From the British vote to exit the European Union to violence in Turkey to a sustained downturn in crude oil prices, headlines over the past year have brought a great deal of uncertainty to emerging market stocks. With uncertainty comes fear, and some investors have shied away from emerging market investments until they can get a better understanding of the global impact of recent events. Smart investors, though, should resist these initial temptations to wait and see. Now is the time to invest in emerging markets.
Uncertainty often signals opportunity, and the emerging market space is full of opportunity at the moment. With pessimistic prospects for global growth – the IMF predicts that overall worldwide growth this year will be just 3.1% – emerging markets remain a bright spot in the global economy. While the IMF recently marked down their overall 2016 growth estimates for advanced economies including the U.S., the U.K., and Europe, expectations are strong for emerging market economies, which the IMF predicts will balance out some of the lower growth in developed economies.
With a global economy experiencing turbulence, everything becomes relative when it comes to seeking returns. And relative to developed economies, emerging markets offer several strengths. One of the most frequently cited advantages is higher growth rates, driven largely by a growing middle class throughout the developing world that is eager to consume more as they rise in status. Additionally, lower debt rates leave emerging economies less burdened by obligations than their more developed counterparts, allowing them to maintain spending with fewer risks of default.
Many investors are already catching on to these potential upsides, and emerging markets equities are up 9% in the third quarter of 2016. With the Federal Reserve holding interest rates steady since December 2015, the low rates have kept the U.S. dollar from strengthening, providing support to the many emerging economies which deal mostly or even solely in dollars. This additional boon to emerging markets is yet another reason that emerging markets are especially attractive at the moment.
Perhaps the time has finally come in which investors will correct for the phenomenon known as “home bias,” a common occurrence in which investors overweight their exposure to domestic stocks in their home country and underweight stocks abroad. The long standing problem, which has been shown to affect investors in countries throughout the world and especially in developed countries, leaves investors exposed to high levels of systematic risk. That risk could be easily avoided with a more internationally diverse portfolio. As globalization continues to break down barriers across the world, it is also breaking down barriers to financial markets. All investors should take advantage of the many low-fee options and convenient avenues to invest in emerging markets, helping the problems of “home bias” to become a thing of the past.
Parallel to the emerging market space, investors seeking even greater returns have been drawn to frontier markets, which are less established than traditional emerging market economies but still have investable capital markets. Frontier markets are yet another way to ensure that investors are truly capturing These markets often have an even higher scare factor, with political risks and often causing concern. Within their emerging markets allocations, exposure to these markets Rising interest in these more exotic endeavors not only highlight the importance of exposure to a diversity of international markets, but also show that standard emerging markets are becoming mainstream.
Even with positive forecasts for future growth, the downside risks to emerging markets investments should not be ignored. A strong U.S. dollar, slowing trade growth, and political risks to open economies are all factors that could have a negative impact on emerging market growth. Just like any other investment, though, a degree of risk by no means invalidates the positive attributes and strong potential upsides of the investment. There may be challenges along the way, but emerging markets are well-poised to emerge resilient.