Emerging markets attracting attention as investors' hunting to diversify their portfolios

By Godwin Anyebe

An emerging market is an economy that has experienced rapid economic growth but still has room to grow, meaning it has not reached its full economic potential like that of a developed economy.

While the U.S. has the world’s largest economy, there are other countries and regions with economies that are growing at a much more rapid pace.

“Emerging markets are selling at discounted valuation multiples to the U.S. markets, but perhaps have a short-run benefit tied to global growth coming out of the pandemic,” says Jeremy Schwartz, executive vice president and global head of research at WisdomTree Asset Management.

Schwartz says getting faster growth at a discount to the U.S. is a positive combination. While emerging markets are not immune to risks, vaccine rollouts, steady economic rebounds and low interest rates may prove to be appealing tailwinds for emerging-market equities this year.

Also, it’s worthy of note that, weakness for emerging-market currencies can result from fiscal or monetary mismanagement, weakening demand for the nation’s primary exports, political turmoil or rising interest rates in the U.S., which can impair many emerging markets’ abilities to support debt-financed growth,” he continues.

An emerging-market economy may also be presented with several challenges like insufficient resources or material goods, delaying output and hindering business growth. Other risks include flawed monetary policies or fiscal practices leading to a weak economy or inadequate regulatory practices. These economic risks could lead to a volatile investment portfolio.

The MSCI Emerging Markets Index represents 27 different emerging-market countries, which include Brazil, Chile, China, Colombia, Nigeria, Czech Republic, Egypt and Greece, to name a few. The index holds more than 1,300 assets of varying sector weights. China takes up almost 40% of the index, followed by Taiwan, South Korea, India and Brazil in terms of weightings.

The annualized return for the index since December 2000 is nearly 10%. While the pandemic has impacted domestic as well as international investments, emerging-market equities are up about 3.85% year to date and have one-year annualized returns of about 36%.

With concern among some investors that the U.S. stock market might be overvalued, there may be bargains in emerging-market stocks or spare room for companies in this market to grow.

In general, emerging-market equities bring a broader set of exposures as the opportunity set encompasses wildly differing geographies that in many cases have little to nothing in common with one another.

That diversification, Leonard provides exposure not only to differentiated businesses and geographies but also exposure to local economies that may not be as accessible to foreign firms.

Investment opportunities in emerging markets are attractive because these countries have growing economies. More people are moving out of poverty, resulting in a growing middle class. This new cohort of consumers is driving economic growth and could present opportunities for businesses to innovate and prosper.

Another significant benefit of investing in emerging markets is capturing the pace of economic growth. According to the International Monetary Fund’s January 2021 “World Economic Outlook” report, growth projections for emerging markets and developing economies in 2021 is 6.3%, compared with growth projections of advanced economies in 2021 of 4.3%.

Among the 27 emerging-market countries in the MSCI Emerging Markets Index, Expert says these countries represent about 13% to 15% of global market capitalization. “But (they are) almost 50% of global gross domestic product, and about 60% of the global population lives in emerging markets, so it’s massively underrepresented in terms of the market cap relative to their contribution to the global economy,” he explains.

That said, there’s a lot of room for that market cap to grow. Loking forward, Analysts are of the view that about 80% of the global middle class will live in emerging markets by the end of this decade.

Furthermore, investment opportunities have improved, simply because four of the world’s top 10 companies by market cap live in emerging markets and this reflects that these opportunities to have substantial earnings power generated by the emerging markets consumer.

To this end, emerging markets are budding economies with a lot of volatility. That said, investing in these countries comes with risks and rewards. Having access to a different set of countries can offer exposure for investors seeking higher yield, growth and diversification.