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Investment in Emerging Markets: Opportunities & Risks attached

Investment in Emerging Markets Opportunities and Risks Attached to It

One of the most interesting shifts in emerging markets is that it makes any investor fall prey to the markets in no time as a result of their outstandingly cheap prices in the market. Emerging markets have remained the most popular and efficient investment area since the early 2000s. Such markets generally exist in developed countries with rapid economic growth as well as great market volatility. But, many issues, including political crises, trade disputes, and environmental disasters, are all leading investors to re-appraise their exposure to emerging market assets, but at the same time, there are various possibilities for growth as well investing in such markets. Let’s find out all the possible opportunities and risks associated with investing in emerging markets!

Risks Associated with Investing in Emerging Markets

Opportunities Associated with Investing in Emerging Markets

Investment in emerging markets is the most efficient way to diversify the investment portfolio of an investor by putting a portion or section of assets into such markets. They have a huge impact on the GDP of the country, with the potential for business growth. Such markets are generally categorized by economic factors like rapid growth in industrialization with lower per capita income and are compared to the markets of other developed countries. Here are some of the key opportunities for investing in emerging markets :

  • High Growth Potential: An investor always seeks high returns in the market and causes an emerging market to yield a higher rate of returns due to the rapid growth for the investors, which eventually provides them with the opportunity to expand their wealth and, at the same time, diversify their investment portfolio. Investors would not normally gain much from investing in domestic or established markets as compared to emerging markets. For example, The BRIC countries — Brazil, Russia, India, and China — are examples of developing economies with huge growth in the past decade and are referred to as the top emerging markets of the world due to their fast economic growth.   
  • Diversification: When an investor plans to diversify the allocation of investments in assets or securities, investing in an emerging market might be the most beneficial and strategic move for the investor. It provides the opportunity of receiving quicker and higher returns on investment and the advantage of attractive valuations in the stock market.

Risks Associated with Investing in Emerging Markets

Even though investing in emerging markets has its share of advantages or pros, there is a much greater level of depth in things to take into account before investing in such markets. Returns will fluctuate from year to year, sometimes dramatically and sometimes it gets difficult for the investors to quantify their expropriation risks. Here are some of the risks associated with investing in emerging markets –

  • Political Risk: There are certain political factors faced by investors, including political uncertainty, policy risk, and policy uncertainty or regulatory risk. The emerging markets may be prone to volatile governments, which becomes a serious threat to the investors and the economy of the country as well. Also, there is a probability of disruption of the operations of the companies as a result of the actions of the government and political institutions, including minority groups and movements. This creates a limit on the company’s ownership or control of its assets. 
  • Market Volatility: Emerging markets can also be volatile, which means that the magnitude of price movements of the assets or securities in the market may fluctuate, and the more frequent the fluctuations are, the more volatile the market will be. Since emerging stock markets are characterized by high volatility, it is important to notice the major shifts in the market, which eventually affect the investors as a result of these sudden increases or decreases in the variances.
  • Liquidity Risk: Investment in the stock market is generally distinguished by higher market liquidity which means it is easier for investors to invest in markets where they can buy and sell assets without minimum changes in price. Many emerging markets suffer from low levels of market liquidity, which creates a constraint on economic growth and development. Lower liquidity creates a negative impact on the underlying economy of the market, as a result of which the investors lose the ability to make investments freely.

Conclusion

Economies of emerging countries can benefit investors only if they can access capital at a reasonable cost and increase employment which will drive the investors to invest more and yield a high rate of returns on their investments. When it comes to emerging markets, many factors, like political instability, currency risk, regulatory risks, and liquidity risk, can create market stress and lead to significant losses for investors. But at the same time, investing in emerging markets can outperform investing in other developed countries because if you invest in economies with higher growth, you can expect high returns on investment. Some consider this statement a myth. This is because emerging market investment can be a roller coaster ride with tons of uncertainties and fluctuations while, at the same time, it gives high hopes to the investors with high return expectations on their investments. It is very important to understand the crux of how the markets move, how their prices fluctuate, and the research on the outcomes of investments.

Bhive

Bhive

Blogs, News and Articles related to Finance and Real estate

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