Diversifying into emerging marketing can be a challenging decision for investors. With elements like human risks and climate change at play, it can be complex to figure out the right strategy to invest in emerging markets. However, extensive evaluation and research can alleviate some of the biggest concerns associated with emerging market investments.
Emerging markets comprise a significant category of some of the world’s biggest population markets. Key emerging markets include China, India, Brazil, Pakistan, Indonesia, and Mexico. These markets offer a host of different economic and geographical advantages to investors to capitalize on the growth prospects. Missing out on the investment prospects in these markets can equate to reduced diversification.
According to studies by Morgan Stanley, a comparative analysis of emerging markets and the US stock markets showcased a lack of correlation. This means that over the long term, investing in emerging markets can serve as a viable portfolio diversification tool for investors. Emerging market investors reduce portfolio volatility and offer investors the ability to generate higher returns.
However, before exploring the key positives of emerging markets, it is essential to explore the downsides that are currently impacting emerging markets in 2022.
Potential Risks of Emerging Market Investments in 2022
The Omicron Variant
Even though the Omicron variant is posing a risk to most major economies, emerging regions are at much higher risk can developed economies. This is because of the lack of established infrastructure in the healthcare segment. In contrast to the US, emerging markets have significantly tanked as a result of the omicron variant. Omicron spread is expected to be a significant threat to developing economies in the initial half of this year. However, positive developments are expected in these economies after the culmination of the pandemic.
Climate change is being increasingly identified amongst the biggest threats to emerging economies in 2022. Developing countries are facing risks of food security, industrial output, and increasing sea levels in key segments. These factors pose a much stronger risk in emerging economies in contrast to the existing landscape in developed nations.
Restrictive Monetary Policies
Western central banks have started to adopt restrictive monetary policies. This poses a significant risk to emerging markets because there is an established correlation between these policies and asset outflows from emerging economies. Restrictive monetary policies are also significantly impacting investments in regions like China due to existing geopolitical conflicts.
Human Right Concerns
Leading emerging markets have repeatedly been flagged due to detrimental working conditions in industrial segments. Significant human rights concerns also exist regarding working and living conditions for people in these countries. These concerns can be a significant deterrent for clients across developed countries based on established requirements.
Authoritarian Decision Making
Counties like China and Russia have emerged as key warning signs for investors. Shareholder rights in the regions have been compromised due to involvement from governmental sources. In the landscape of these regions, exploring ESG investments is essential to ensure that investment deviates away from companies that don’t comply with environmental, social, and governance standards.
Insights From Emerging Markets – The Prospects
With the US Fed announcing three interest increases in 2022, US growth is expected to peak. This landscape provides a viable avenue for investors to explore emerging economies that are proactively navigating through the challenges. Key emerging economies have been taking radical steps to minimize the global impact of inflation through increasing interest rates. Over 23 emerging and frontier nations have increased interest rates to boost real returns and mitigate inflation.
Another positive factor in the emerging market segment is China’s changing policy. Authorities in the country are enhancing efforts to support the economy by lowering barriers to borrowing. The country is pushing forward efforts to counter the impacts of the property market crackdown.
Here are some key insights from leading investment firms regarding viable asset classes in 2022.
- Morgan Stanley Investment anticipates a decrease in inflation in the second half of 2022, with supply chain constraints reducing in the market. The company expects Chinese equities and high-yielding currencies to be viable investment avenues.
- Goldman Sachs expressed a strong belief in the dollar maintaining its strength, with Chinese stocks being a viable asset for 2022. The investment firms also expressed optimism about Eastern European currencies.
- Bank Paribas Asset Management is positive about the prospects of high-yield bonds in China and external debt in West African countries. The bank emphasized the importance of the Chinese regulatory directives on emerging market investments.
Expected Normalization – Importance of Selectivity
The record-breaking global inflation observed in the past year is expected to taper off in 2022, thanks to improving supply chain logistics. Persistent digitalization is another factor facilitating the recovery from high inflation in the medium term. Emerging markets are better placed in terms of inflation due to the role of food in the Consumer Price Index. Normalization of the inflation landscape is expected in developing economies on the basis of supply chain improvements.
Selectivity is an integral factor of investments in emerging market economies to prevent the volatile landscape. Sector-based evaluation can help investors and institutional managers avoid risk and diversify their portfolio allocations.
DIF Recommendations – Emerging Market Investments in 2022
Despite the challenging global conditions present in emerging economies, the aggressive growth of the US market offers a viable avenue for emerging market investments. DIF experts anticipate increased emerging market investments after Q2 this year based on the interest rate hikes expected in the US. ESG investments are the most viable segment for investors looking to mitigate risks and diversify their portfolios.
Even though all investment options include their inherent risks and compromises, it is essential for investors to consider the importance of global diversification and explore growth prospects in screened emerging economies. DIF will continue to monitor and invest in viable emerging segments to maximize portfolio diversity for stakeholders.