Emerging markets offer investors some of the best long-term growth opportunities , but risk and volatility can be high. However, these dangers can be reduced with proper analysis, while volatility can present surprising entry points for disciplined investors.
This guide provides an overview of how to analyze and invest in emerging markets, primarily through ETFs. Exchange Traded Funds (ETF) or listed funds are investment funds that have the characteristic that, like a stock, they are listed on the stock market, and their management is passive, since their intention is to replicate a reference index.
Of course, the topic is vast enough that no single guide on the subject is completely comprehensive. But what this approach does is basically apply engineering analysis to the problem, which means it breaks the problem down into smaller parts that can be more easily solved individually .
One of the best ways for investors to focus on emerging markets is to look at the four levels of risk involved: fundamentals of the company you want to invest in, market values, exchange rates, and capital flows. These aspects can be studied separately and then create a global vision to obtain a more general knowledge.
Why invest in emerging markets?
In short, the reason to invest in emerging markets is that, on average, they have more GDP growth than developed markets.
As a group, they have higher population growth and higher GDP per capita growth, making the overall increase much faster compared to slow-growing rich nations . For this reason, emerging markets are becoming a growing part of the global market capitalization.
Emerging markets have higher levels of risk than domestic stocks or developed foreign stocks. It is, therefore, a problem that must be taken into account, as an opportunity to take advantage of .
Some countries have better risk/reward ratios than others. You can invest in a wide variety of emerging market ETFs, or you can take your chances on an ETF from a particular emerging market country or company . You can also combine both methods, so that you have a diversified portfolio, but one that focuses on certain sectors.
5 things to keep in mind about any emerging market
Either way, the more you know about what’s going on in different countries, the more confident you can be in your investments and the more resilient you’ll be when big sell-offs happen in emerging markets. Hopefully you see opportunity instead of fear.
Although there are many metrics and data that you must take into account to analyze any country, here are the most important basic aspects if you want to know how to invest well in an emerging market :
Growth rate
First, find out about demographic trends in the country . Countries with growing populations have an easier time increasing their GDP. Trading Economics is a reliable website that works as a quality source to learn more about this statistic.
Next, check the GDP growth rates . The IMF regularly publishes reports on the world economy, which include future estimates of GDP growth rates for each country.
debt levels
The Bank for International Settlements has data on debt levels as a percentage of GDP for most major countries. You can look at government debt as a percentage of GDP, household debt as a percentage of GDP, and corporate debt as a percentage of GDP.
In this way, you can check where there may be debt bubbles, which countries are relatively debt-free and which have mostly relied on debt for growth in recent years.
Balance of trade
You can check the trade balance in Trading Economics or a similar source to check if the country you are interested in investing in has a trade deficit or a trade surplus : Does it produce more than it consumes or vice versa? A trade surplus, or a relatively equal balance close to zero, shows that it is an economically competitive country. You should also check the current account to know the net inflow or outflow of investments.
foreign reserves
One of the most important tools a country has to protect the value of its currency is its foreign exchange reserves. If their currency weakens, they can sell some of their foreign reserves and buy domestic currency to strengthen it.
Therefore, it is useful to look up the amount of a country’s foreign exchange reserves relative to the size of its GDP from a reliable source . Thailand, for example, has foreign exchange reserves equivalent to about 45% of its GDP, which is high. Turkey, on the other hand, only has foreign exchange reserves equal to 15% of its GDP, which is a low percentage.
You can also check out inflation rates, interest rates, and historical exchange rate charts . XE.com is an ideal website for historical exchange rate data.
Stock value
Finally, it is important to know the stock valuations of the country in which you are interested in investing or the average stock valuations of emerging markets as a whole.
The World Bank has a good set of graphs/data of stock market capitalizations as a percentage of GDP , so you can see the trend over time.
You can Google, “MSCI [country] index” and view the MSCI PDF data sheet for any country. Updated monthly, it displays the price-to -earnings, futures price-to-earnings, and price-to-book ratios of the nation’s stock market index . You can also check single country ETFs on iShares to get a look at this stat.
Investing in emerging markets as a strategy to diversify your investment portfolio is a smart move . This gives you a chance to make a profit, as you will have most of the world’s economic growth in your hands for the next two decades.
Volatility should be viewed as an opportunity to rebalance the portfolio or as important entry points , rather than something to be avoided.
When you know a country’s growth rates, debt levels, money resources, trade balance, and stock valuations, you have a pretty solid picture that can show you the potential of a country’s stock market performance over the years. next 5 to 10 years. None of these are short-term indicators, but they give you an idea of how the country’s market will behave in the long term.
For most people, sticking with emerging market ETFs is the way to go if they want to pursue a simple, diversified strategy . However, the broad emerging market funds, which are heavily concentrated in China, may or may not be the best. Investors who want to focus more on other countries, such as perhaps India, can also buy ETFs from a specific country.
