10 Reasons Why We Should Not Overlook Emerging Economies

While a little while ago emerging markets were disregarded by many investors, the steady growth some of them have experienced in recent years caught the investors’ eye. Here are 10 reasons why we should not overlook emerging economies.

With the International Monetary Fund having recently revised growth projections for emerging markets expected to rise up to 4.5% in 2017 and 4.8% in 2018, more and more investors are focusing on countries like China, Russia or India. Buying businesses in developing economies at low price earnings ratios will not only diversify your portfolio, but it will also give it a significant boost for the next 10 years, experts say.Furthermore, not all emerging markets are low priced, and the best strategy is to invest in stocks. Let us see why.

Global Growth Driving Force

Growing economies have been the driving force of global force in the last ten years, and their quick economic growth soon stirred the interest and fuelled the envy of the developed economies. In many cases, growth was triggered by the export-led models that the countries adopted, which worked perfectly for them in the early years of economic development and industrialization. An increasing number of these countries are still following this path while looking forward to shifting towards a more sustainable and consumption-led growth. With this in mind, investors should not forget or underestimate the contribution of emerging markets to the global economic growth. The spectacular growth momentum that countries like China and India gained has generated wealth, which in turn, has set the global wealth machine to work, by triggering significant overall returns in equity markets.

As numerous growing economies are beginning to steadily turn into economic powers and integrate themselves into the global economic ‘picture’, corporate aggregate gains in emerging market environments have also seen an unprecedented rise over the years, with several developing market businesses emerging as key actors in the different sectors they operate in.

Global GDP Contribution

If you need more convincing as to considering investing in emerging market stocks, you should not overlook the significant role that developing countries play in securing the ‘health and welfare’ of global economy, which is reflected in the gradual increase of their share of the global gross domestic product (GDP). JPMorgan Asset Management analysts say that the contribution of developing economies to the global nominal GDP in 1988 was 17% and rose to 38% before the end of 2012. So long story short, is it or is it not worth investing in emerging markets? As the end seems to be following an ever-ascending path, investors cannot afford to miss such huge opportunities. More valuable resources on the topic are available at getabstract for business.

High Profitability

In close connection with the above, high GDP growth reflects in higher return on equity (ROE). Statistics show that the profitability of businesses operating in emerging economies is by far superior to that of companies operating in developed economies.

Stable Growth Trends

Despite the negative cyclical effects that developing economies have been exposed to in recent years, many of them are still following a stable, long-term growth path. An illustrative example is the ASEAN region, with approximately 610 million total combined populations as of the fourth quarter of 2013. This accounts for 8.6% of the world’s population and is greater than the population of the US and Japan together. Countries with fast growing populations like Indonesia, Thailand, Malaysia, Vietnam and Myanmar also have a solid consumption basis that drives economic growth. Similarly, Brazil and China are evolving towards a consumption-driven economy. Growing economies have seen an unprecedented rise of the middle class, which has triggered a fabulous increase in consumption, leading to an overall growth in consumer discretionary sectors and financial services, among others in the last ten years. Comparatively, growth prospects for developed countries tend to remain rather sluggish.

While the emerging markets have experienced certain volatility, their long-term, structural growth remains intact. Corroborated with the economic recovery of the US, Japan and Europe, developing economies seem to have an even brighter future, given that many of them are cyclically exposed to global growth and are to a certain extent still dependent on demand from the developed economies for exports.

Appealing Valuations

Even though the structural growth and increasing importance of developing economies in completing the ‘bigger picture’ of global economic health, investors are yet not giving enough credit to emerging markets’ equity for the mere fact that they are cheaper than their developed counterparts.

However, what investors need to keep in mind is that the continued, steady rise in developing equity markets, with the European Stoxx 600 index gaining 1.7% and the US S&P 500 index experiencing a growth of 1.2% year-to-date, according to RM measurements as of 11 March 2014, and the under-performance of emerging markets, with MSCI Emerging Markets index incurring losses of 4.5% year-to-date as per RM measurements as of 11 March 2014, the difference between the developing economies and their developed counterparts in terms of valuations has continued to grow in recent years. While the developed markets like the US and Europe are approaching their fair values (if not a downturn, considering the uncertainty that the Brexit has brought about for business in Europe), the emerging markets hold promise for good return on investment. For example, the 43.1% upside in estimated earnings growth for the emerging markets for 2015 has continued to grow, beating analysts’ expectations and it still follows an ascending trend.

Commodity and Oil Price Stability

If you’re planning to diversify your portfolio, here’s another reason why you should seriously consider investing in emerging economies. Many developing countries rely on commodities like oil, iron and copper to boost their economy.

2015 was marked by a dramatic drop in commodity prices, with oil prices hitting a historical 7-year low in December. While oil and other commodities are not exactly expected to see a sudden growth throughout 2017, they’re not likely to tank either, analysts say.

Higher Returns

Although investment in emerging markets is generally viewed as ‘more risky’ than investment in developed markets, over the past decade, however, mixed portfolios of emerging and developed market assets have demonstrated similar volatility but significantly higher returns.

With the Rise of the technological age having High returns is more common with Online Stock Forecasting Tools Especially from VectorVest.

Lower Volatility

Despite the general belief of high volatility, emerging markets’ volatility has actually been following a downtrend, while it consistently maintained at a lower level than the FTSE All Share and S&P 500 indices. Subsequently, it was eliminated more rapidly.

Capitalization

Although developing markets seem to dominate in terms of world population, land mass, foreign exchange reserves, and GDP growth, they only have 10% of the world equity market capitalization. In the last ten years, this figure has been steadily growing and is expected to grow even more in the upcoming years.

Country Profile – China

China’s mind-blowing growth beat all expectations this year. For years, the world’s second largest superpower economy, China had been a major importer of raw materials from south-east Asia, Europe and Latin America. The country is now transitioning from a manufacturing and construction-driven economy to a consumer-led one, which means that its demand for those commodities has dropped.

As the country’s economic growth slowed down significantly in 2016, Chinese officials pumped capital into the country’s economy by cutting interest rates. Measures like this caught the attention of China’s trade partners and paved the way for new investment opportunities in the country.

Hoping we have debunked the myth revolving around developing economies, remember opportunity is not the postman to knock on your door twice, don’t miss it. Growing markets have a lot to offer. Now is your chance to diversify and expand your portfolio.