Why Emerging Markets Are Important To A Portfolio

Advanced economies growth rates compared to emerging economies

 
 
 
 
5 Year Average Growth Rate 
Examples 
Advanced Economies 
.42% 
United States, Europe, Japan, United Kingdom and Canada 
Emerging Economies 
6.5% 
Russia, China,India, Brazil, and Mexico 
Source

What are emerging markets

 

            Emerging markets are the international markets growing at high rates. The countries were known to be in poverty and the living conditions very poor. These countries have used globalization to adopt technologies, process, systems, and efficiencies to generate growth. The population in these areas is growing and the living conditions are improving. The more the money the people of these countries make, the more spending opportunity they have to create revenues. Many economies in the emerging markets are growing at rapid rates each year. The United States has become a mature market with a steady growth or no growth each year.

The emerging markets have untapped potential to create gains for investors. The countries in these markets are starting to have positive balance of payments and the government will have funds to improve the infrastructure of the country. Many emerging markets have become targets of foreign direct investment because of their high growth rates. Businesses want to enter these markets to generate revenue through the growing economies. Investors want the same benefit as FDI without entering the country physically. The growth rates and financial advancements of these emerging markets will provide growth and generate gains for the investor’s portfolio. Many emerging markets can be compared to the United States during the Industrial Revolution. This gives investors a long-term investment in the emerging markets until they begin to mature and the growth rate of the economies steady.

United States compared to emerging economies

Country 
5 Year Average Growth Rates 
United States 
-.02% 
China 
11.2% 
India 
 8.3%
Brazil
4.5%
Russia
3.6%
Mexico
1.6%

As you can see, the growth potential in the emerging markets is much higher than that of the United States and other advanced economies. The advanced economies will grow at a steady to moderate pace because of the advancements the countries have already implemented. The emerging economies are just beginning to modify their infrastructures and increase efficiencies in their countries. The emerging markets offer a higher potential of return to investors but that comes with higher risks. These countries contain political risk, country risk, exchange-rate risk and others that investors must be aware of before investing these economies. My suggestions is to have no more than 30% of your equities position invested in the emerging markets and do extensive research before entering these markets.

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