Why this investment class is a growing opportunity.
As stock markets fluctuate, it can be challenging to make the right investment decisions. Good communication with your advisor is incredibly important, and the more you know, the better you can communicate about the best way to achieve your financial goals. Keeping up with the latest investment terms and trends is an important part of the process.
While not a new financial concept, you might be hearing more about emerging markets lately. If you’re not quite sure what they are, consider this your guide to understanding this important investment opportunity.
What is an emerging market?
An emerging market is an up-and-coming economic force – a country experiencing significant economic growth, industrial growth and rising household incomes. Countries currently considered emerging markets include Brazil, South Africa, China and Taiwan, among others. Morgan Stanley Capital International (MSCI) is considered the industry standard for determining whether a country qualifies as a developed or an emerging market. MSCI currently classes 27 countries as emerging markets, based on economic criteria that include:[1]
- Three consecutive years where income levels are 25 per cent above the high-income threshold set by the World Bank
- Stock exchanges that include a certain number of companies with strong balance sheets and significant trading volume
- Stable, efficient markets that are open to foreign ownership[2]
Tech innovation
Twenty years ago, Mexico, Brazil and South Africa accounted for nearly 30 per cent of emerging markets. Today, Asia dominates, with China, India, South Korea and Taiwan accounting for nearly 80 per cent of the MSCI Emerging Markets Index. Technology and communication services are strong economic drivers, with companies that deliver e-commerce solutions, cloud computing services, data storage and online health care diagnostics experiencing a strong boost from the global pivot to digital escalated by the pandemic.
“There are some economies that benefitted greatly from the pandemic. For example, work from home meant increased demand for internet-related services for video conferencing, digital transactions, and enhanced server farms to accommodate the increased capacity of cloud computing,” says Philip Ehrmann, Senior Managing Director of Manulife’s Emerging Markets Fund. “As we see an increase in e-commerce and cloud computing, emerging markets such as Taiwan and South Korea are valued for their manufacturing of semiconductor chips, handheld devices and other electronic devices that we all take for granted.”[3]
Highs and lows
Emerging markets as an asset class is considered a high-risk investment and requires careful consideration. Countries within this group may be experiencing exciting transformations and rapid expansion. However, they are in the early stages of economic growth. A healthy dose of caution is required as short-term fluctuations can also occur.
Emerging market countries may have a higher risk for political instability, currency fluctuations, market volatility and less transparent financial rules and regulations. Investment portfolio managers who specialize in this sector spend a great deal of time examining the stability of a country’s economy, along with the strength of key corporate financials within that country. Because of the inherent risks, it pays to work with your advisor to identify opportunities with strong track records and portfolio managers who specialize in emerging markets.
When considering your portfolio, the most important thing is to evaluate your level of risk tolerance with your advisor. The emerging market asset class is considered a high-risk investment with short term fluctuations. Here are a couple of things to keep in mind:
- Consider your comfort level with risk and the length of time you are willing to stay invested. Emerging markets are countries at the beginning stages of economic growth and may also experience bouts of volatility. A long-term perspective may be required, along with a willingness to tolerate ups and downs in the market.
- Speak with your advisor about the emerging market investment options available and consider dollar-cost averaging. Regular contributions can help to offset market volatility. Check out this article to learn more about the power of dollar cost averaging.
Depending on your level of risk tolerance, emerging markets might be the right fit for your investment portfolio. Speak to your advisor about this and other investment opportunities that align with your long-term financial goals.
[1] www.msci.com/our-solutions/index/emerging-markets
[2] www.msci.com/documents/1296102/1330218/MSCI_Market_Classification_Framework.pdf
[3] https://www.manulifeim.com/retail/ca/en/viewpoints/capital-markets-strategy/investments-unplugged-with-philip-petursson
