Volatility in Emerging Markets: Opportunities and Risks
Emerging markets economies have a lot going for them:
· High growth potential on account of faster local and regional economic increments
· Expanding middle class with more disposable income and interest in investments
· Favorable returns resulting from access to exclusive economic growth premiums
For these and many other reasons, international investors have always looked at developing markets as strategic options to help diversify their portfolios. However, the biggest downside of such investments has always been the unsteady, unpredictable nature of the emerging markets themselves. In this post, we examine the volatility of these markets, evaluate the opportunities offered, and assess the inherent risks.
But first, what exactly are emerging markets?
What are Emerging Markets?
Emerging markets refer to the economies of developing nations primarily found in Latin America, Southeast Asia, the Middle East, Eastern Europe, and parts of Africa.
These emergent markets are evolving from a low-income, semi-primitive status to a more robust and industrialized one. What typically characterizes them is bourgeoning populations, escalating urbanization, rising economic growth, and advancing financial systems. It is these explosive traits that create lucrative opportunities and risks for interested investors.
Volatility within these markets is largely driven by local economic factors such as fiscal policies, interest rates, and inflation. Political instability and regulatory precariousness also add to the instability. There’s also external influence in the form of capital flow, international market trends, and trade dynamics to contend with.
Be that as it may, let’s explore some of the opportunities presented by these developing markets.
Emerging Market Opportunities
· Enhanced Investment Diversification
Emerging markets offer portfolio diversification which is advantageous because it allows the investor to spread risk while enhancing potential outcomes. Additional benefits of this type of foreign hedging include exposure to several growth occasions, capital preservation, reduced concentration risk, and flexibility.
· Compelling Value Propositions
By their very nature, developing markets present attractive asset valuations to profit-hungry investors. The favorable price ratios, market multiples, and desirable indicators are appealing to the risk-tolerant investor.
· Impressive Growth Outlook
Emerging markets enjoy strong, robust, and lucrative expansion opportunities. The growth outlook in many of these countries is generally positive presenting global investors with significant potential for impressive returns.
However, don’t be fooled by the promising outcomes, there is still a high probability of incurring some loss.
Developing Markets Risks
· Lack of Ease of Buying and Selling
Market liquidity is one of the major concerns international investors have. The uncertainty of not knowing if you’ll be able to sell off assets can make investing more of a gamble. Most developing markets don’t yet have the depth and fluidity sophisticated markets enjoy, which can lead to money being locked in.
· Political Instability and Geopolitical Risk
Political instability in neighboring territories can trigger geopolitical risks within the region that can affect your investments. Regulatory risks are also almost always lurking in the background.
· Exchange Rate and Foreign Currency Risk
When trading on the global stage, there are currency conversions to deal with. This opens you up to both exchange rate uncertainty and currency volatility. Neither of which as an investor you can control.
Conclusion
The growth prospects of emerging markets are self-evident, but they are not without great risk on account of local and regional instability, high volatility, and regulatory discrepancies. As with any investment, injecting capital into a developing economy necessitates thorough research, consultation with risk management specialists, and willingness to accept the possibilities of total loss.