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Are Emerging Markets Still a Good Investment?
By admin March 15, 2017

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Photo by Selvan Tamilmani

 

Multiple factors such as political instability and limited export growth had made emerging markets less attractive in the recent years but the trend looks to soon be reversing. In 2016, emerging-market economies grew just three percentage points faster than developed nations. And even though it is lower than what it used to be, this growth gap is likely to expand in the next years with increased political stability and the stabilization of recessions notably in Russia and in Brazil.

A Regional Approach to Emerging Markets

As we see China’s economic growth slowing down, India has become more and more attractive to investors. The International Monetary Fund (IMF) predicted that the country would be the “fastest major growing economy in 2016.” It has had steady productivity growth through the fluctuations of the global credit cycle and its recent economic rebound has led investors to look at mutual funds and Exchange-Traded Funds (ETF) with Indian holdings. A KPMG report found that India is the fastest growing investment destination for foreign investors in 2016.

India’s recent election results where “the ruling BJP government dominated the outcome” ensures that foreign investors that had remained skeptical in investing in the country will now examine new investment strategies.

What Investments to target in Emerging Markets

In recent years, the broad MSCI Emerging Market Index has concentrated in a few large companies dedicated to specific sectors (ICT and energy notably). However, investors usually add emerging market exposure to their portfolio because of the fast growth of these small economies. For this reason, they will want to diversify their investments and not limit them to a few international companies. That is essentially part of what makes the small cap universe so interesting to them. Indeed, contrary to the large cap universe, it offers more exposure to domestic demands. This particular exposure also guarantees investors with additional protection, as investments in domestic markets are less likely to be affected by national policies limiting trade.

On a more technical perspective, small cap universe stocks have less coverage than large cap universe stocks do which increases the chances of mispricing. Targeting small companies when investing in emerging markets is an opportunity to be exposed to attractive economies like India.

Therefore investors are reexamining emerging markets because of the rapid growth perspectives this market allows, taking into account long-run perspectives of these investments. That is one of the reasons why political stability through policies that lead long-lasting economic reforms is so important. India’s stable productivity growth in the recent years, paired with the promising election of Narendra Modi has made the country a target for international investors.

 

Read more:

Forbes: How to Invest in Emerging Markets Now.

The Economic Times: India one of the fastest destinations for investments: KPMG 

The Economic Times: Election attracting foreign investments

The Street: India’s Economy surpassing China

CNBC: Reasons to invest in emerging markets

The Economist: Investing in Emerging Markets


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