Traders Guide to
Emerging Markets

When some investors hear the term emerging markets, they often think of one monolithic region. The truth, of course, is that not all emerging markets are created equal. Some, like China or South Korea, are so developed they rival developed countries such as the U.S. and Germany. Others, such as Brazil are in the midst of trying to recover from crippling recessions in order to develop a solid middle class.

What these emerging markets share, however, is an opportunity for smart investors to achieve higher returns than they might from more mature and developed economies. Indeed, including emerging markets in a portfolio is one way that investors can avoid what’s known as home bias. When well-known domestic companies like Netflix, Apple and Amazon grab the headlines, it often follows that they attract an outsized share of investors’ dollars. Given that countries outside the U.S. are at vastly different stages of economic development, they can often deliver results that can outpace their more developed neighbors. In fact, despite slowing global growth, the International Monetary Fund (IMF) forecasts that emerging markets will grow 4.7 percent this year, more than double the 2.1 percent growth rate estimated for developed markets.^[1]

The other side of this coin, of course, is that emerging markets can be risky. They are often marked by economic instability, underdeveloped regulations, and frequent political unrest. By taking all these considerations into account, individuals can better evaluate the opportunity and become more confident in their investing decisions.

Different Influences
Before investing in markets outside the U.S., it’s important to understand the different factors that affect these countries. Index makers like MSCI classify a country as emerging based on a number of criteria, including gross domestic product per person, the depth of its capital markets, and the ease of doing business there, amongst others. But beyond that, there can be events, like pervasive corruption trials (as seen in Brazil), or wildly fluctuating currencies that can affect the overall economy. A country’s level of debt and overall growth rate also play into the health of an emerging market.

Logistically, it can also be more complicated to invest in emerging markets. For instance, if a company isn’t registered in the U.S.—its stock isn’t listed or sold on the Nasdaq or some other U.S.-based exchange—an investor may not be able to invest in it directly. The same scenario holds true for government bonds. That’s where Interactive Brokers (IBKR) can help. Based in Greenwich, Connecticut, this online securities firm with $7 billion in equity capital, offers traders a global platform to access stocks, futures, options, foreign exchange and ETFs in these hard-to-reach markets, all from one account.

Further, with Interactive Brokers, investors have access to market data 24 hours a day, six days a week, enabling them to stay connected to emerging markets. The firm connects to 125 markets in 31 countries, and investors can trade in 24 currencies, with low fees and unparalleled transparency. IBKR also offers a wealth of knowledge and emerging market intelligence through its Traders’ University online learning portal.

For many years, investors needed only to focus on U.S. securities to achieve the kind of returns they were after. But with the growing influence of emerging markets, that formula is changing. These regions come with greater risk, but with the right market intelligence and careful analysis, emerging markets are becoming an essential part of a well-rounded portfolio.