With higher risk comes higher return potential
Emerging markets- as opposed to developed markets in Western Europe, North America, and some Asian-Pacific countries- are countries that initially fell behind the West but are on the rise, offering higher growth potential, and also higher risk.
At the beginning of this century, Jim O’Neill, a Goldman Sachs economist, came up with presently well-known acronym BRICs. It stands for Brazil, Russia, India, and China. These are large countries, both in terms of territories and populations that have much room to grow. Indeed, they did grow quite a lot since the beginning of this century.
The investment management community has taken advantage of this ingenious grouping to create funds that invest in those countries. Nowadays, there are many exchange-traded funds covering these markets such as iShares MSCI BRIC run by BlackRock.
Since China is the biggest economy among the four, the largest investment is made in that country (around 45%), followed by Brazil (25%), then India and Russia (remaining 30%). Investing in a fund like this gives exposure to major emerging markets as well as some diversification among countries.
Later on, the concept of BRICs has been expanded to include South Africa, thus there are BRICS. Some even say that Indonesia should be included as well. The creator of BRICs has also invented another term, MINTs. It stands for Mexico, Indonesia, Nigeria, and Turkey- other relatively large emerging economies.
While investing in emerging markets offers higher returns, it also exposes investors to higher risk. The risk can come from currency devaluations (not that uncommon in emerging counties), political turmoil (such as Russian annexation of Crimea, strikes in South Africa, Islamic terrorism in Nigeria), asset bubbles (some markets are already highly priced), and economic mismanagement (such as misaligned investments in China).
The equity funds aren’t the only way to invest in emerging markets. There are funds that invest in emerging markets debt as well as balanced funds that invest in both equities and debt.
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