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Should you invest in emerging or developed markets?

Updated: Dec 16, 2022

The Indian markets saw some of the most extraordinary bullish rages and bearish attacks in the past two years, with investors jumping from ship to ship for investment opportunities. And why wouldn’t they? The volatile market surely favored those who timed their buys and sells right, while trampling the hopes of those who couldn’t.

That is something that budding investors have frequently ignored - the risks of investing in emerging economies. But before we go there, let’s understand what makes emerging markets more attractive and almost utopian to investors.

Investing in Emerging Markets

Investing in emerging markets is a high-risk, high-reward proposition that can tempt any investor to hunt for opportunities. About 90% of the world’s population under 30 lives in these emerging economies, contributing to their strong labor-market growth. To support this fact, the International Monetary Fund forecasted average annual GDP growth of 5.5% for emerging markets in 2021-23, compared with 3.5% for advanced economies, WSJ reports.

To add to all of it, experts suggest that inflation has a lesser effect on emerging economies now than it used to, stabilizing them to some extent.

These facts are luring investors but at a huge risk because the success achieved by their financial markets tends not to last too long.

Russia is considered a prime example of this case. Amid extreme communism and poor financial management, Russia has faced massive debts and currency depreciation since the 1990s.

Other countries like India and Brazil that were severely hit by the pandemic are also expected to face a bearish response this year.

Investing In Developed Markets

Emerging markets are still prone to great adversities that developed markets are quite immune to. Very little political or social unrest and consistent economic growth enables developed markets to ensure consistent benefits to global investors.

Here’s a comparative outlook at the essential aspects of investing in developed markets that clearly outdo the momentary joys of investing in emerging markets.

Persistent Returns:

Developed markets, especially in the US, are home to some of the most gargantuan companies that have grown for decades against all odds. Alphabet, Amazon, Tesla, Meta (formerly Facebook), Microsoft, and many less known conglomerates reside here. And data shows, people made 27.39% return on their investments in the US market (NASDAQ) Vs. 13.63% return on their investments in the Indian market (NIFTY) in just three years till 30th June 2021.

More Security:

The MSCI Emerging Markets Index was down by 2.5% at the end of last year (2021), underperforming the developed markets MSCI World Index by approximately 24%. The same index indicated a standard deviation of 18 over the past ten years, compared with 14 for the MSCI World Index of developed markets (a higher number indicating more volatility).

It only proves that even in 2022, emerging-markets stocks are much more volatile than those in advanced economies. And the key contributors to this volatility are the political, economic, and liquidity risks associated.

Developed markets have better regulations to mitigate such risks and offer stable returns. For example, in a rare case of investment theft, fraud, or insolvency, foreign investors’ securities in US markets are insured up to $500,000 by SIPC, while the cash portion of their investments is insured up to $250,000 by FDIC.

Currency Appreciation

Emerging-market currencies can be greatly appreciated or depreciated in a period of socioeconomic fluctuations. It may also suffer due to the increasing value of developed-market currencies regardless of internal influences.

To take an example, the Indian Rupee has suffered a 2.5% depreciation against the US dollar by an approx 2.5% per year, devaluing Indian investor portfolios. But the investors betting on the US dollar are gaining supernatural returns.

As the emerging markets are still struggling to recover from the damage and tackle unchecked inflation, global investors turned to the US dollar for safekeeping their investments. And the rising interest rates also add to the value of dollar-related assets like treasury bonds and yield bonds. And when the value of the dollar rises, so does the value of all its underlying assets, like the stocks, treasury bonds, government bonds, currency bonds, etc.

Banks like HSBC, Citibank, and JPMorgan Chase have already forecast further gains for the US dollar in 2022.

Access To Diverse Growth Stocks

The US markets account for 40% of the world’s total market capitalization. The NYSE alone is home to the world’s fastest-growing tech companies. And as almost 25% of the American population invests in their markets along with a snowballing number of foreign investors, new attractive IPOs will just keep rolling in.

The sheer variety of growth opportunities in these markets allows investors to balance their portfolios without spreading out their investments too much. Investors aim for higher capital gains through growth investing, which has proven to be the case in the US and other developed markets.

How To Invest with High Returns & Low Risk

Considering the unpredictability and short-term successes in emerging markets, researching and trading individual securities in these markets becomes extremely difficult. If you still wish to explore the emerging markets safely, globally established U.S. blue-chip stocks are and EFTs can be an option.

Blue-chip stocks or funds that invest in these stocks allow some exposure to emerging markets while securing your portfolio with a developed market’s stability.

Our US-oriented curated investment stacks are one such low-risk-high-return option that we offer to our investors. Both the War and Peace and Global Innovation stacks are scientifically constructed and curated baskets of investment instruments from globally competitive assets including robust and cash-rich companies listed on NYSE.

If you wish to learn more about investing in the US markets confidently and judiciously, this article can guide you better.



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