Emerging Market Investment: Navigating Foreign Lands

Emerging market investment is investment in markets in developing countries that are undergoing rapid economic development. Including Russia and China, and countries such as Indonesia and Peru or Czech Republic and Turkey. Because of a host of economic and political factors, emerging markets are much riskier and more volatile then many other investment markets. It is common to see the values rise and sink within a space of a few months. Understanding the pitfalls and potential dangers involved in emerging markets can lead to profits for investors.

Understanding Emerging Markets

Countries are classified as "developed" or "developing." Developed countries have benchmarks they must adhere to. If a country does not meet the standard for a developed country, they are considered a developing countries. Some of the development benchmarks include:

  • Human Development Index - measures a nation's average life expectancy, education and standards of living. While some of the other lists focus on the economy, this list aims to show how economic development affects its citizens' quality of life. In order to be considered developed, a country's human development index must be over 0.800.  The index is compiled on annual basis by the United Nations.
  • World Economic Outlook survey - measure a nation's economic development using per capita income, degree of integration into global financial systems and export diversity (in other words, they export more then one type of product). The qualifying indicators chance every year depending on the overall economic conditions. It is compiled by the International Monetary Fund.

Developing countries, with emerging markets, are countries that exhibited significant economic growth and revised it's laws to make it's financial institutions more efficient, accessible and investor-friendly. This attracts foreign investments, which fuels further growth. The growth is accompanied by significant economic development, though the extent of it varies from country to country. Their economies usually grow quicker than those of the developed countries. However, because their advancements need time to grow, the emerging markets are much more vulnerable to sudden, equally dramatic declines.

Investing in Emerging Markets

Because of the risks involved, investors need to carefully consider whether they want to invest in an emerging market of any given developing country. They must research that country as thoroughly as possible.  For best results, they may want to get help from a trustworthy resident. This will allow the investors to anticipate factors that might affect the value of their investments. Some of the things investors should research include:

  • Economic structure - what the country exports and imports, what kind of natural resources does it have? How dependant is it on tourism? And how it's stock market fared against various crises? Weighing those factors should give an investor an idea of whether an investment is something they are comfortable with.
  • Laws and corruption - every country has a corruption to some degree, but in many emerging market countries, the laws aren't strong enough to effectively combat corruption and hold the individuals involved accountable. Investors should pay special attention to laws regarding fraud and identity theft.
  • Infrastructure - businesses need to be able communicate and transport products quickly and efficiently. This may not be possible if the country's infrastructure is underdeveloped, Investors should pay attention to all aspects of the infrastructure - just because one aspect is efficient doesn't mean the same is true for others.
  • Education - how many college-educated professionals does the country have and what fields do they usually belong to.
  • National attitudes towards foreign investment - what is the general attitude about foreigners investing in their economy? And, how does this affect local elections (if any)? If a significant section of the population is hostile to foreign investors, the investors may face hostility and other various legal hindrances.
  • Potential armed conflicts - does the country have a history of armed conflict with it's neighbors or ethnic minority groups within it's borders? Investors should consider it's size, the state of it's armed forces and how it handled conflict in the past. Wars can lower the value of investments, though the extent of it usually depends on the scale and scope of the conflict.  Investments that involve border and disputed regions are particularly vulnerable.
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