The Case for and Against Investing in Emerging Markets Now
Emerging market equities have outperformed developed market equities over the past 12 months, making them a tempting investment option. So now is the time to take the plunge, or should investors stay on the sidelines?
On the positive side, economic growth in emerging markets is expected to outpace that of developed markets over the next few years. And emerging market equities can be useful for U.S. investors to diversify a portfolio because they do not move at the same pace as U.S. equities.
But emerging market equities exhibit higher volatility than developed market equities and a range of risks, including political risk, currency risk, liquidity risk and economic risk, despite optimistic projections. And investors can gain exposure to emerging markets more securely with a portfolio of US stocks that includes companies doing business in those markets.
“Investing in emerging markets is a high risk and very profitable proposition,” says Eswar Prasad, professor of trade policy at Cornell University. “Many emerging markets have done well in terms of growth and their financial markets have had periods of success, but this tends not to last too long. “
With that in mind, here’s a closer look at the arguments for and against investing in emerging markets now.