Investing in Emerging Markets

If you are only invested in the US stock market, you could be missing out on some pretty big opportunities. It’s always smart to be on the lookout for any deal that is potentially profitable to you. Increasingly, these types of bargains and opportunities are being sought out by venture capitalists and everyday investors alike in emerging markets around the world.

Even though most of the money from investors still flows pretty much to silicon valley, New York, London, China and India, the trickled streams that lead out to other markets keep getting a little wider, deeper, and faster moving. With the risk involved with markets overall in the world today, the risk in these markets is looking less scary when compared to the potential gains. As the world moves further into the age of technology, the barriers to entry for higher-tech companies are being broken down in places that would have previously been considered taboo or downright lunacy.

Many small start-ups are developing at a faster and faster pace in these smaller second- and third-world countries. The commodities market has also been booming in places like South America, where exports to the steam-engine growth centers of China and India have remained solid, even while the US lags more and more behind. The four big emerging markets, China, India, Brazil, and Russia have seen huge growth over the past decade, and even through the recent and ongoing global recession they are beating the pants off most markets in terms of return on investment.

Other than higher risk tolerance and lower barriers, many venture capitalists are throwing money into emerging markets because they can get involved at the ground level with these entrepreneurs, leveraging their local knowledge with the VC’s background in the mechanics of business to create a beautiful creature of a company together. Small tech-based companies such as application developers, software companies, and others are popping up at an increasingly rapid pace in countries such as Malaysia, and established brands like Samsung in South Korea are expanding wildly, bringing interest in other plays from the region.

Apart from the emerging markets tech plays, commodities, and manufacturing, investing in companies that are not based in but do business in emerging markets are great ways to invest while staying in the US stock markets. Dell, while not the player it once was, spent time establishing a presence in China years ago. SAB Miller, while a top brand of beer in the US, has incredible marketshare in South America, India, China, Africa, and Russia. How’s that for an emerging market play? The point being that while investing directly in emerging markets can be a great addition to your portfolio, if you are wary of this option you can still take advantage of the growth in these regions by investing in the businesses that are established or growing there.

While 2011 saw some slippage in the emerging markets growth rate, 2012 has already had some promising news on several fronts. The manufacturing gauges for China and India indicate that the hard landing some were predicting may not be coming after all, and the central European banks still have investing funds flowing there. Brazil’s inflation estimates have been cut 5 straight times by economists, and their shares are rising. Poland’s commodities index is up after tax decreases on metal extraction, and Mexico’s central bank said that their remittance rate is up almost 9% over last year. Without getting caught up in too many particulars and bogging you down with boring numbers, let’s just say that this may be a great time to look outside the Dow Jones for some alternative investment strategies.

The governments in many of these emerging market countries are becoming increasingly democratic in nature, recognizing that the free market principles they are easy into are helping to spur their economies and growth. It is ironic that countries such as China and Russia are experiencing growth while relaxing governmental burdens on businesses, the US has seen stagnation and economic decline while continuing to raise overbearing regulations on businesses. In the past the exact opposite was true, showing that history is a great teacher, to some anyway. As they continue to promote business growth through lighter regulation and removing trade barriers, these markets should continue to see more growth.

When investing in emerging markets, it is wise to also consider the downsides, which can be numerous depending on which region you are looking in to. Turbulent political problems, unstable regimes, and stresses within the countries’ population or with another nation can be a high risk factor. It is often impossible to know if the market will be open for business the following day in some countries. In addition to these issues, the rules of the markets are made and enforced with varying degrees of compliance. For instance, in the US insider trading is fairly stringently monitored and enforced. In most other countries, even though they claim to keep a watch on this practice, in reality the enforcement is generally lax. There is also less liquidity in most emerging markets, which can cause orders to be filled at unfavorable (read higher) levels and higher broker fees. For example, while markets such as Egypt have been on investors’ radars for several years, in the aftermath of the Arab Spring uprisings the future of the region is much less certain.

Diversification has always been a hallmark of any good investment strategy. Most often you will hear this preached as spreading your money over different sectors, and this is indeed a smart thing to do. If you are looking for an even wider range of diversification, however, looking beyond the traditional bond market or real estate plays onto the emerging markets of our new global marketplace could be the strategy that takes your investing to the next level.

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