Many investors are familiar with popular U.S. technology stocks like Apple Inc. (ticker: AAPL), but it’s a great big world of opportunities out there. That means that if you truly want to find the best investments and take a fully diversified approach to the stock market, you may want to look beyond America’s borders to Europe, Japan and Australia — and even to emerging markets such as China, Brazil and India.
“Emerging markets” used to be a phrase that meant a lot of risk, thanks to underdeveloped infrastructure as well as the practical difficulties of getting U.S. dollars into these investments. But nowadays, emerging-market stocks are easily accessible — and often as easily tradable as stocks like Apple.
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If you’re interested in this asset class, either because of its profit potential or simply to add some geographic diversification to your portfolio, it is simpler than ever before to invest in emerging markets. But before you get started, you’ll need to have answers to the following foundational questions:
— What are the risks and opportunities in emerging markets?
— What are the main emerging-market countries?
— How do you buy emerging-market stocks?
— What should you look for in emerging-market investments?
What Are the Risks and Opportunities in Emerging Markets?
Emerging markets are typically countries that are not as advanced as so-called developed economies, such as Europe and the U.S. But it’s important to understand that the word “emerging” implies action and is a very positive characteristic.
Typically, emerging markets feature more rapid gross domestic product, or GDP, growth, since these economies have much more room to expand. They also tend to feature big growth in capital markets as innovation, debt issuance and capital formation all come into their own under increasingly established financial infrastructures. And last but not least, emerging markets tend to feature a rising standard of living as a growing consumer class and high-tech professional class are born out of a more traditional and industrialized economy.
It’s easy to understand why this is a great opportunity for investors. Regions that are generally seeing more growth, more wealth and more opportunity create a tailwind for all parts of the economy. But many times this growth can be fragile or sporadic, since systems haven’t matured enough to withstand some of the disruptions or challenges that more mature economies can take in stride.
In other words, investors can climb to much higher highs in emerging markets, but naturally risk a harder fall if things don’t go as well as planned.
What Are the Main Emerging-Market Countries?
Every nation’s path to growth is different, so there’s no universal definition of what makes an emerging market — or what makes it attractive or unattractive at a given moment. But that said, four countries that make up the acronym BRIC tend to be the most popular emerging markets. They include Brazil, Russia, India and China. Here’s a bit of detail on each:
Brazil
The largest economy in South America, Brazil is the world’s fifth-largest country by area and the seventh largest as measured by population. It’s also incredibly resource-rich, with active materials and industrial sectors. The big opportunity, however, is the move beyond this traditional economic model to a more digital one. Unfortunately, recent government corruption and bribery scandals have created headaches with big-picture infrastructure improvements and economic growth in the region.
Russia
The economy of Russia has gradually transformed from a planned economy under communism into a mixed market-oriented economy. But similar to Brazil, government corruption and the strong-arm approach of Vladimir Putin have created challenges and unpredictability. Specifically, after the 2022 invasion of Ukraine and resulting sanctions on Russia, it has become difficult to invest in many assets related to this region.
India
The world’s largest democracy with about 1.4 billion residents, just a hair short of the total population of China, India has become an emerging market worth watching because of its people power. The nation is trying to embrace Western financial models but also has a very do-it-yourself approach that has led to large populations of small-time investors, tech innovators and creative thinkers. It’s definitely messy in India given the strain of a massive population that still faces serious poverty. But the nation is undeniably full of promise.
China
Ranking as the No. 2 economy in the world by GDP, it’s a bit strange to consider China as “emerging” instead of “emerged.” But the fact of the matter is that despite its relative scale, GDP per capita is still quite low in this nation — only about $12,000 per person as of 2021, whereas the U.S. GDP per capita is more than five times that figure. That hints at a lot more headroom.
This list of leading emerging markets is not fixed, however, and can change and evolve based on geopolitics or local economic trends. Russia’s relative decline on the world stage after its invasion of Ukraine is the most stark example of this. But on the other hand, the rise of China over the last decade or so has lifted neighboring nations such as Taiwan and Indonesia, which have benefited thanks to simple proximity to this long-term growth story.
Smaller nations that are considered emerging markets and are worth mentioning include South Korea, Mexico, Saudi Arabia and Turkey, all topping $1 trillion or so in GDP.
Many investing experts consider nations much smaller than these to be too illiquid or uncertain for reliable investing. These are often labeled “frontier” markets.
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How Do You Buy Emerging-Market Stocks?
Many years ago, it was difficult for Americans to buy into emerging-market companies. Enterprises either were not publicly traded, or if they were, they had listings on foreign exchanges that weren’t easy for U.S. investors to access.
Nowadays, many overseas companies trade on U.S.-based exchanges via American depositary receipts, or ADRs. These are special certificates issued by a U.S. bank that represent shares they own in foreign stocks.
The most popular ADRs are recognizable foreign brands, such as Japanese automaker Toyota Motor Corp. (TM) or U.K.-based pharmaceutical giant AstraZeneca PLC (AZN). But ADRs also include stocks like Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) or China tech conglomerate Alibaba Group Holdings Ltd. (BABA). These companies are valued at hundreds of billions of dollars, and can be bought and sold just as easily as your favorite blue-chip stocks.
If you’re looking for easy access to emerging-market stocks, then ADRs like these are a great place to start.
Smaller emerging-market stocks that don’t have ADRs are admittedly harder to trade. However, there are many exchange-traded funds, or ETFs, that provide easy access. These instruments are pools of various assets — stocks, bonds, commodities or other types of investments — that trade the same way that stocks do.
In other words, for the price of a single share, you can buy into emerging markets via diversified funds like Vanguard FTSE Emerging Markets ETF (VWO). This ETF holds thousands of emerging-market stocks across Brazil, China, India and elsewhere. You don’t get to pick the stocks yourself, but you get low-cost, diversified exposure to investments in more than 30 countries.
What Should You Look For in Emerging-Market Investments?
If you understand the general risks and opportunities presented by emerging-market stocks, and if you understand how to buy into these regions via ADRs or ETFs, it’s time to get serious about your strategy.
And as with many things in investing, that begins with research.
The first thing to research is the big picture. Many emerging markets are overly sensitive to macroeconomic policies, and stocks there take their lead from broader business and consumer spending regardless of their individual business lines.
One recent example was the underperformance of China in 2020 and 2021, thanks to its strict zero-COVID-19 policy that limited economic activity. As a result, while the S&P 500 gained 18% in 2020 and 28% in 2021, the flagship Shanghai Composite index was only slightly better than flat across that period.
In other words, investors who were expecting a post-COVID bounce in this emerging market were sorely disappointed.
But beyond the big picture, it’s also important to look at individual company news and sector trends. For instance, Alibaba cofounder Jack Ma vanished in late 2020 after falling out of favor with Chinese regulators, and he reportedly moved his entire family to Tokyo. As a result, BABA stock hit its lowest levels since entering public markets in 2014.
This combination of big-picture trends along with company-specific factors can make emerging markets even more complicated and challenging to predict. But that shouldn’t dissuade investors from accessing the overall potential of emerging markets. With some research and the help of tools such as ETFs, which provide built-in diversification, even everyday investors can tap into the potential of these high-growth regions.
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Megatrends: The Future of Emerging Markets originally appeared on usnews.com
