Emerging Markets Investing: Higher Growth, Higher Risk
Learn about the risk and reward profile of emerging market equities, including what drives returns in developing economies and how to size your allocation.
What are emerging markets?
Emerging markets are countries transitioning from developing to developed status, typically characterized by rapid economic growth, improving infrastructure, and expanding middle classes. Major emerging markets include China, India, Brazil, Taiwan, South Korea (by some classifications), and South Africa. These economies often grow faster than developed nations, but their stock markets come with additional risks.
Risks unique to emerging markets
- Political instability and abrupt policy changes can disrupt markets overnight.
- Weaker rule of law and corporate governance may disadvantage minority shareholders.
- Currency volatility tends to be higher than in developed markets, amplifying return swings.
- Capital controls can restrict your ability to move money in or out of a country.
- Lower liquidity in smaller markets can make it difficult to exit positions at fair prices.
Historically, fast GDP growth has not reliably translated into strong stock returns. Much of the growth may already be priced in, or it may accrue to private companies, government entities, and new share issuance rather than existing shareholders.
Research global opportunities
Compare valuations and fundamentals of companies across markets.
FAQs
How much should I allocate to emerging markets?▼
Emerging markets represent roughly 10-12% of global market capitalization. A common starting point is 5-15% of your equity portfolio, depending on your risk tolerance and time horizon.
What is the difference between emerging and frontier markets?▼
Frontier markets are even less developed than emerging markets. Countries like Vietnam, Nigeria, and Bangladesh are often classified as frontier. They offer potentially higher growth but with significantly more risk and less liquidity.
Are emerging market ETFs a good way to invest?▼
Broad EM ETFs provide instant diversification across dozens of countries and hundreds of companies. They are typically the simplest and most cost-effective way for individual investors to gain emerging market exposure.
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Intrinsic Investor is for education and research only. Not financial advice.