Are you looking for an investment that may not be priced as high as US equities? Are you looking for a way to diversify your assets, possibly increase returns and decrease your overall portfolio volatility? Then you may want to consider looking abroad to the emerging markets. In the last year to year and a half the emerging markets have been hit hard and are poised to get back to their historic returns. One reason these markets have been hit is recent unrest in their political systems and a second reason is the Federal Reserve is cutting back on their bond buying and that is causing currencies to decrease against the US dollar in many emerging markets. Emerging markets have had a history of being volatile but they have also had some very good returns as well.
So what is possibly the main reason emerging markets have slowed in recent months? As local political situations do influence that countries markets if you own an ETF that invests in numerous markets one country may not have a significant influence on your investment. But the tapering of the Federal Reserve’s buying of US bonds in theory will cause the interest rates on the bonds to increase and make them more attractive to both domestic and foreign investors. And that may cause countries in the emerging markets to see inflation, a tightening of their monetary policy and slow their economic outlooks. Again by investing in a very diversified ETF that is not concentrated too heavily in one country or a geographic area these negative factors to reduce the value of the ETF as much as if it is heavily invested in a particular country or geographic area. While investing in emerging markets is a good plan investing in a single emerging market is extremely risky.
As the Federal Reserve continues to reduce the buying of the bonds it may continue to have an adverse effect on emerging markets. However, some countries have already taken certain steps to reduce the volatility of their markets as they relate to the actions of the Federal Reserve. In many markets the countries have raised interest rates and intervened in the currency markets. There are five countries in particular that may be very reliant on what the Federal Reserve does and how their own government’s react to both foreign and domestic issues. The five main emerging markets in question are Brazil, India, Indonesia, Turkey and South Africa. China has taken steps to restructure its economy and their individual stocks appear to have future bad news built into today’s prices.
Now here is where you as an investor will have to do your homework and due diligence. As China is the largest of the emerging markets it comprises about 20% of the MCSI Emerging Markets index. As I told you earlier in the blog you need to make sure one country does not make or break your investment. With ETF’s being as inexpensive as they are it is possible to diversity by owning several ETF’s that invest in geographic regions. It is also possible to invest in emerging market bonds through the use of ETF’s as well as a way to diversify risk.
Emerging markets may be down right now but their future is bright. As more and more families that live in these emerging markets enter the middle class these economies will start to move forward. As a general rule emerging markets offer higher growth opportunities than developed markets.