Investing in Emerging Markets: Yes or No?

Cynthia Cheng 

Many people are talking about investing in emerging markets, countries that are not yet, but soon to be come mature.  If we look at these as human beings, they’d be like teenagers, or perhaps 20-somethings.  But why do we want to invest in emerging markets?  Why not stay safe and invest in the so-called developed countries?  The truth is, many emerging markets, such as China and India are actually outpacing mature markets in terms of growth or will do so in the near future, according to Forbes.com.   So why bother investing in something that’s already there?  New is good.  And don’t forget, even mature markets were, at one point, emerging, even here in North America.

These countries are growing.  Many of these countries, such as India and much of Latin America, were former colonies of European empires.  Others, such as the countries in Eastern Europe, have gone under vast political change in the past twenty years.  Because the markets in these countries lack maturity, assets are much less expensive than in a matured market, and hence, offer much greater upside opportunity.  For example, one can possibly purchase the same amount of land in an emerging market for much less than in a non-emerging country.  Also, labour is cheaper there, so investors would also save costs when it comes to building, even if they are luxury condos or a resort.  This would be like investing in Los Angeles was turned into the home of the film industry or investing in Las Vegas before the casinos turned it into the playground of the United States.

But are there risks or issues?  Of course.  Politics is definitely one.  Most of the emerging countries are still under totalitarian government.  The rule of investing by foreigners can change over night.  And then there can be political unrest and turmoil.

Pakistan, for example, is considered one of the emerging markets.  But given the current climate, investing in Pakistan is probably not the best idea.  Quality control is another issue.  China has recently suffered many product recalls, especially items made for children.  There may also be environmental and human rights concerns.  If there are enough issues, a domino effect will occur.  People will be turned off from investing in said country and when people stop making new investments, the counry’s economy will eventually fall.  This would also be bad for people who already invested as they will have nobody to sell their investments to.  They will be stuck.

The decision to invest in emerging markets is, at the end of the day, a risk reward analysis.  All in all, the upside potential should outweigh the risks.  The key is to make sure we do not put all the eggs in one basket.  Only a portion of our investments should be in these markets, and such investments should be spread over a number of countries.  Diversification is the best way to manage risk.  Once you decide to invest in these markets, adequate research needs to be done before the actual investment is made.  A negative characteristic of the emerging countries is the lack of transparency.  Information is not readily available.  Only by hard due diligence and analysis, can we distinguish the good opportunities from the bad ones.  There’s no such thing as a free lunch.  Good luck.