Advantages & Disadvantages of Investing in Emerging Economies

by Geri Terzo

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.

Identification

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.

Diversification

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.

Trends

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 in 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 February 2011, with escalating tensions in the Middle East and fewer countries to spot value because of a run-up in prices, investors began withdrawing assets from emerging market mutual funds by the billions of dollars and redirecting that money into major economies.

Growth & Risk

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. These were the conditions in the leading emerging markets during the spring and early summer of 2011. During this time, investors were turning to emerging market bonds for safety at the expense of some major developed markets. The appeal was formidable economies and a manageable credit risk.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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