written by: Jason C. Chavis•edited by: Rebecca Scudder•updated: 12/31/2009
Emerging markets across the planet are increasingly looked to by investors as a viable option to hedge against the uncertainty of traditional and domestic stocks. These emerging markets provide value and reasonable investment risks with the potential of gains in sectors otherwise overlooked.
slide 1 of 4
Most investors in the United States are familiar with the way the stock market operates within the confines of the U.S. However, investing in emerging markets across the world can be beneficial and provide the possibility for extensive gains in industries and markets not available domestically.
Emerging markets also allow investors to hedge against possible losses on the domestic front. While certain regions, like the United States, and market sectors falter, others can pick up and show gains. In this way, emerging markets may provide profitable investments while investments in the more established markets are losing value.
slide 2 of 4
The key to determining which regions to invest in is to learn a little about the economic climate and potential of a developing market. The best markets are those that have recently come into a new stage of development either through political stability or major changes in the economy.
Historically, some of the best places to investment are regions that were traditionally third world countries but have somehow improved their economic stability. Examples of this include Asian markets after World War II and Eastern Europe after the fall of the Soviet Union. During the 1960s and 1970s, the Four Asian Tigers of Singapore, South Korea, Hong Kong and Taiwan emerged as global leaders in a variety of sectors. This was a great opportunity for investment. When the Central and Eastern European markets were privatized during the early 1990s, a plethora of investments were available in nearly every market imaginable.
Here in the early 21st century, emerging markets tied to the development of China and India, as well as former Eastern bloc countries with improving prospects for economic relations with the European Union show potential promise.
Finding regions in which the market is shifting upwards and the certain needs that must be met is a challenge, however, the benefits of investing in foreign stocks can be rewarding.
slide 3 of 4
The other main challenge for investors is to find which sectors in which areas will provide the best possible gain. For example, the cellular industry is one of the fastest growing business models in the world. In regions without established telecommunications technology such as phone and cable lines, cellular technology offers a chance to leapfrog older technologies and implement 21st century concepts. A number of companies have emerged in these developing markets to handle the establishment of the infrastructure, profiting with growth.
Cash and bonds are also a large advantage to many emerging markets. Many of the countries in this sector do not have the level of debt that most of the established nations posses. Some of the more economically stable emerging nations own a large volume of U.S. Treasury bonds, adding liquidity to their financial sectors. Opportunities in sectors that are able to take advantage of this increased capital could prove promising.
A long-term outlook for emerging markets is essential. As the third world countries develop, new industries and companies continue to be established. Each of these companies is gifted with potential growth opportunities that may not exist within the traditional marketplace. However, such developments do not happen overnight and can come with setbacks, making emerging markets more volatile. The investor should monitor these developments closely.