As an investor you will often hear the term emerging markets mentioned alongside the words “profit” and “growth”. But, even when such terminology is used, it can be hard to get a grip on what emerging markets actually are and how they relate to your investment portfolio. A nation that is defined as an emerging market by industry experts will be one that has a growing working population and is transitioning into an open market economy. The term was originally coined by Antoine van Agtmael back in the 1980s, as a way to do away with the less flattering term “less economically developed country” or LEDC.
What Makes an Emerging Market?
An emerging market isn’t too difficult to define, it doesn’t matter whether it’s Hungary’s slow-developing economy or China’s powerhouse product exporting prowess, emerging nations often share a select number of characteristics. These characteristics are signs of growth, however there are still risks involved should you choose to invest in an emerging market. The following are the characteristics that will define whether or not a nation is an emerging market:
- Transition – An emerging market is one that is often in a state of transition, from a closed to an open economy. During a transitional period, prosperity is often the predicted outcome, however the political and monetary fragility of a nation will be tested and may result in increased investment risk.
- Growing population – The backbone of any emerging market is a growing working population, preferably with those of a younger age. It stands a country in good stead for long-term growth, even if there is also an increased risk of political instability in some cases.
- Increased foreign investment – Emerging markets that have strong reputations usually have an element of foreign direct investment. It usually stands as a sign of anticipated economic growth, but in some instances it has also been a tell tale sign of corruption, especially if too much occurs too soon.
Emerging Markets and Your Portfolio
When looking to increase the diversity of your portfolio, emerging markets represent a realistic route to go down. The easiest way to gain exposure to any and all emerging markets will be through an Exchange Traded Fund (ETF). It offers traders the chance to gain access to a variety of different emerging markets via a single security and thus at a reduced level of risk. Popular emerging market ETFs include the likes of iShares, Vanguard, BLDRS and SPDR S&P among others.
Emerging markets can be an exciting avenue for investment. In many ways investing in them allows people to enter on the ground floor, and reap the rewards of a country’s future prosperity. Emerging markets are nations that have rapid growth in mind and are looking to further industrialization and business investment among other things. However, in spite of the appeal it should always be remembered that emerging markets carry a high element of risk and that there are no guarantees that you will get back the same amount that you pay in.