As the global financial landscape expands, investors are seeking new frontiers for growth and diversification. Among the most compelling options are emerging markets such as India, Brazil, Mexico, and South Korea — dynamic regions with rapid development, substantial consumer bases, rich natural resources, and strong tech sectors. Exploring emerging markets presents high growth potential and and unique opportunities to diversify. However, investing in emerging markets comes with higher risk than domestic markets. That’s why it is imperative to pursue a tactical approach while mitigating the potential risks. Here’s where to start.
Emerging markets are commodity producers, which means that there is a higher amount of market volatility due to a larger degree of correlation with commodity prices. Additionally, geopolitical uncertainty can prohibit investors from reaping returns. Emerging markets like China and Russia are currently undergoing regulatory uncertainty and political tensions that have slowed growth in markets that were otherwise highly promising. These major factors make investing in emerging markets riskier. Investors need closely monitor the rapidly changing social and political climate of emerging markets prior to moving assets. Investors also need to be wary of currency volatility in these regions, as sudden currency devaluations can disrupt the value of investments.
Each market is inherently global in nature, and while this can make the process of assessing global markets more complicated, it can also present new avenues for investors willing to put in the work. If one thinks about companies that are domiciled in Europe, those that have established an international foothold do not accrue 100% of their revenue from Europe. Most companies are global in nature, so even if a publicly traded company operates in a struggling market, it may flourish if it operates globally.
Investing in global markets is a slow and steady process, and the “home country bias” is more than a stereotype. In our experience, using factors and case examples from the current global economy helps us to guide investors toward new markets. For example, if the dollar is close to peaked, one can advise the client to invest in non-dollar-denominated assets outside of the U.S. that are more attractive than U.S. equities.
Similar to investing solely in domestic markets, a portfolio incorporating global markets requires balance. The MSCI World Index is a vital tool that can be utilized by investors to see how emerging markets are performing in comparison to emerged markets. The MSCI provides important functions for investors as the indexes offer market performance benchmarks that can better inform asset allocation and risk management. It tracks the performance of stocks from developed economies worldwide, representing a broad and diversified snapshot of the global market. In addition to utilizing MSCI, it's also paramount to be aware of the current economic, social, and political dynamics of the global market one is interested in investing in. Overall, investors should consider their own long-term goals and allocate resources in accordance with how willing they are to invest for the long-term through uncertainty and fluctuations.
Do your homework, place your trust in data, and consider investments in emerging markets from all angles and with all relevant macroeconomic factors at play.
Josh Markman is a partner at Bel Air Investment Advisors.
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