By Yann Kostic from the October 2018 Edition
Given their potential volatility, emerging markets are not for fainthearted investors and many people avoid them. But, emerging markets aren’t the vast unknown they used to be.
What are they? Emerging markets are countries that are still developing, usually by means of rapid industrialization. It may surprise you to hear that some economic powerhouses – such as China – fall into this category. Others, such as Thailand and Indonesia, are less surprising. The primary reasons to consider emerging markets are diversification and growth potential. Emerging-market stocks may perform well when developed-market stocks are performing poorly. And in some cases, emerging markets offer unique growth opportunities. For example, China is transitioning from an industrial economy into a digitally led economy, with a high number of graduates in technology fields, significant venturecapital funding and tax credits that support innovation. Mexico is another one, with its president elect declaring that he is ready to tackle NAFTA directly and immediately. This could create quite an opportunity in several sectors of the Mexican economy.
Of course, emerging markets aren’t for everyone. The main risk is volatility. Any political or currency-related crisis in an emerging market could devastate its stocks. Another concern is the potential impact of US interest-rate hikes, which can lead to a stronger US dollar. In such an environment, conventional wisdom holds: emerging markets under perform. Others point out that emerging markets have outperformed developed markets during most rate-tightening cycles since 1969, with exceptions occurring only when the rate increases came sooner than the market anticipated or were stronger than the market anticipated.
That said, a bout of volatility in the first quarter of 2018 stresstested emerging markets, and they held up fairly well, as evidenced by flows. In other words, investors kept investing. If you would like to discover the potential for portfolio diversification and growth through emerging markets, schedule a conversation with your financial professional. He or she can point you in the right direction, based on your individual financial circumstances and goals.
Note: This material has been prepared for informational purposes only, and is not intended to provide financial advice for your particular situation.
Yann Kostic, MBA and Tom Zachystal, CFP, are Presidents of their respective Assets Management firms, both US-Registered Investment Advisors (RIA). Tom is the San Francisco Financial Planners’ Association President. Tom and Yann cater to US expats in Mexico and worldwide. Comments, questions or to request his newsletter, “News you can use” contact him at firstname.lastname@example.org, in the US at (321) 574-1 529 or in Mexico, (376) 106-1613.