Emerging markets have been one of the hottest – and the riskiest – investment areas since the early 2000s. Popular with traders all over the world, they’re constantly growing and experience high volatility. Today, with the US-China trade is in full swing, emerging market stocks are at a generational low. Will they fight back?
Emerging markets outlook: bearing the brunt of the trade war
Right now, emerging markets are bearing the brunt of an escalation in trade tensions between the world’s two largest economies – the US and China – with no ending in sight.
Last week the MSCI’s index, which tracks emerging market currencies, went down 3.5%, following the “trade deal trauma”. According to the latest emerging markets review by EPFR Global, institutional and individual investors pulled $1.3 billion out of emerging market shares in just one week.
Emerging markets are highly sensitive to external risk factors, such as changes in monetary policies and global growth rates. Combined with domestic risks, including a weak currency, dependence on commodities and high current account deficit, these markets can be considered risky investments.
Despite all the challenges, emerging markets are still considered a gainful investment area. Those yield-hungry investors, tired of a lack of returns from developed markets, are edging closer towards the emerging economies.
For those who can’t settle for less than the best, emerging markets can still prove an attractive destination, which may potentially bring above-average returns. By trading emerging markets, you diversify your investment portfolio and get rid of a home-country bias, heading to the faraway places, where economic growth is accelerating much faster.
Risks of investing in emerging market stocks
There are two major risks related to emerging markets trading: the risk of being late and the risk of being wrong.
When it’s too late. Let’s take a closer look at China. Once an emerging market, China has already established itself as the world’s economic powerhouse. This may also mean that much of the rapid growth is already done. The right timing for your investments also makes the difference. The growth of the emerging markets is not smooth and steady, swinging up and down sharply. That's why picking up the right moment is extremely important.
When you make a wrong choice. Investors face the risk of choosing the wrong stock every day, regardless of whether they trade domestic or foreign stocks. However, emerging markets pose an additional risk. The price swings are much bigger when it comes to emerging markets. Transforming into a developed economy can take years. During this time the countries may face a lot of obstacles, such as political unrest and natural disasters, which may push the emerging markets back for years.
Reasons to buy emerging market stocks
Having acknowledged all the risks, investors still believe in the potential of emerging markets. Experts share some compelling reasons why they should ignore President Trump’s trade threats and continue buying emerging market stocks.
Emerging markets reached historic lows, which may actually be a good thing. If you were to track the MSCI Emerging Markets Index against the S&P 500, you will see that emerging markets are now down to around the levels of 2004.
Low valuations. Some extensive analysis has shown that investing in the world’s cheapest stock market has brought outstanding results in the long run. Experts from the German StarCapital name Russia and China the “best bargains” among the emerging stock markets, followed by Turkey, Greece and Korea. Experts believe that picking up and investing in the emerging market stocks according to their fundamental data, such as earnings and sales, could potentially double the investments over the next decade.
Portfolio diversification. Emerging markets develop under a different scenario than the developed ones. Sometimes this difference may save you, when the habitual markets you usually deal with bring you down. That's exactly what happened between 2000 and 2010, when the US market flunked and the emerging markets doubled.
High volatility. You know that volatility can be both a friend or a foe. A market can be a great bargain when it is down and almost no one wants it, and less attractive when it is up and everyone is buying. All the previous emerging market crashes in 1998, 2001, 2009 and 2016 provided fast and fabulous buying opportunities.
Too small a share. Investors in the USA have only 6% of their money invested in emerging markets. However, emerging markets share around 40% in the global economy and it has doubled in a generation. Emerging markets are growing way faster than the developed world. According to the International Monetary Fund, emerging markets will have a larger economic output than the developed and prosperous countries of the G7 by 2024.
Top 5 emerging markets to invest in
The term “emerging markets” usually refers to countries going through the stages from “developing” to “developed”. Since the beginning of the 2000s, emerging markets have included the BRIC nations – Brazil, Russia, India and China, accompanied by Vietnam and South Africa. The up-to-date list of the top 5 biggest emerging markets today, include the following countries:
China ($14 billion GDP)
The second largest economy in the world, China is still considered an emerging economy. The country experienced huge growth through the 1990s and 2000s, followed by an economic slowdown. In 2017 China’s growth rate grew again due to the increased demand for Chinese products at home and abroad. In 2018 the Chinese economy slowed down as the result of the escalating trade was with the USA.
Although the outlook for the Chinese stocks may seem risky, Lewis Kaufman, Artisan Partners’ portfolio manager, believes in the Chinese stock market anyway: “Regardless of what ultimately happens with the China trade tensions, there is a robustness to China that doesn’t exist anywhere else in the emerging markets”.
India ($2.8 billion GDP)
The world’s 7th largest economy and the 3rd most powerful emerging market, India kick-started its successful economic development in the 1990s. The Indian government introduced policies to boost market competition, per capita income and to increase the standard of living. By 2015 the economy of India had increased by 7.2%, which is significantly faster growth rate than that of other emerging markets. It is expected that the country’s economic growth will continue throughout 2019.
Brazil ($2 billion GDP)
Brazil has been showing impressive growth results, however, from 2010 onwards the country faced some problems, which caused investors to doubt the country’s economic future. Most of the concerns were caused by the unstable situation with Brazil's government and the further arrest of the former president Dilma Rousseff. In January 2019, Jair Bolsonaro took office. Since then, the new president’s economic policies for reducing taxes and cutting spending were received well by the financial markets.
Russia ($1.7 billion GDP)
The 12th largest economy in the world, Russia has been alternating between the developing economy and the emerging market since the 1990s. The scars of communism, the massive debt default that ruined the ruble, made Russia’s image far from attractive for investments. Since 1998 Russian economy began its step-by-step growth. After some efforts were taken to ensure financial stability, the International Monetary Fund increased its forecast for Russia’s GDP growth for 2019 – up from 1.7% to 1.8%.
Mexico ($1,2 billion GDP)
Mexico gained the reputation of one of the most popular emerging markets among international investors. Today Mexico represents the 2nd largest economy in Latin America and the 13th largest economy in the world. Despite a slowdown during the global recession, Mexico’s GDP has been rising since 2016 from $1.07 trillion to $1.2 trillion in 2018.