Emerging markets: A great opportunity or a risky investment?

Is your emerging market glass half full or half empty?

If it is the latter, then investing long term in emerging markets may not be for you. If it is the former, then with the right tailored investment there are huge gains to be achieved.

After a proliferation of emerging market funds in the 1990s, growth has slowed drastically due to disappointing preliminary results. Private sector funds initially appeared promising because of the demand for capital in emerging markets, the new receptivity of governments to foreign investors and most importantly the prospect of high returns. One of the main uncertainties is that emerging market countries have never gone into a global downturn from a position like the one being experienced. It is likely their economies will slow, but it’s unlikely they will see a huge compression like those seen in the MEDC economies. It is on this thesis that emerging market investments still continue to be the choice for higher risk, higher reward fund investment.

Fund managers must align their business models more closely with emerging market realities by establishing a local presence, adopting a more hands-on approach to monitoring their investments and developing creative exit strategies. The Ashmore Group, a specialist in emerging market investment, reported huge full-year profit growth of 36 per cent. Graeme Dell, group finance director said in City AM: “Local currency products were attractive to emerging market institutions as a hedge against the long-term structural decline in the US dollar. Emerging market central banks have large US dollar reserves.”

The future of emerging markets

Goldman Sachs mooted the BRIC successors, otherwise known as the Next-11 (N11). This grouping comprises Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam.

Key indicators for potential emerging markets

Some of the signs of success have to do with governments’ attitude toward the market. For example, a foreign exchange regime that rewards people for exporting is basically a government that lets growth happen simply by staying out of the way. This is just one of the many factors that could stimulate in the next wave of ‘BRIC’ economies. Those countries following the BRIC path will typically experience high rates of population growth (creating a surge of potential new consumers) at the same time as increases in disposable. 

We are seeing an increase in the volume of fund managers moving or specialising in emerging market investment. This is due to the high margins that can be achieved through educated investments. Because of the competitiveness of the market, candidates will fare more favourably when job searching if they have previous experience or have the ability to show an in-depth knowledge of what is happening in the world of emerging markets. While career direction decisions are never to be taken lightly, being aware of the changing emerging markets will keep a driven candidate one step ahead of the game.


Oliver Connolly


Consultant - Investment Management & Insurance, Marks Sattin