A fully flexible way to invest
4 minute read
Investing in emerging markets can be a rollercoaster ride. We explain what you need to know.
Who's it for? Investors with basic investment knowledge
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.
The world’s your oyster when it comes to investing, so you don’t have to stick to your home country when looking for opportunities.
Many investors often start out investing in the developed countries they are familiar with, such as the UK or the US, but for those with a strong constitution and more experience there are plenty of so-called ‘emerging markets’ that may offer long-term growth potential.
Here’s what you need to know.
The term ‘emerging market’ was coined by Antoine van Agtmael in 1981, an official working for the World Bank. There isn’t a universally accepted definition of what an emerging market is, but they are usually countries with economies still very much in the development phase – often with large, young populations, a rising middle class, and the potential for strong economic growth.
Countries considered to be emerging markets vary dramatically in size; from the powerhouses of India, to far smaller economies, such as Tunisia. However, they are often considered to be ‘emerging’ because of their economic development and reform programmes, and markets that are attracting global investment.
The MSCI Emerging Markets Index is a benchmark for these markets, and includes investment performance across 26 emerging market countries. These include countries in Africa, Eastern Europe, Latin America, some in the Middle East, Southeast Asia, and Russia.1
Among some of the largest and well-known emerging markets are the BRIC countries, or Brazil, Russia, India and China. Together, these countries alone account for around 40% of the world’s population, and carry a wealth of natural resources.2
There are several reasons that emerging markets might appeal to investors.
Emerging markets have, at times, been plagued by political instability, poor regulation and corruption, with stock markets that can be highly volatile and sensitive to any negative news.
For these reasons, investments in emerging markets tend to be much more volatile than those in more advanced economies, and so are more likely to fluctuate in value. They definitely aren’t for the faint-hearted and you’ll need to be comfortable accepting the fact that you could get back less than you put in.
It’s therefore vital that you take a long-term view when investing in emerging markets. While most experts typically recommend that you should have a time-horizon of at least five years, for emerging markets, investors may need to buckle up for far longer.
When it comes to investing overseas, you’ll also need to take currency risk into account. If the pound weakens, this will boost your returns from foreign investments. However, if sterling starts to strengthen the opposite will happen.
Funds which invest in global emerging markets include the Investec Emerging Markets Equity Fund which aims to exploit the opportunities of emerging markets, and the Lazard Emerging Markets Fund. The Lazard fund typically invests in the shares of companies located in countries in the MSCI Emerging Markets Index, which it aims to outperform.
Investors should bear in mind that our referring to funds does not constitute advice or a personal recommendation to invest in these or any other investment. If you’re unsure about whether investing is right for you, seek independent advice.
Please remember that investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.
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