Last Updated on
The Rewards of Investing In Emerging Markets
Inasmuch as emerging markets are very volatile, investors discover that the rewards outweigh the risks. A typical example is China where investors earned a return 46.27% over five years, while the Dow Jones returned a mere 1.2% over the same period. This difference in returns between emerging and developed markets can be seen globally. Thus, in general, the highest growth and returning securities are increasingly being found in emerging economies.
Growth With Moderate Volatility
Investors can easily add emerging market potential to their portfolio by only taking moderate risks. One can reap huge profits by putting all their investments in emerging markets like China, but this can cause sleepless nights whenever there is a skirmish in China or a change in government policy against private investors. Providentially, there are emerging markets that are less risky and that guarantee investment protection. In addition, there are professionals and financial service companies that help investors select the right type of investments in specific markets. Moreover, many companies are going global hence their stock offer a favorable exposure to up-and-coming markets. Consequently, investing in such stocks or ETFs can increase returns from emerging markets with a moderate risk exposure.
Private Equity investment in emerging markets
Private equity is a method through which listed and unlisted companies raise funds privately as opposed to public equity in exchange markets. This mechanism works well for unlisted companies whose risk is perceived to be high. Private equity investors acquire stakes in a company and share its returns as well as its risks. Just like the public equity industry, the private equity industry has its own share of challenges. Before the recent global financial crisis, the world has enjoyed a decade of cheap financing. This period ended with financial markets freezing resulting in a credit crisis. The private equity industry is sailing through the aftermath of the crisis, as it is struggling to maintain an attractive level of return. As a result, private equity investors are seeking investment opportunities in emerging markets such as Asia, BRIC (Brazil, Russia, India, and China), and Africa.
Nonetheless, private equity investors face a number of challenges in these new markets. These include unfavourable taxation, and legal and regulatory impediments. Therefore, investors must perform thorough due diligence before putting their money into these markets. With the mobility of investments between old and new markets, investors realise that tax issues need to be addressed and the favoured route is structuring investment holding vehicles in Offshore Jurisdictions such as Mauritius. Mauritius being the most preferred jurisdiction for channelling of private equity investments in Africa and Asia for the past decade due to its various double tax treaty agreements with emerging countries.
It is evident that emerging markets are very risky; however, the benefits of investing in them can significantly outweigh the risks. There are opportunities for investors to cash in on the rapid growths and returns while simultaneously taking reasonable risks.
The good news is that many of the emerging markets are increasingly investing in institutional and legal reforms so as to create better business environments for foreign direct investors.