An important strategy for building a diverse portfolio is to include holdings from a variety of locations, both domestic and international. And when you invest internationally, you have the opportunity to invest in both developed markets and emerging markets.
Difference between Emerging Markets and Developed Markets
An emerging market economy is generally considered an economy that is transitioning into a developed market economy. It has rapid GDP growth, growing per capita income, increasing debt and equity market liquidity, and an established financial system infrastructure. Examples of countries in this group are China, India, Russia, Taiwan, Thailand, etc.
Developed markets, on the other hand, have more advanced economies, better-developed infrastructure, more mature capital markets, and higher standards of living. These are the most economically advanced countries, with highly developed capital markets, regulatory bodies, and high household incomes. Most developed markets are located in North America, Western Europe, and Australasia. They include countries like the United States, Canada, Germany, the United Kingdom, Australia, New Zealand, and Japan.
What are the best ways to invest in both emerging and developed markets?
Investing internationally is a smart financial move, but it can be scary to invest your money in companies and regions that are completely unfamiliar to you. One of the easiest ways to incorporate stocks from both developed markets and emerging markets is to purchase shares in managed funds. Such funds are especially attractive to those interested in investing in emerging countries but nervous about immature capital markets. U.S.-based investors tend to avoid the headaches and hurdles associated with direct investments in emerging market stocks and opt for exposure to the asset class via passive exchange-traded funds or actively managed mutual funds.
Are there risks involved with investing in emerging markets and developed markets?
There are always risks involved in any investment. But the risks of investing in emerging markets are unique, such as those associated with political and economic instability. There’s also the risk associated with foreign currency fluctuations, as declining currency values can cancel out your gains or amplify your losses.
In addition, accounting standards and financial reporting requirements are much less stringent in developing markets. Despite these risks, there are returns to be gained from including emerging market stocks in your investment portfolio. For instance, they offer the opportunity to capitalize on economic growth that is occurring more rapidly than in developed economies. Emerging countries usually also have growing populations to fuel future consumption. In most cases, developed markets offer less risk of sudden political or economic instability, and when investing domestically, you can also avoid the risks associated with direct foreign currency. Despite these benefits, U.S. and developed equity markets also carry risks.
Every market, whether developed or emerging, offers both advantages and disadvantages for investors. Those differences are the things that make investing in all types of markets worthwhile. When developed markets are down, emerging markets may be booming, and vice versa. By building a diversified portfolio that includes holdings from both emerging markets and developed markets, you’ll be more likely to successfully weather the storms of each market.
In addition to the relatively high return on investment, investors also have confidence in the economic fundamentals of emerging countries. Consequently, investments in emerging countries have a high level of risk as well, so you should choose to invest in stocks with strong fundamentals. Or if you are interested in investing in debt instruments, you should focus on investing in government bonds of countries with good economic fundamentals that can drive the economy to grow continuously.
For investment strategies in developed countries, large-cap stocks should be highlighted as they are safe from the global economic slowdown and political concerns, including businesses that benefit from global trends such as technology, medicine, health, etc. As for debt instruments, emphasis on government bonds and bonds with a credit rating that is acceptable for investment should be considered. Given the rapidly changing world situation, it becomes a challenge for investors who wish to invest in developed or emerging markets. Therefore, the most important thing is to study the information thoroughly and to create the best return opportunity.