It’s time to explore new ideas. And that includes some investment options you may not have considered before.
One idea for investors for whom potential growth is more important than stable principal value is emerging markets. These are a group of developing countries that are becoming more advanced and have the following characteristics: increasing gross domestic product; a low level of debt; an improving standard of living; a banking system and standard currency; and a market exchange with regulatory oversight. These countries also produce commodities such as metals and oil that are in high demand worldwide.
About 23 countries, such as India, China, and Chile, meet such standards according to the International Monetary Fund, S&P and other organizations.
In the past, investing in emerging markets was a strategy designed primarily to provide diversification as well as growth. In fact, many of these funds provided considerable returns fueled by the growth of a middle class that demanded more products and a better infrastructure, which in turn boosted their economies. Now, emerging markets have even greater growth potential.
Markets: Why Now?
The global recession of 2008 weeded out weaker companies throughout the world. In developed countries such as the U.S. and Europe this has resulted in markets that have gone up somewhat in relative value, but not significantly. Today, developed markets are highly leveraged and also have an older, and consequently smaller, working population. These factors suggest less opportunity for growth.
Emerging markets, on the other hand, have similarities to developed markets but also significant differences. They also experienced belt tightening caused by the global recession, which resulted in stronger balance sheets and better efficiencies. Many of emerging economies are closely tied to commodity prices, which have been facing downward pressure for several years with the realization that economic growth in China is slowing. However, the trend seems to be turning in recent months. Copper, for example, rose 19% in the month of November 2016 alone. Finally, these countries have a lower level of debt and a younger workforce than developed countries. All of these factors suggest a potential for considerable growth in emerging markets.
Emerging markets present some risks and variables that need to be actively managed by professional advisors. They include the following.
While they have strengthening financial systems, some emerging market countries remain vulnerable to corruption and weak regulatory oversight.
Emerging markets could be impacted by developed countries apparent move toward populism and protectionism. This could hamper trade and global growth.
The rise of commodity prices could slow, which could have a negative effect on emerging markets.
The U.S. dollar could continue to strengthen, which would make emerging markets investment less desirable.
For those who are focused primarily on preserving principal and generating current income, emerging markets may not be the best choice. But investors who want to diversify geographically and take advantage of growth in economies that are increasingly becoming more stable, now may be the time to consider emerging markets.
Chris Kim serves as the Chief Investment Officer of Tompkins Financial Advisors