In recent years, emerging markets have become an alternative for investors who want to bolster their portfolios. Generally speaking, emerging market stocks originate from countries whose economies are transitioning from low-income, underdeveloped, and largely preindustrial to modern, industrialized ones that are increasingly engaged with the global economy.
When we discuss investing in emerging markets, we will be using MSCI’s definition of what qualifies as an “emerging market.” Elements such as market size, liquidity, accessibility criteria, and economic development all factor into defining which countries fall into this category.
Having that baseline definition of emerging markets doesn’t guarantee they’re an optimal investing area, though. As is the case with any potential investment approach, you’ll need to weigh the pros and cons.
What Are the Advantages of Investing in Emerging Markets?
Currently, U.S. stock market prospects aren’t particularly attractive from a valuation perspective. American share prices have become exorbitant relative to historical prices and are now at their second- or third-highest valuation level ever — depending on your preferred metric. On the other hand, emerging market stocks at present remain a comparative bargain and trade at relatively inexpensive valuations due to their tendency to be overlooked.
When factoring in the uptick in federal debt sparked by COVID-19 and aging demographics that might sap long-term investment returns and hinder growth, it adds up to the potential for lackluster investment performance in developed countries over the coming years. Many emerging markets are in better shape with respect to government debt, and some have young populations poised to fuel economic growth in the future.
Investing in emerging markets can also help mitigate the risk associated with being siloed in just one country. Diversifying your global exposure through emerging market value stocks can help curtail the severity of portfolio fluctuations in response to a declining dollar — and potentially lead to greater returns.
Of course, emerging markets do come with risks that you might not associate with U.S. stocks. Currency volatility is one significant risk; investing in a currency that loses value relative to the dollar can cause otherwise healthy returns to disappear. To reduce this risk, target shares in companies that operate in stable countries, demonstrate fiscal responsibility, function under a strong rule of law, and have a current account surplus.
Making the Most of Emerging Market Stocks
Opportunities for investing in emerging markets exist worldwide, but you should know this: Not all emerging markets are created equal. South Korea, for example, is a stable country with relatively strong institutions. As the home of highly industrialized household names such as Samsung, LG, and Hyundai, South Korea is brimming with technological and manufacturing prowess. Despite these factors, it is still considered an emerging market because stocks trade at a material discount compared with similar American shares.
As investors shy away from the high valuations commanded by U.S. stocks, emerging markets are gaining increased attention for the opportunity they present. While investing in emerging markets still involves some degree of risk, in-depth research and experience can mitigate that risk and turn emerging markets into future growth sources. Diversifying your portfolio across several countries make investing in emerging markets a chance to achieve some stability on occasions when the dollar hits a few speed bumps.
Emerging market stocks can be an essential piece of any investment strategy because of their ability to balance a desire for returns with an appetite for risk. Are you interested in learning more about them as an investment approach? Contact Pekin Hardy Strauss Wealth Management to set up a consultation.
This commentary is prepared by Pekin Hardy Strauss, Inc. (dba “Pekin Hardy Strauss Wealth Management”, “Pekin Hardy”) for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any security. The information contained herein is neither investment advice nor a legal opinion. The views expressed are those of the authors as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy Strauss Inc. cannot assure that the type of investments discussed herein will outperform any other investment strategy in the future. Although information has been obtained from and is based upon sources Pekin Hardy believes to be reliable, we do not guarantee their accuracy. There are no assurances that any predicted results will actually occur. Past performance is no guarantee of future results.