Investing in emerging markets and their potential for growth

When it comes to investing, the best growth potential often comes from avenues that are at a relatively early stage of development. For instance, consider the stocks of small-cap companies: such companies have yet to go through major growth and expansion, and early investors can benefit from their journey over the long term. This logic is not restricted to specific assets — it also extends to specific geographies, like emerging markets.

An emerging market is a country whose economy is experiencing rapid growth, and is transitioning from being a developing economy to a developed one. One of the best examples of an emerging market is India, with its rapidly expanding middle-class population, increasing investment in infrastructure, and political stability. Other emerging markets include China, Thailand, Brazil, South Africa, Saudi Arabia, and the UAE.

As an Indian investor, the question you need to ask yourself is — should you invest in other emerging markets? We believe the answer is ‘yes’. Let’s explore the reasons for this, and how to best go about investing in such markets. 

Reasons for investing in emerging markets 

Here are some of the reasons why emerging markets represent good investment opportunities:

1. GDP growth  

Historically, the GDP growth of emerging markets has consistently outpaced that of developed countries across different market cycles, and this is expected to continue. What’s more, the contribution of emerging markets to global GDP is only growing.

According to the International Monetary Fund’s projections, emerging-market and developing countries were expected to account for around 59% of the world’s GDP based on purchasing power parity by April 2023. 

2. Global diversification 

Emerging markets are not all concentrated in one geographical area. There are Southeast Asian countries like Thailand and Malaysia, Middle Eastern countries like Saudi Arabia and the UAE, South American countries like Argentina, Brazil, and Chile, and African countries like South Africa and Nigeria. This means that by investing in such countries, you can reduce the risks associated with a specific region, whether political or economic, thus benefiting from geographical diversification. 

For instance, the MSCI Emerging Markets index includes investment avenues from 24 countries across sectors like financials, consumer staples, information technology, healthcare, and real estate. 

3. Unique opportunities 

With a rapidly changing global economy and complex geopolitical dynamics, emerging markets now offer unique opportunities that can benefit your investment portfolio. For instance, since the end of the pandemic, several industries in the West are looking to deglobalise their supply chains and bring them closer to home. Due to this, countries like Brazil and Mexico are benefitting as companies look to move away from China and rework their supply chain strategies. 

Or consider Indonesia: due to the rise in Electric Vehicle (EV) adoption, Indonesia’s growth prospects are rapidly improving, as it has crucial metals like nickel, copper, and bauxite that are required for EV production.

4. Robust debt markets

Compared to developed countries, emerging market countries have robust debt markets, which are favourable for investors. Not only do such countries tend to have more stable debt profiles, but their public debt levels are also typically lower than those of developed countries. This is attractive for investors, as it is indicative of lower risk. 

In addition, debt instruments in emerging markets often provide higher yields, making them lucrative investment options. 

5. Favourable demographics 

Emerging markets typically have a growing middle-class population, which is often an indicator of strong future economic growth. This is because as the middle-class population expands, consumer spending increases, directly benefiting companies. 

Moreover, many of these markets have a growing proportion of young people that are educated and have internet access. For instance, as of 2021, 85% of Thailand’s population had access to the internet, making it one of the best-connected emerging-market countries in the world. 

How to invest in emerging markets 

1. Identify the right markets 

The first and most crucial thing to do is to identify the emerging markets that would be ideal for you to invest in, and to know why. Here are some examples of emerging markets and reasons to invest in them:

• Mexico

Mexico’s proximity to the US and Canada, along with its favourable trade agreements with several countries, makes it an attractive emerging market to invest in. It also has growing manufacturing and automotive industries, along with a strong tourism industry.

• Saudi Arabia 

Saudi Arabia is the largest economy in the Middle East, thanks to its vast oil reserves, and is also undergoing rapid infrastructure-oriented development. It also has strong tourism, entertainment, and technology sectors; in combination with its efforts towards liberalisation, these factors make it an attractive emerging market.

• Brazil 

Brazil is a country rich in natural resources like minerals, oil, and agriculture. It is also likely to become an EV hub in the near future, as Chinese EV giant BYD recently chose Brazil as the site for its first EV plant outside of Asia. It also has a rising middle-class population, and is undergoing rapid urbanisation and infrastructure development.  

2. Understand the risks involved

While emerging markets offer the potential for high returns, they may also be characterised by higher volatility. There are several kinds of risks associated with them, including economic risk, political risk, and currency risk. 

For instance, many emerging markets suffer from volatile governments, high inflation, and unsound monetary policies. Moreover, if the currency of such a country experiences a significant depreciation, then that can impact investment returns as well.

Hence, it’s essential to first understand country-specific risks when investing in any emerging market, and to aim for further diversification into multiple emerging markets. 

3. Choose the right investment platform

When introducing any kind of international exposure to your portfolio, it’s essential to choose a platform that makes your investing journey seamless, cost-effective, and secure. With Appreciate, you can invest globally in a way that maximises returns and minimise risks, all with just a few taps on your phone. Download the app today!

Emerging markets: a world of untapped potential 

As emerging markets continue to grow, investments in them offer the potential to do the same for your portfolio. In this day and age, it would probably be prudent to diversify your investments beyond the domestic market. In this day and age, when it comes to building wealth through investments, the world is truly your oyster!