I always tell people if someone asks you at a cocktail party what you think of the stock market, a good response is, “well, it all depends on interest rates.” Then, quickly walk away...unless you want to explain why. The fact is, that has been a great answer over the years, especially in more recent years as interest rates have remained at historical lows. These days, if I was asked the same question, a better response might be, “well, I like emerging markets...you know, mostly the BRICS.” This time you can be prepared to back up the statement. Keep reading to find out how.
Why invest in emerging markets?
Emerging Markets, also known as developing countries, have become the catalyst for global growth. Over the last 10 years, emerging markets as a whole have produced rates of return averaging 16.9% per year. A good reason why US stocks have done so well in the last few years is because of growth in their markets outside the US. Another strong benefit for investors is the diversification that emerging markets provide. This asset class tends to perform differently than developed markets, and has been successful at not being as sensitive to the greater, longer term afflictions of the mature economies of the West.
What are BRICS?
BRICS refer to the title of an association of emerging national economies: Brazil, Russia, India, China, and South Africa. BRICS members are, for the most part, representative of all developing or newly industrialized countries. They are notable for their large, fast-growing economies. They have significant influence on regional and global affairs. As of 2013, the five BRICS countries represent almost 3 billion people, with a combined nominal GDP of $14.8 trillion dollars, as well as an estimated $4 trillion dollars in combined foreign reserves. Presently, South Africa holds the chair of the BRICS group.
Where there is risk, there is reward
Investing in emerging markets can yield substantial returns in a portfolio. However, investors should be aware that all returns must be judged within the risk and reward framework. Here are some risks that are unique to investing in emerging market stocks: foreign exchange rate risk, relaxed insider trading restrictions, less liquidity, poor or sloppy government, sovereign political risk – just to name a few. For these added risks our best practice is to limit the exposure by diversification and finding well managed funds with strong track records in periods of volatility.