Investing in Emerging Markets

The term 'emerging markets' was coined in the seventies, to dispel some of the negative connotations of the previous descriptor 'less economically developed countries'. Emerging markets, as the term suggests, are relatively new markets in global terms, and are characterised by rapid growth. As such, emerging markets often present an attractive investment opportunity for both large financial institutions such as Legal and General, and private investors.

However, the relative instability of such dynamic markets also means the potential for exposure to greater risk than might be encountered in established markets.

As an Investor and entrepreneur, you are of course already well versed in the risk versus reward paradigm. With stagnant growth in many developed economies, investors large and small are increasingly looking to emerging markets for the promise of healthy growth. One of the most popular ways of investing in emerging markets is to track an index of the combined emerging economy.

For small investors, products such as an emerging markets index tracking ISA provide a straight forward way to follow the performance of some of the most rapidly growing economies in the world. The tax free nature of this growth, as facilitated by the ISA vehicle, ensures the optimum performance for this investment.

The leading emerging markets include countries like Russia, Brazil, China and India. Russia and Brazil are significantly powered by the fossil fuels market, while China and India are additionally experiencing massive growth in manufacturing across diverse sectors.

In general, emerging markets and economies exhibit strong GDP growth and relatively low levels of public debt. The working population is typically young, with a growing middle class to stimulate domestic demand. To take some concrete examples, the average age of the worker in the developed economies of Italy, Germany and Japan is 43. Contrast this with a median of 34 in China, and 25 in India. The younger working population has the potential for sustained growth, through an experienced and often skilled workforce that has many productive years ahead of them. In contrast, developed economies, like Japan in particular, face fiscal stress from the needs of a growing ageing population that is no longer economically active.

The main risks faced by the investor in emerging market include the fact that the investment may be less well regulated than it would be in the U.K.

The safekeeping of assets may be less reliably arranged, and investments can sometimes be harder to sell on. Additionally, an emerging markets investment fund will probably hold significant assets in foreign currencies, the value of which can fluctuate against the pound sterling, thus affecting the value of the investment.