Where and how should you invest your money? A very plausible and frequently asked question, however it’s extremely difficult to answer it. Choosing the market alone, can be very difficult, this is usually why it’s a great idea to diversify your portfolio. For example investing in emerging stock markets can always be considered smart, but it does carry a lot of risks.
Developed markets like the USA, Japan or Norway are considered safe places to invest your money. Thanks to advanced infrastructure, a high level of industrializations, laws etc. one can be sure, that these regulated markets, will maintain a stable development without huge surprises. However, because of the high development, growth rate is slightly slower then in developing markets, which have a lot of catching up to do.
It’s hard to precisely define what can be stated as an emerging market, but it can be implied to countries, that show rapid development in order to reach the state of global leaders. Many companies have made lists of emerging markets amongst listed countries you can usually find:
– Poland etc.
These markets show great potential, but only have some of the infrastructure circumstances needed provide a background for trade. Banks, a stock exchange and a unified currency can be found, however there is usually a lack of securities regulations or the strict standards in accounting, which would be desirable.
The biggest risk you have to take when investing in emerging markets is the instability found mainly in two forms:
– Political: this is a very common flaw, arising political crisis’ frequently affect developing countries economies, by disabling trade, ruining diplomatic connections or causing interior discordance. Governments tend to make bad decisions, which can have deep impact on the economy and currency of the country. A good example for this was in the first week of January 2012, when because of the Hungarian governments decision to decline help from the IMF, lead to a record low Forint.
– Economical: Since the crises in 2007-2008 stimulus measures have helped the recovery, however have also resulted in growing inflation in China or India. There are also numerous countries that have great dependence on foreign funding and have requested many loans from financial institutions, such as the IMF.
When investing in foreign markets an additional risk factor can be the lack of information you can attain regarding the country. It is of key importance to have thorough knowledge of everything that may affect the bonds, stocks, ETF’s etc. you invested in. With the internet this is seemingly an easy task, however in many cases detailed delineation isn’t available in english, so you may have to turn to people who speak the country’s language.
Regardless of the many risks, investing in emerging markets is very popular, because of the large returns. These economies are blooming at a very fast pace, recovery from the previous crisis has taken them a shorter time then those which are considered developed. Another very appealing quality is the relatively small external debt, this is just a fragment compared to the members of the G7 for example.
It can be a good idea to invest in emerging markets, because of the potential for high returns, however due to the large risks, this should only be done with a well diversified portfolio. Have other, safer investments, so you can be prepared for a worst case scenario.