With a variety of industries and growth rates that developed markets can only dream of, emerging markets have been a popular option for investors seeking to increase their risk profile and diversify their portfolio.
But these markets are not one-size-fits-all, making it important to examine the different regions before choosing where to invest.
An emerging market is one with low to middle per capita income. For the current 2015 fiscal year, low-income economies are those with a gross national income (GNI) per capita of $1,045 or less in 2013, and middle income are stated to be those with a GNI per capita of between $1,045 and $12,746, according to the World Bank.
These types of economies are in the transitional phase between a frontier market and a developed market, from a closed market to an open one. This process often requires structural, political and economic reform in order to attract foreign capital into domestic industries.
Activities in developed markets have a substantial impact on the behaviour of emerging markets. Quantitative easing (QE) might have delivered a boost to emerging markets in the early stages, but that is now wearing off. Much of the liquidity produced by QE that was once directed towards emerging economies is now being diverted back to the developed markets, particularly the United States.
Oil prices have had the largest impact on emerging markets in recent months, as the economies are split between net importers and exporters. Importers, such as India and China, have benefitted from cheap energy prices. Exporters, including Russia and Venezuela, have felt a sharp downturn, though currency depreciation could conversely attract foreign investors to other areas of their market.
Mona Shah, research analyst at Rathbones, emphasising the need to differentiate between the regions of emerging markets, says, “We are thinking of the evolution of emerging markets as an asset class. They are becoming less homogenous, with more granularity. Investors need a long-term horizon and to be cognitive of risk, such as significant volatility from currency valuations and sustained low commodity prices.”
The wide variety of countries included under the emerging markets umbrella makes it difficult to assess the market as a whole. Before investing in emerging markets it is necessary for advisers to look at specific regions to determine which are best suited to their client’s risk profile, then invest in funds that are geared toward these regions.
Russia
Russia has dominated the news over the past year. Beginning with the Western condemnation of its annexation of Crimea and ensuing conflict with Ukraine, to economic sanctions and tumbling oil prices, the state of affairs in Russia is extremely poor.
