally led economy, with a high number of graduates in technology fields, significant venture-capital funding, and tax credits that support innovation.
Of course, emerging markets aren’t for everyone. The main risk is volatility. Any political- or currency-related crisis in an emerging market could devastate its stocks. Another concern is the potential impact of US interest-rate hikes, which can lead to a stronger US dollar. In such an environment, conventional wisdom holds: emerging markets underperform. Others point out that emerging markets have outperformed developed markets during most rate-tightening cycles since 1969, with exceptions occurring only when the rate increases came sooner than the market anticipated or were stronger than the market anticipated.
That said, a bout of volatility in the first quarter of 2018 stress-tested emerging markets, and they held up fairly well, as evidenced by flows. In other words, investors kept investing.
If you would like to discover the potential for portfolio diversification and growth through emerging markets, schedule a conversation with your financial professional. He or she can point you in the right direction based on your individual financial circumstances and goals.