After a strong run-up in the wake of the 2008 global financial crisis, emerging markets have taken a beating recently. Developing nations are experiencing weaker currencies as well as a decline in their bonds and equities.
Meanwhile, the Federal Reserve continues to reduce its bond-buying program, which was aimed at stimulating the U.S. economy. The Fed is also considering raising short-term interest rates. The prospect of tighter money and higher interest rates has had a negative effect on emerging markets such as Turkey and Brazil.
The MSCI Emerging Markets Index, which tracks stocks in 21 developing markets, declined by 3.8% during the first six weeks of 2014 alone. The index fell by 5% in 2013.
While these trends pose a significant challenge for those already invested in developing countries, it also signals an opportunity for those who wish to jump in.
Such investments are essentially on sale right now. Add in the possibility of an economic resurgence, and export-driven nations in Asia and South America, such as China, India and Mexico, could post impressive economic gains, rewarding smart investors.
How can you best invest in emerging markets around the world?
American Depository Receipts (ADRs)
ADRs are certificates that represent foreign stocks. They are issued by U.S. banks and denominated in U.S. dollars, which allows you to avoid foreign taxes and pay lower administration costs. Most importantly, it is easy to purchase ADRs because they are listed on major exchanges such as the NYSE and NASDAQ.
That said, ADRs aren’t fully shielded from the risks of investing internationally. You’ll still need to account for exchange rate risk, inflationary risk and political uncertainty. Those risks are often more prevalent than they are in the United States. So keep this in mind with ADRs and other emerging market investments.
Exchange-Traded Funds (ETFs)
ETFs are like mutual funds in a sense they track a basket of assets, commodity or an index. However, the difference lies in the fact they can be traded like stocks. Their prices change throughout the day as they’re purchased and sold, just like the stocks you may be accustomed to holding. Conversely, mutual funds only trade at the end of the day at the net asset value (price). An added benefit is that ETFs allow you to expose your portfolio to foreign markets while minimizing the difficulties and risks of doing so.
Foreign ETFs can be purchased based on a country or region. The latter provides greater diversification, which is important not only for hedging U.S. investments, but for limiting the downward pressure that country-specific risks may place on your portfolio. For example, by investing in an ETF that encompasses a host of Asian nations, you’d limit the damage that one nation’s economic collapse or war could inflict on your portfolio.
Basket of Multinational Corporations
Another option for investing in emerging markets is to purchase a basket of multinational corporations. Multinational corporations are businesses that have subsidiaries in foreign nations, which means many are active in emerging markets. While a plethora of choices exist, notable options include Nestle and Unilever.
Swiss-based company, Nestle, produces various food and beverage products including baby food, bottled water, breakfast cereals, candy, coffee, dairy products, ice cream, pet foods and snacks. The company has 450 factories and operates in 86 countries, or around 42 percent of all nations on Earth. It has recently relied on quick growth in countries such as China, Brazil and Mexico.
Headquartered in London, Unilever sells food, beverages, cleaning agents and personal care products. It owns over 400 brands and its products can be found in nearly every country worldwide. It’s worth noting that Unilever generates more than half of its sales in developing and emerging markets.
Regardless of which multinational stocks you select, be sure to diversify your portfolio by investing in various countries and industries.
Keep in mind that all emerging markets are not equal. For example, Brazil and Russia are solid for utilities, while China is a better bet for health care investments.
Also, some markets are riskier than others. For instance, emerging European markets are currently struggling due to fears that the current unrest in Ukraine is worsening. The same thing could happen in any country or region that experiences civil unrest or other events that typically cause adverse economic impacts. So you’ll want to pay close attention to the stability of any market or region you invest in.
For specific investment advice, it’s a good idea to consult a financial adviser.