For the past decade, the stock markets of developed nations have outperformed those of developing ones. However, in 2022, investors will be unlikely to be looking to emerging markets as a destination. That is due to a number of challenges, including deteriorating economic growth, rising inflation and eroded sovereign financial health. The category also faces significant risks, including geopolitical risks and the U.S. Federal Reserve’s imminent hikes in interest rates on many emerging market debt.
For example, in countries such as South Korea, corporate earnings may be under pressure from proposed higher corporate tax rates and a forecast tapering of the U.S. Federal Reserve’s bond buying program. Meanwhile, Southeast Asia, Africa and the Middle East are still developing strong economies. The global economy is entering a period of increased inflation and growth. During previous periods, EM and Asian equities were the best performing asset classes, outperforming the S&P 500 Index and the MSCI EAFE Index.
Unstable governments. Instability in the government can negatively impact the economy. Insufficient labor and raw materials are two major problems in emerging markets. Currency risk can reduce investment gains. Inflation can result in massive deflation and high inflation. And, as you can see, emerging markets are growing rapidly. If you invest in a diverse portfolio, you’ll have a better chance of making a profit.
Low Interest Rates. The U.S. stock market has reached an all-time low, and emerging markets are cheap. They offer the most attractive risk/reward profile for long-term investors. Furthermore, the U.S. dollar is expensive relative to other currencies. But in the meantime, these two reasons should sway your decision to own more emerging markets equities. But if you are unsure whether investing in emerging markets is a good idea, don’t hesitate. The risks are worth it!
Investors in emerging markets should also consider the risks associated with the region. In the past, these countries have been a source of investment opportunities for the U.S. and are a leading source of global growth. This trend is largely due to the growth of middle class consumption. The economies of emerging markets account for 41% of global GDP, which is a significant percentage. The potential for return on investment is great and there are several benefits.
Investing in emerging markets has many benefits. While there is risk, these investments offer high returns. By investing in EM equities, you can benefit from the growth of countries with lower inflation. This asset class can be very profitable. It is also one of the best diversifiers for your portfolio. Its booming economy is an important part of the global economy. It is a good idea to own more EM equities.