Is it worth it to invest in emerging economies? Because of the uncertainty that exists on the market, investors continue to think whether it is right or not to invest more in emerging economies. Despite the slowdown in the growth of these countries, these economies continue to run at double speed compared to the developed countries.
While emerging economies and countries are no longer able to run at record speed, their growth rate is still unreachable from the already developed countries. It is enough to take a look to what is happening to China. For this reason, emerging markets continue to offer good opportunities and they can provide interesting gains in the medium term.
It must, however, always remember that there are differences among the economic capabilities of each country. There are nations that, although the slowdown, have an economy in good health; while others are in need of structural reforms to allow their economy to continue to grow.
The best profit potential is mainly concentrated in the stock market. According to Research Affiliates LLC, sub-consultant to one of the largest fund managers in the world, ‘the assets of emerging markets currently have a very affordable price and they could represent the investment of the next decade’.
The assets of the emerging markets allow us to obtain much higher yields (up to 40%) compared to those offered in the main markets of Europe and United States. They are, on average, more likely to give good profits.
We must be careful, however, to the risk associated with these investments because it is often higher than those of developed countries.
Research Affiliates continues by stating that “capital flight from emerging markets is a great opportunity – and most likely the investment of the next decade regarding to long-term investments. We are increasingly convinced of our position about emerging market bonds and stocks”.
As for bonds, we need to consider another factor: the Federal Reserve. In 2015, the bullish monetary policy of the Fed and the rise of the US dollar have had deleterious effects on debt in dollars of Corporate in emerging countries. Especially, if the dollar strengthens, it weakens the bonds of emerging countries.
But this should not discourage you; although the bonds are no longer able to guarantee the good yields obtained in the past months, they still offer a much higher return than that of bonds traded on the markets developed.
The real problem of investors in emerging markets is the volatility on the financial instruments that are linked to these countries since it is still fairly high.
Despite the trend fluctuations recorded on the emerging markets in 2015, foreign debts have been priced better than many other instruments, such as US stocks, global government bonds and US debt.
Investors thus will demand higher returns for the higher risk they are willing to take buying emerging market debt.
To understand if it is a good move to invest in this kind of countries, it will be important to focus on the impact that the monetary policy of Fed will have on bonds and on emerging market equities and be careful to the prices of the raw materials of which many developing countries are net exporters.