As the new year approaches, it’s time to start thinking about investments for 2017.
You could leave your money where it is, but interesting alternatives are available. For instance, take a look at growing — or emerging — markets. These investments arise in countries where most residents live on moderate or reduced incomes. The definition covers a lot of ground: about 80% of the world’s inhabitants. Nations included in this category vary greatly in size, structure and power. Brazil, China, India, Mexico, Poland, Qatar, Russia, South Africa and Taiwan are a few countries with emerging markets.
Traits that link them all include the movement of their economies. Once self-contained, with no imports or exports, emerging markets are in the process of opening to outsiders. Reforms make these economies more stable and transparent. In-country investments increase. A nation’s exchange rate system is revamped, leading to greater foreign investments, as well. Certain features of emerging markets attract financial backers — and also make them wary.
Recognize emerging markets
Why look into emerging markets? Compared to the developed world, 2016 was a great year for up-and-comers:
- The Standard & Poor’s 500 index nudged up just 4% in the U.S. stock market.
- Euronext, the European stock exchange, dropped 2%.
- Japan’s Nikkei stock index fell 9%.
In the next few years, Brexit will likely adversely affect Europe’s developed nations. Japan’s lack of economic growth is also making investors wary.
At the other end of the spectrum, in 2016:
- Brazil’s stock exchange shot up 45%.
- Russia’s MICEX index showed a highly respectable 12% increase.
- Overall, medium-to-large emerging markets offered a 16% return on investments.
- Low gas and oil prices helped boost the economies of emerging markets.
Characteristics of appealing emerging markets go beyond their stock exchanges.
Stick with the middle
An emerging market with a growing middle class is a good bet. This upward mobility suggests that investors may be able to double their money in a few years. Emerging nations that draw more citizens into their middle classes have exhibited good track records for growth. This attracts foreign companies.
Start at the top
Investors should reflect on leadership in emerging markets. Heads of state dedicated to political and financial reforms make these economies more inviting to outsiders. For instance, India Prime Minister Narendra Modi wants to make foreign investment easier within his country. With the expansion of enterprises such as mobile banking, India is booming. In 2015, its economy grew even faster than China’s. Expectations suggest India’s economy will continue moving up, nearing an 8% increase by the end of 2017.
Prepare for the long haul
Any country’s economy has fluctuations, and emerging markets are no different. Investors will see the greatest gains if they let their money stay put for a while. A few strong months annually make a tremendous difference. For instance, a $10,000 emerging market investment in 1988 returned almost $80,000 less than 30 years later. Investors who pulled funds out of these markets when economies slowed missed financial windfalls.
Business as usual
In some ways, a solid investment is a solid investment. When assessing emerging markets, investors should examine some of the same measures used for developed economies, such as:
- Gross domestic product (GDP): This represents the value of all goods and services a country produces. Growth is good. For instance, between 2013 and 2017, China’s GDP is expected to increase almost 46%.
- Inflation rate: This shows changes in prices for goods and services within a country. A high rate of inflation means it will be more expensive — and often more difficult — for a nation’s population to make purchases. At less than 3% annually, Thailand’s inflation rate is impressive.
- Government debt in relation to GDP: A low ratio of debt to GDP typically indicates a healthy economy. An example is Peru’s governmental debt, which is less than 17% of its GDP.
The gas and oil industries could be in line for significant expansion thanks to emerging markets, meaning better returns on investments. Their expanding economies will increase their power needs. Though 2016 saw an earnings drop in these sectors, oil and gas investments might become booming businesses again.
Keep your eyes wide open
The nature of emerging markets includes risks. Some countries, such as India, have deeply entrenched bureaucracies that can be difficult for investors to navigate. Currencies may be in flux and are not always stable. In some areas, safety is an issue, as are governmental and corporate corruption.
Understand the significance of the dollar’s value
Investors interested in emerging nations need to keep an eye on the U.S. dollar. There’s an inverse relationship. Typically, when the value of the dollar sinks, emerging markets improve. The 2017 presidential transition in the U.S. could have a significant effect on the strength of its dollar. Investors should monitor national changes as well as reactions in foreign markets.
Emerging economies can be both exciting and profitable investments. They’re on the rise but still have a long way to go.
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