Emerging markets have been a popular discussion topic in the world of investing ever since the premise was introduced in the early 2000s. Their appeal is due to the fact that they’re a novel investment opportunity that offers equal parts risk and reward. While investors can make considerable gains if they find the right emerging markets to invest in, potential pitfalls can lead to loss.

What Are Emerging Markets?

“Emerging market” is a term that’s used to describe economies that are currently in-between the stages of ‘developing’ and being ‘fully developed’. This phase usually occurs when economies have rapid growth, but that also brings high volatility. 

In 2021, some emerging market economies include those of India, Brazil, Russia, Pakistan, and Saudi Arabia. Usually, when investors are looking to identify emerging markets, they’re looking for countries with little or no political issues and consistent economic growth. 

Pros and Cons of Investing in Emerging Markets

While investing in emerging markets can diversify your portfolio and lead to great returns, there are still a few risks associated with this investment decision. Here are some of them: 

  • It may be hard to find reliable information: When you invest in a company in an emerging market economy, it can be challenging to find official documentation regarding its financials. 
  • Political risk: In emerging economies, the political situation can often be unstable, negatively impacting the country’s businesses. This is especially true if any government or corporate corruption is uncovered. 
  • Currency risks: This is the most significant difference between investing in a stable economy and investing in an emerging one. When the economy is growing, the currency can either increase or decrease in value, which means that the returns on your investments can constantly fluctuate. 

Now that you know some of the cons of investing your money in emerging markets, let’s talk about some of the potential benefits:

  • Diversification: If you’re an investor looking for a broader set of exposures, emerging markets offer you an opportunity to invest in different businesses and expose you to local economies that are often not accessible to foreign firms.
  • Lower valuations: The Emerging market economies will usually carry lower multiples of earnings to offset some of the political and economic risks. Specific stocks, companies, etc., within an emerging market, can have much better valuations by several orders of magnitude, meaning that you paying far less for equivalent earnings potential.
  • Capturing economic growth: By investing in emerging markets, you as an investor can participate in lower multiples and higher growth rates. For example, the growth projections for the economies of developing markets are expected to see a growth rate of 6.3% compared to the 4.3% in advanced economies, which all things being equal investments are likely to give you higher returns. 

Conclusion

Emerging markets are a great investment option for people that want to diversify their portfolios and capitalize on economic growth. Not only are there chances for higher returns, but emerging economies also lead to better valuations and expose you to a different set of investment opportunities that you may not have been involved in otherwise.