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Special Risks in Emerging Markets

Emerging countries have different risks than the world at large, so investing in these emerging markets carries different risks than those associated with investing in developed markets:

  • Political risk: Some countries have established political systems that the citizens are happy with and that have worked for a long time; other countries are less settled.

    Of course, even when a political situation is stable, the economy can have problems. When that happens, politicians like to have someone to blame, and ideally that isn’t someone who can vote for them. Investors from overseas sometimes fit the bill! And that, emerging-market investor, may be you.

    Because political risk is everywhere, you need to pay attention to the markets you invest in so that you can assess current risks and adjust your investments as needed.

  • Social risk: Social risk can take the form of ethnic unrest that complicates hiring or that makes it hard to reach customers. It may come in the form of boycotts or strikes that disrupt supply chains. All that needs to happen is for people to stop getting along and to take it out on businesses.

    Social risk is a little harder than political risk to quantify and to identify, but it’s real. You may well run into it when you invest in emerging markets.

  • Information problems: With any investment, you need reliable information in order to assess the risks and the potential return. The problem with emerging-market investing is that getting good information can be difficult — not to mention expensive. A country may have loose accounting standards, little media oversight, and few objective investment analysts paying attention to how companies are doing.

    It takes time and energy to find media that report on a nation in a language you understand, to become familiar with the differences in legal and accounting practices, and to make sure that the investment you make is for real.

    One easy first question to consider is why you’re being offered this fabulous investment opportunity. Is it because you have special expertise? Are you associated with an investment company that has been active in the region? Or are you just a sucker?

  • Liquidity: With any investment, you expect to get your money back someday. As a prospective investor in emerging markets, you need to be aware that getting your money back can be a problem.

    If you can’t hold an investment over a long period, emerging markets may not be the best place for your funds.

    Many emerging markets are thin, as the traders like to say, which means that few people are buying and selling securities on a regular basis. When you want to buy shares, for example, you may have to pay a high price in order to get the current owners to sell to you. When you need to sell, you may need to accept a discount in order to entice a buyer.

    Some countries have laws that limit the amount of currency people can take out of the country, which means you may be able to sell your investment but you may be prohibited from taking the cash home.

    In addition to currency restrictions, some nations may restrict who can invest and who can sell. You may not be allowed to sell your interest or not allowed to sell all your shares at one time. You need to know the laws of the country in which you invest and react accordingly.

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