Thinking broadly about emerging market investing

 

With great risk, comes great reward. Or at least that’s what some investors believe. And while investing in emerging markets during a time of serious international uncertainty seems frightening to some, others are on the hunt to invest in the next rapidly expanding market.

According to Morningstar Senior Analyst William Samuel Rocco, that might not be the best idea. “Most individual investors should not start trying to pick a market that they think is going to do better – it’s a mistake for individual investors to make those calls,” Rocco said.

But with the expansion of emerging countries such as Brazil, Russia, India and especially China, it’s hard not to wonder what country will take the market by storm next. Last week General Electric Co.’s  Chief Executive Jeff Immelt said that due to a slacking European economy, the company would focus on investing in countries with rich mineral and energy resources including: Algeria, South Africa, Turkey and Venezuela.

Many developing nations offer access to important commodities such as crude oil and metals. In countries such as South Africa, these resources account for about 45 percent of the country’s exports.

While they are rich in resources, emerging markets are also rife with volatility. Unemployment, currency fluctuations and political unrest are among the factors that can make investing in developing nations risky under normal circumstances. But coupled with volatility in European nations, which are large trading partners with the majority of these nations, the risk becomes even more acute.

Still, some investors with a high appetite for risk are intrigued by emerging markets. Exchange-traded funds with single-market exposure such as Matthews India (MINDX) and iShares MSCI South Africa Index (EZA) make it easier than ever to gain exposure and it seems as if there are more and more available every day. When asked if the growth of these country specific funds will slow down due to rocky market condition Rocco says it’s doubtful, “I think in general, the trend is towards more funds and more specialized funds”.

Before investors dive into these investments, Rocco suggests thinking about these three things first:

  1. “How much exposure do you already have?” – Even domestic funds can include exposure to foreign markets Rocco warns. Investors should do some research and figure out what markets they are already invested in.

2. “Think about indirect exposure” – According to Rocco, this is harder to quantify but a large consideration. There’s often a difference between where a company is headquartered and where it actually produces, which can expose investors to additional risks.

3. “Be prepared for volatility” – Rocco says it’s better to look at broad-based diversified funds to smooth out some of the ups and downs. Investors should allow managers to “have the whole emerging world at their disposal” instead of honing in on one small market.

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