An growing economic region that offers potential opportunities for investment is called an emerging market. The question of whether or not one should invest in these markets is a matter of discussion due to their dynamic and unpredictable nature.
India has transformed into the world's largest digital payments market in less than a decade, demonstrating the potential of emerging markets. These economies, which are transitioning from being relatively undeveloped towards becoming fully-fledged post-industrial economies with high standards of living, offer investors numerous opportunities.
MSCI, a leading provider of global equity and fixed income indexes, categorizes national economies into five categories. Emerging market economies include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey, United Arab Emirates, and more.
Investors can gain exposure to these rapidly growing economies through various means. For instance, low-cost index funds such as iShares MSCI Emerging Markets ETF (LON:0JHF) and Vanguard FTSE Emerging Markets ETF (LON:0LMP) track indices, providing a diversified investment option. For a more active approach, investment trusts like Templeton Emerging Markets Investment Trust and Fidelity Emerging Markets Limited (LON:FEML) could be considered.
However, investing in emerging markets is not without its challenges. The International Monetary Fund classifies 40 countries as 'emerging market and middle-income', including Brazil, Russia, India, China, and South Africa. Geopolitical instability, corporate governance issues, and fluctuations in foreign exchange rates pose significant risks to these economies.
Chetan Sehgal, portfolio manager of Templeton Emerging Markets Investment Trust, has highlighted geopolitics as a current challenge, citing the downturn in investments in Russia following its invasion of Ukraine in 2022. Chris Tennant, portfolio manager at Fidelity Emerging Markets Limited, states that they have a list of red flags they look for, and if a company meets these criteria and is also expensive, it becomes a big short position.
Moreover, some emerging markets, such as China, have corporate governance issues that investors need to be aware of. On the other hand, the current trend towards de-dollarisation may be beneficial for emerging market economies, as it could mitigate the risk posed by fluctuations in foreign exchange rates.
In 2025, there was a shift in the global perception of the US dollar, with Donald Trump's trade tariffs disrupting the global status quo and reducing appetite for US assets, creating opportunities in other parts of the world. Emerging market assets have been largely ignored over the last decade, leading to cheap valuations due to the outperformance of US equities and the US dollar.
In conclusion, while investing in emerging markets requires careful consideration of several factors, the potential rewards can be substantial. As these economies continue to grow and develop, they will undoubtedly remain an attractive option for investors seeking to diversify their portfolios.
- To capitalize on the growth of emerging markets, investors might consider ETFs like iShares MSCI Emerging Markets ETF and Vanguard FTSE Emerging Markets ETF, offering diversified investment options.
- However, investing in such markets comes with risks, such as geopolitical instability, corporate governance issues, and fluctuations in foreign exchange rates, as seen in countries like Russia or China.
- The ongoing trend of de-dollarization and reduced appetite for US assets due to trade tariffs, as seen in 2025 with Donald Trump's policies, could present opportunities for investors in emerging market economies.
