4 Factors You Should Consider Before Investing in Emerging Markets

November 27, 2018

Emerging markets have been on the path of rapid growth since the early 2000s. These markets are characterized by enormous growth potential that makes them a profitable place to invest in. However, the risks involved in investing in emerging markets are sometimes understated. So, you need to decide if investing in an emerging market is the right choice for you. With so many assumptions and estimations, how should investors respond? We’ll look at a few facts in this article and try to help you make an informed decision. We believe now is the time to embrace the decision of investing in emerging markets and stay the course. But before landing on the analysis of investing in emerging markets, let’s understand a bit about the characteristics of emerging markets.

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Characteristics of Emerging Markets

Characteristic #1: Demanding market and culture

Factors like narrow highways, dust and heat, low budgets, and scarcity of financial resources all place strains on products in the emerging world. Modern consumers are very demanding and expect high value for their scarce cash. Therefore, companies investing in emerging markets cannot compromise with the quality of the products or services they provide. Both products and services have to be adapted to local traditions and culture in the emerging world, which can be very different from those in the developed markets.

Characteristic #2: Rapidly changing markets

The rapidly changing markets is one of the most significant characteristics of emerging markets as they embrace change and technology advancements very frequently. These markets can shift in a year or even in a matter of months like the markets of South Korea, China, or India. This also depends on the factors such as traditional business practices and culture, government regulations, and actions of corporates. Improved economic conditions backed by rising incomes keep on changing consumer behavior creating predictable shifts like empowering women. Therefore, investing in emerging markets faces new challenges as well as opportunities.

Characteristic #3: A youthful and growing population

While U.S, Japan, and Europe, are more worried about the rapid aging of their populations and their pensions, emerging economies are young. If we compare, only 21 percent of the U.S population is under the age of 14, while in countries like India, Brazil, and Iran this population percentage ranges from 30 percent to 35 percent. A more energetic and creative population is expected to provide better growth opportunities for their economy.

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Factors to Consider Before Investing in Emerging Markets

Political stability- a must know

With governments running the show in many emerging countries, it is pertinent to check how stable their reign is. No company or investor wants to invest in a country that has unstable leadership. Would you, being an investor, like to invest in a country where the leadership may one day wake up and decide to nationalize the country’s sole cell phone carrier? These are one of the many real concerns if you are investing overseas, especially while investing in emerging markets. Investment in countries that have frequently changed governments and weak regimes is risky. This is because the power shift leaves the economically distressed and policies unimplemented.

Immense growth opportunities

Investing in the emerging market offers immense growth potential with the opportunity to tap local resources. Emerging economies hold great promises and can exhibit faster growth than what can be achieved in developed markets. The differences in political and economic structures pose challenges while investing in emerging markets. But, on the other hand, evolving market demand is one of the major characteristics of emerging markets that can be utilized by foreign investors to grow faster.

Evaluating risk and growth

Before investing in emerging markets, it is very crucial to evaluate risk and growth. Growth is an attractive attribute while high risk can be a major deterrent. In 2018, investors globally are increasingly concerned about the heightened risks in emerging markets with the rising of the U.S. dollar. Also, the concern grew about Italy leaving the euro or the European Union that resulted in slow production in some of the emerging countries.

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