Emerging Markets Offer More Options for Investors

We’re witnessing a period of unusual economic trends across the world.

While the economic recovery in the U.S. and other developed nations seems to be at a standstill, there is growth taking place in other parts of the world. 

Many countries with “emerging markets” continue to see their economies expand despite the stumbling global economy. These markets may represent investment opportunities for individuals who reside both inside and outside of these areas. You may consider positioning your portfolio to take advantage of these emerging markets.

 A brief history of emerging markets

A few decades ago, the economies of only a few countries were based on capitalism similar to the U.S. Outside of North America, Western Europe, Japan and Australia, the free market system was virtually non-existent. 

That changed dramatically when the Soviet Union crumbled in the late 1980s. A movement toward free market economies swept across Eastern Europe, Asia and other parts of the world. Underdeveloped nations began to promote more private sector activity, and many have become wealthier as a result. 

The need for structured capital markets became apparent in many of these countries, leading investors to become intrigued by the potential of emerging markets. The story is well known. For example, China and India — both considered emerging markets — are now economic powerhouses and growing rapidly. Other, smaller countries are following suit. 

The rise of new economic forces

The Organisation of Economic Cooperation and Development (OECD), estimates that in the year 2000, countries that make up what is generally considered the “advanced world” represented 60 percent of the world’s total economic output as measured by Gross Domestic Product (GDP). In today’s economy, world GDP is split almost evenly between developed countries and emerging markets. 

The OECD also projects that by 2030, close to 60 percent of the world’s economy (as measured by GDP) will originate from emerging markets. By some estimates, China’s economic output could match or possibly exceed that of the U.S. 

One of the more exciting developments across emerging markets is the rapid growth of the middle class. In the U.S., the rise of the middle class in the 20th century is credited with our nation’s emergence as the premier economic power in the world. While the size of the middle class in the U.S. has stabilized, it is expanding rapidly around the world. According to the OECD, the global middle class, currently 1.8 billion, will reach 3.2 billion by 2020 and nearly five billion by 2030. That represents a sizable jump in the number of consumers gaining spending power, creating the potential for investors to capitalize on the potential growth. 

The changing investment landscape

I believe that from a stock investor’s standpoint, certain industries and companies will be positioned to profit from the changing world marketplace. A growing percentage of the world’s largest companies are now based in emerging market countries. 

Fortune magazine’s list of the 500 largest global companies shows that nearly 75 percent (367) are based outside of the U.S. Ten years ago, only 63 percent of companies on Fortune’s list were headquartered in non-U.S. markets. Most notably, 61 of those companies on today’s list are based in China, compared to just 12 in 2001.1 

Many investors are underrepresented in overseas positions. If you haven’t already, it is worth looking at the potential benefits of owning a more diversified mix of domestic and international assets. This is true for both stock and bond investors who have a long-term time horizon. 

Things to consider

Investing in emerging markets includes some unique risks. One such risk is volatility. Historically, emerging markets have experienced more dramatic price movement over short periods of time in comparison to less volatility in developed markets. You have to be willing to ride through extreme market swings. 

Another risk is that currency fluctuations, which can be wildly unpredictable, can affect your return. If the U.S. dollar strengthens against another currency and you have invested in that currency, then the value of your investment in dollars declines. If the dollar weakens however, your investment will perform better. 

Advancements in technology and travel continue to allow companies to expand internationally and this trend will likely continue. Investing in multi-national companies — typically large firms with worldwide distribution — might be another way to capitalize on global growth trends. 

As you look at your portfolio, keep in mind that national borders need not act as a barrier to achieving your long-term investment goals. I believe that making informed, long-term investments in expanding markets may provide you a chance to take advantage of the global economy that continues to fluctuate.

1 Fortune Magazine, July 25, 2011 

Rob Davis lives in University Place with his wife Lorri and sons Wesley and Parker.  He is a CERTIFIED FINANCIAL PLANNING Practioner and licensed/registered to do business with U.S. residents in the states of Washington and Idaho. 

The views expressed above reflect the views of Ameriprise Financial as of September 2011.  These views may change as market or other conditions change.  This report is not intended and should not be used to provide investment advice and does not address or account for individual investor circumstances.  Before making any changes to your investments please consult a financial advisor or tax professional regarding your individual circumstances and objectives. Past performance does not guarantee future results and no forecast should be considered a guarantee either. 

Investments in foreign securities involve certain risks not associated with investments in U.S. companies, due to political, regulatory, economic, social and other conditions or events occurring in the country, as well as fluctuations in currency and the risks associated with less developed custody and settlement practices. Risks are particularly significant in emerging markets, which present greater risk of loss than a typical foreign security investment. Because of the less developed markets and economics and less mature governments and governmental institutions, the risks of investing in foreign securities can be intensified in the case of investments in issuers organized, domiciled or doing business in emerging markets. 

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients. 

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