Understanding emerging markets


Volatility, Emerging markets, Liquidity

Marcus Svedberg of East Capital explores some of the key opportunities and challenges for investors in relation to emerging markets, and reveals his outlook.

Even in some of the larger emerging markets, liquidity for small- and mid-caps can be an issue.

This is why it is so crucial for emerging markets to build up domestic pension funds and mutual funds for the purpose of stock liquidity, among other reasons, he explained.

In addition to investors looking at volumes at the bottom of the market as well as at its top, investors must also be aware that the economic and political systems in emerging markets are shifting.

Transitions in economics and politics

According to Svedberg, economic and political transitions can lead to a volatile ride for investors.

In the long-term, moving into markets which are changing offers a great investment opportunity since such changes signal a fundamental shift towards something better. However, he said, it is also volatile, and investors should be aware of that when assessing opportunities.

For example, emerging markets tend to devalue currencies more frequently than developed markets, and political risks can generally be higher, explained Svedberg.

It is therefore wise to spread investments across multiple emerging markets, he advised.

The next step for emerging markets

To date, Svedberg said a lot of focus has been on the BRIC economies.

However, there are clear differences between these markets. For example, Russia and Brazil are quite similar as middle-income countries with a fair number of commodities, whereas China and India are low-income countries. Svedberg said such differences within the same basket are a positive thing to capture opportunities at different stages of developments.

As the net widens and more countries are available for investing into, however, he said investors need to be aware of liquidity constraints due to the small size of their stock markets.

At the same time, emerging markets are slowly starting to play a bigger role in global policymaking, added Svedberg, so this will help the shift into these markets.


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