059_What are Emerging Markets? | Explaining Investment Risks and Returns for India, ASEAN, and Chinese Stocks
What are Emerging Markets? | Investing in the High-Growth, High-Risk 'Frontier'
'India will grow like China is now,' 'ASEAN will become the next factory'—investing in emerging markets is an exciting option that carries both significant returns and significant risks.
What are emerging markets?
Emerging Markets (EM) refer to the stock and bond markets of countries experiencing remarkable economic growth and whose financial markets are still in the development stage.
These are countries undergoing rapid economic development and the expansion of the middle class, in contrast to developed nations (the US, Europe, and Japan).
Representative emerging countries
BRICs (and BRICS)
Originally the four countries of 'Brazil, Russia, India, and China.' In recent years, South Africa (S) has been added, and they are referred to as 'BRICS.'
Major emerging countries
China: The world's second-largest economy. Concerns over real estate issues and US-China tensions.
India: World's largest population, high economic growth rate, and a large youth demographic.
Brazil: A resource and agricultural powerhouse. Subject to political and currency risks.
Indonesia: The largest economy in ASEAN. A population of 270 million.
Vietnam: Rapid growth as a 'China Plus One' manufacturing hub.
Saudi Arabia: Advancing economic diversification away from oil revenue.
The appeal of emerging markets
1. High economic growth rates
While developed countries have annual growth rates of around 1-3%, some countries continue to see high growth, such as India at 6-8% and Vietnam at 5-7%.
2. Young population structure
The average age in India and ASEAN is in the 20s and 30s, and future expansion in consumption and labor force is expected.
3. Undervalued valuations
Compared to developed countries, PERs are often lower, and there are many cases where one can invest at a discount.
Risks of emerging markets
1. Political risk
Political instability, such as changes in government, sudden policy shifts, and the risk of nationalization, has a major impact on investments.
② Currency Risk
Emerging market currencies are highly volatile and can drop significantly due to inflation or capital flight.
③ Information Opacity
Financial information and accounting standards may not be as reliable as those in developed countries.
④ Liquidity Risk
Market size is small, and you may be unable to sell when you want to during a sharp decline.
Reasons Why Indian Stocks Are Attracting Attention
In recent years, India has been receiving particular attention among emerging countries.
The world's largest population (over 1.4 billion people)
A young average age of approximately 28
Rapid development of the IT and digital industries
Relatively low geopolitical risk as a democratic nation
A destination for supply chain diversification away from China
How to Invest in Emerging Markets
Emerging Market Stock Index Funds: eMAXIS Slim Emerging Market Stocks, etc.
Emerging Market ETFs: EEM/VWO (US-listed)
Individual Country-Specific ETFs: INDA (India), EWZ (Brazil), etc.
Starting with diversified investment in emerging markets included in global stock indices is an easy way to begin.
Summary
While emerging markets offer high growth potential, they also carry high risks such as political, currency, and liquidity risks. A stable approach is to allocate about 5-15% of your total portfolio to emerging markets and diversify using index funds or ETFs. Attention toward growing emerging nations, centered on India, is likely to continue.
