Equities in emerging markets have great long-term growth potential. There is still plenty of room for technological advancement which will ensure improved productivity, continued urbanization, a more educated middle class with greater earning power which will increase economic activity.
Regulation of exchanges and overall fiscal governance has improved thus reducing sovereign and operational risks for the major investors in emerging markets.
Key factors for investing in emerging market equities:
There may be a slowdown in developed markets due to enforced cuts in government spending. Governments are seeking to reduce their budget deficits to reduce debts and may look to increase taxes, cut public spending and cut public sector jobs.
The increasing earning potential of the workforce in emerging markets means consumers have more to spend on goods and this will boost demand for manufacturing and production firms.
Improved regulation of the financial markets exchanges means that investors can access the markets easily and there is ever improving liquidity in the markets.
Some emerging market stocks are still undervalued due to the perceived uncertainty and political risks involved with investing in these markets. These stocks offer great potential long-term returns due to increasing demand, improved regulation and running of exchanges as well as a greater influence of developed markets on emerging markets in terms of direct investments and efficiently running exchanges.
Overall given the debt situation in developed markets and the expected slowdown in economic growth, emerging markets should continue to grow at a faster pace which offers investment opportunities.
There are plenty of scope for improvement in emerging markets which will further boost growth prospects and equities returns. Financial regulation is improving, governments are more prudent and the markets are fast catching up with technological advancements.
When investing, a balanced portfolio needs to be diversified to spread out risk. A diversified portfolio needs to include equities and government bonds from developed markets as well as those from emerging markets. Hence emerging market equities do not only offer great potential for equity growth but also offer an alternative in diversifying an asset portfolio.
Risks Associated with Emerging Market Equities
Market risk: the value of assets in the Portfolio is typically dictated by a number of factors, including the confidence levels of the market in which they are traded.
Operational risk: material losses to the Portfolio may arise as a result of human error, system and/or process failures, inadequate procedures or controls.
Liquidity risk: the Portfolio may not always find another party willing to purchase an asset that the Portfolio wants to sell which could impact the Portfolio’s ability to meet redemption requests on demand.
Exchange rate risk: changes in exchange rates may reduce or increase the returns an investor might expect to receive independent of the performance of such assets. If applicable, investment techniques used to attempt to reduce the risk of currency movements (hedging), may not be effective. Hedging also involves additional risks associated with derivatives.
Custodian risk: insolvency, breaches of duty of care or misconduct of a custodian or sub custodian responsible for the safekeeping of the Portfolio’s assets can result in loss to the Portfolio.
Derivatives risk: certain derivatives may result in losses greater than the amount originally invested. Counterparty risk: a party that the Portfolio transacts with may fail to meet its obligations which could cause losses.
Emerging markets risk: emerging markets are likely to bear higher risk due to lower liquidity and possible lack of adequate financial, legal, social, political and economic structures, protection and stability as well as uncertain tax positions.
