What Emerging Markets Offer Investors - dummies

What Emerging Markets Offer Investors

By Ann C. Logue

Investors everywhere want to get a return for taking risk and to be a part of economic growth. Emerging markets offer opportunities for both. The very function of investment in capital markets is to provide funds so that companies and governments can grow, creating jobs and improving people’s lives in the process.

Emerging markets have new companies selling new products and bringing new energy and ideas to the rest of the world. And these companies generally have to overcome crises and hardships that barely register in the developed world to attract attention on a crowded world stage, so they already have a proven track record. Emerging markets offer a range of investment openings:

  • Great growth opportunities: The total value of goods and services produced in a country is known as the country’s gross domestic product, or GDP. The GDP of the United States is $14.6 trillion. Consider that a 1 percent increase in the U.S. GDP works out to $146 billion. Now consider that the entire GDP of the Philippines, an emerging Asian market, is $167 billion, according to the World Bank. That’s about 1 percent of the entire U.S. economy. If the Philippines were to add $146 billion to its GDP, the country’s economy would almost double — and it would still be a tiny fraction of the U.S. economy.

    Many countries with a small economy have a large population, and that’s another opportunity for growth. The combined population of India and China provides more than 2 billion people who need shoes, soda pop, and sunscreen; who want watches, washing machines, and window cleaner. Meeting the needs of the world’s emerging middle class is enough work to keep many companies profitable for decades to come.

  • Uncorrelated returns: The basic philosophy of investing is that you take risk in exchange for the expectation of a return. One of the many attractions of emerging markets is that the risks are very different from those in developed countries. You can actually reduce the risk of your overall portfolio and increase your long-term return by making investments with a range of different risks that then cancel each other out making your returns uncorrelated.

    For example, the United States and South Africa are in different cycles. One country is fully developed and last had a revolution more than 230 years ago. The other is rapidly developing after a peaceful revolution just 20 years ago.

  • New technologies: The billions of people in emerging markets are putting their brains to work, coming up with new ideas for products and technologies for use at home and abroad. From sophisticated computers to low-cost cars to new pharmaceuticals to mobile-phone applications, businesses in emerging markets are serving the world, not just folks in their own countries.

  • New markets: The emerging-market countries are great customers for companies everywhere, both those based in developed countries and those in other emerging markets. Everyone trades with one another. A company in China working on low-cost solar power has a ready market in Nigeria. An Indian company that develops a $2,000 car for the new middle class there can sell it in Indonesia and Malaysia, too. A Mexican cement manufacturer can find customers in the United States and in El Salvador.

    Although you may think of some of these markets as new, many of the countries considered to be emerging have a long, rich history and, in many cases, had a rich economy in centuries past. For whatever reason, they retreated while nations elsewhere became strong, but now, they’re coming back!