Are emerging market investments on the upswing again? Many financial analysts seem to think so. And recent data shows that emerging markets are gaining traction. After a promising performance last year, two of the most popular and widely emerging markets ETFs – iShares MSCI Emerging Markets (EEM) and Vanguard FTSE Emerging Markets (VWO) – are already up approximately 5% in 2017.
If you’re considering gaining emerging market assets for the first time, or expanding your existing portfolio with a more aggressive investing approach, our investment advisors have put together some crucial issues to think about first. So before you take the plunge, read on!
Key Considerations – Market Perspective
On a broad macro-level, here are three areas to keep in mind. These take into account the geo-political aspects of a potential emerging market investment:
- Survey the political scene. Almost all emerging financial markets also have emerging political systems. It’s always a good idea to keep your political ear to the ground, as frequent government instability has a negative impact on future growth. Aside from financial indicators, well-run government is probably the biggest-single difference between established and emerging markets. The link between a maturing parliament and profits is stronger than most people think; stay up-to-date with the political news in any prospective emerging market.
- The HDI helps explain the ABC’s of emerging markets. One good indicator for an emerging market’s potential is the Human Development Index (HDI), a measurement of a country’s infrastructure, life expectancy, literacy rate, GDP, education level and other key factors. The higher the HDI, the more likely an emerging market can blossom into a developed market. Most emerging markets are in countries with an HDI of 0.750 or lower. Norway (0.944) ranks first in the most recent list, while Niger (0.348) is last. Current emerging market countries to keep an eye on include India (0.609), Vietnam (0.666) and China (0.727), to name just a few.
- Review the resources. If you’re interested in a particular emerging market, research which natural resources are readily available to exploit. Is the country primed for a mining boom? Does their slate of natural resources align with future manufacturing trends? For example, a sizable supply of silver deposits may indicate potential growth in precious metals exports, since many technological devices (smartphones, computers, etc.) are manufactured with silver components. Even resources like food can impact an emerging market; to cite one recent example, a food shortage in Tanzania has that country’s government in damage-control mode, with civic unrest and riots looming possibilities.
Key Considerations – Investment Perspective
How do emerging markets fit into your personal portfolio? Remember these following factors:
- Know yourself; how much risk are you comfortable with? Emerging markets are more of an unknown and unpredictable quantity than other investments. That’s why it’s so important to understand one of the sure-fire “knowns” when investing in emerging market stocks, mutual funds and ETFs: your investing strategy in general, and your risk level in particular. You’d be surprised how often investors fail to accurately recognize and assess their own personal financial profile. Our advice? If you’ve allocated a certain amount of medium-risk to high-risk securities for your portfolio, emerging markets are worth looking into. Allow your own habits and comfort level to determine how much you should invest in emerging markets.
- Keep an eye on fees. Emerging market ETFs typically have slightly higher fees than other types of investments, particularly for “active managed” securities. To limit the amount of “fee-creep” into your profits, look for an emerging market mutual fund or ETF with a “Net Expense Ratio” of 0.5% or less.
Will emerging market investments help sustain your own portfolio? Is investing in third-world countries a first-rate strategy? To help clarify how emerging markets can enhance your portfolio, it’s best to have as much information as possible. Yet quantity of data isn’t everything; you must have quality information and news to act upon. That’s why investors across the globe rely on Frontera for up-to-the-minute intelligence on political risk analysis, investment strategies, business developments and much more.