As emerging markets captured the attention of growth-oriented investors, focusing on the BRICs (Brazil, Russia, India, China) has been a frequent theme in recent years.1 But as these countries have developed distinct economies, some investors are digging deeper to select investments within one of the BRIC countries or are scouting elsewhere for emerging economies.
BRIC Growth May Level Off
According to a recent report from Standard & Poor’s Financial Services LLC, growth within the BRICs remains healthy but has slowed. China has revised its forecast for growth in gross domestic product (GDP) for 2012 to 7.5% from 8%. Since China is the largest exporter of manufactured goods, and also invests significantly in Africa, some observers believe that economic growth below 7% could be problematic for the global economy.2 Growth in India also has leveled off from 8.5% to 7%, and economic expansion in Russia and Brazil have experienced similar trend
As growth in the BRICs has eased, some observers are looking to Central and Eastern Europe to pick up some of the slack. UniCredit, a global bank, has expressed interest in expanding operations in the Czech Republic, Poland, and Turkey.
Risks and Rewards
Emerging markets historically they have been more volatile than developed markets, although past performance does not guarantee future results. The potential rewards and risks can be seen from the experience of investors in Asia from late 1997 to 1999.
A major collapse in emerging markets began in July 1997, when the Thai government dramatically devalued its currency, the baht, in the face of a very large currency account deficit, foreign debt, and a government budget shortfall. The result ricocheted throughout Asia as currencies in the Philippines, Malaysia, and Indonesia came under attack from speculators. Despite the International Monetary Fund’s rescue package directed at Thailand, and promises of economic reform from Indonesia’s government, investor confidence did not return to emerging markets until 1999, when signs of economic recovery began to appear.
Implications for Investors
What does the potential growth and volatility of emerging markets mean for investors? There may be several factors to consider:
- Pooled assets, such as mutual funds, may offer greater diversification compared with individual securities.3 It may be difficult for U.S. investors to access securities of companies domiciled outside the United States.
- Corporations headquartered in the United States and other developed markets may earn a portion of their revenue from emerging markets. This type of indirect investment may be suitable for certain investors.
- Currency risk can present another risk factor for emerging-market investors. As the currency exchange rate fluctuates, so does the value of an investment in U.S. dollar terms. Many emerging countries have their local currencies pegged to the dollar, which can result in a relatively constant exchange rate.
After the Asia crisis, many investors realized that the high return of emerging-market investing comes with high risk. For those prepared to ride out short-term volatility, investing in emerging markets may help to diversify a portfolio weighted to more-developed economies.
1Consider the market risk associated with emerging markets carefully before investing. Investors in international securities may be subject to higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities.
2Standard & Poor’s MarketScope®Advisor, “Emerging Market Investors Look Beyond BRICS,” May 8, 2012.
3Investing in mutual funds involves risk, including loss of principal.