Emerging market investing can be appealing to many investors. Developing countries, considered emerging markets, have innovation and growth potential that may be more limited in developed markets. As a new asset class for some investors, these investments are not without their own unique risks and challenges.
What is an Emerging Market?
An emerging market is a country or geographical region characterized by rising income and education. These traits may allow an emerging market to become more globally engaged, and potentially, a developed, global player.
Attributes of an emerging market may include:
- Increased liquidity in local debt and equity markets
- Increased trade volume and Foreign Direct Investments (FDI)
- Domestic developments of financial institutions
It is important to remember that not all emerging markets may turn into developed markets, and there is no set timeline for if/when this could occur.
Innovation in Emerging Markets
Innovation has the opportunity to thrive in emerging markets – but not out of luxury. Many businesses may be forced to find innovative business models and methods of raising capital out of necessity. Startups in emerging markets traditionally do not receive the same cash injections as businesses in developed markets, and therefore may turn to accelerators, angel investors, and crowdfunding to fulfill their capital needs. Additionally, businesses in emerging markets may not have the financial flexibility to take on higher risk, so instead, they often extensively refine their product before seeking investors. With the potential for rich innovation, some investors may see investing in emerging market as tantalizing.
Advantages of Emerging Market Investing
Emerging markets may have advantages that are less often found in developed markets. The potential for growth could be more substantial in emerging markets than in developed markets. These markets are typically smaller and more concentrated in both scope and geographic size, which could result in easier facilitation of connections. Founders may be more readily able to find the right partners and resources to help their business scale and grow. Investors can diversify their portfolio geographically to possibly offset economic downturns in other markets. This concentration of resources and diversification potential is a unique combination typically not found in developed markets and lends itself to the appeal of emerging markets.
Disadvantages of Emerging Market Investing
Not unlike other investments, emerging market investments have risks and disadvantages. Political factors, economic risk, and currency value all have the potential to affect the success of an investment. While emerging markets can be characterized in part by increased liquidity in local equity and debt markets, these investments may still have less liquidity than those in a developed market. Additionally, a lack of infrastructure could potentially increase chances of corporate bankruptcy, and the possibility of war or civil unrest has the power to impact such investments. While emerging markets may have a higher growth potential, they potentially carry more significant risks than developed markets.
Key Considerations
Emerging markets could be appealing to many investors. Benefits not typically seen in developed markets have the potential to outweigh associated risks. Here are a few things investors should keep in mind:
- Diversification –Diversification is crucial for investing in general, but investing in emerging markets may require a more concentrated effort to mitigate risk.
- Size of Scope – Emerging markets are typically contained and have a smaller scope. It is important to note that not every emerging market may become a global player.
- Liquidity – Expect less liquidity than one could see in a developed market. Local political or policy changes, environmental and socioeconomic factors, and currency value may lead to longer hold periods or inability to attain liquidity.
- Disclosure Frequency – Issuers in emerging markets may be likely to provide investment updates less frequently than those in developed markets.
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
