Advantages & Disadvantages of Investing in Emerging Economies

Emerging economies have great potential for growth because there is still major development occurring. Investors can gain exposure to these regions and see dramatic increases in investment portfolios. Unfortunately, there is also a lot of risk involved in emerging markets. This is often due to political and economic uncertainty in emerging nations, which can be reflected in investments in these countries.

Unlike developed that have already attained enough growth to create major economies, emerging markets remain in the early stages of expansion. Emerging economies typically hold great promise, however, and can exhibit faster growth than what can be achieved in developed markets. Investing overseas has its challenges in even the most developed economies because of the differences in the political and economic structures. By adding the instability that is often present in developing economies, investors could be in for some severe market swings.

One of the advantages of investing in emerging market economies is the diversification that investors can achieve. MSCI, which provides investment decision support tools, tracks performance in nearly two dozen developing economies in its emerging markets index. Economists streamline the selection process further by identifying the the leading developing economies. Brazil, Russia, India and China, for instance, make up the so-called BRIC nations. These emerging economies are among the largest and fastest-growing markets. They also have the greatest potential to influence the global economy. Investors can track market performance in these countries by following the MSCI BRIC index.

When investment professionals tout the prospects of the emerging economies, it's not long before investors who are in search of returns set their sights on these places. This is especially true when the profits available in the domestic markets are lackluster. The disadvantage of this rush into the emerging economies is that it inevitably makes these markets more pricey. In 2018, observers began to worry that political turmoil and declining currency values in many emerging markets could indicate those markets are overvalued.

Growth is an attractive attribute of the emerging economies, while high risk can be a major deterrent. For investors, emerging markets would provide expanding economic conditions with reduced risk exposure. In 2018, investors were increasingly concerned emerging markets could present heightened risks as the U.S. dollar rose, trade wars seemed increasingly possible across the globe, concern grew about Italy leaving the euro or the European Union and production slowed in some of these emerging countries.