Read This Before You Buy Emerging Market Investments

by Karim Rahemtulla

Read This Before You Buy Emerging Market Investments

by Karim Rahemtulla, Investment U's Emerging Markets Specialist

Tuesday, October 5, 2010: Issue #1359

Now that the hurricane force winds of the financial storm have abated somewhat, investing in emerging markets is back en vogue.

And why not? Emerging market nations offer the kind of explosive growth opportunities that developed economies haven't seen in decades - and here at Investment U, we're on the case.

We've touted the benefits of emerging markets for a long time as an essential part of portfolio diversification.

For example:

It's easy to see why emerging markets are so compelling...

Behold... the "Century of Growth"

Ordinarily, 8.5% annual economic growth is superb. But for a country like China, it's considered a "slowdown." India is raising its interest rates in order to slow the pace of growth. And even after an attempted political coup in Thailand, its stock market recently set new highs.

These countries are living up to what some have termed the "Century of Growth."

If you've read any of my columns on investing in India, or Thailand, you'll know that I'm generally bullish on the growth prospects for emerging markets.

That said, you do need to be aware of some obstacles before you invest, so that you know your money is in the best place. Many investors forget that these burgeoning markets are still in their infancy and undeveloped, so it's still a case of "buyer beware."

Make sure you've considered the following issues before you press the "buy" button...

Do You Know These Four Crucial Emerging Market Factors?

From volume, to politics, to the social structure, emerging-market investing is one area where you can never do too much research - particularly with regard to the following areas:

  • Liquidity

There's still an imbalance between the number of investments available and the amount of money chasing them.

Take India, for example. Over the past five years, the Indian stock market has seen more money funneled its way than in the past 20 years combined. Yet the number of "high quality" Indian companies like Infosys (Nasdaq: INFY) or Reliance has remained relatively small.

  • Politics

Places like Russia and China have closed political systems. That means one protest too many and their markets could fall by 20% overnight.

In Russia, its oligarchs with implicit government backing still control the market. And the lack of a real constitution or solid business protection means you're essentially investing without a safety net of any sort. When the guy running the company is only a figurehead, how much credence can you put in what he says?

  • Social Instability

If you're looking for a prime example, look no further than the recent unrest in Ecuador. We witnessed an attempted coup when the police tried to overthrow the president and the military came to his rescue.

While many emerging markets are growing solidly, Banana Republics still exist. Keep in mind that the further flung the market, the more likely it is that you'll be exposed to situations that are potentially damaging to your investment dollars.

  • Correlation

Investing in emerging markets makes sense as a tool for diversification through vehicles like ETFs and mutual funds.

However, while it's true that what happens in one country doesn't necessarily impact what happens in another, the exception is when you correlate what happens in just about any country to the United States.

Remember, foreign markets crashed when America did. The difference is that many others recovered much faster and the trick is to be prepared how to trade these types of situations at the right time for maximum profits.

Become an Emerging Market "Spy"

Nothing I mentioned above should come as a surprise to any emerging-markets investor.

However, there's one other point that I'd like to emphasize strongly. Few people are even aware of it, so make sure you're not one of them, as it's a big issue.

Information.

Credit and ratings agencies still don't cover emerging markets well enough, which sometimes means that obtaining reliable information can be tricky. Alas, there's no Dun and Bradstreet for Vietnam. And U.S. ratings agencies (not that they're perfect) have little information on foreign companies that aren't headline names.

Considering what happened in the United States - arguably the most transparent market in the world - you need to pay extra attention when investing in emerging markets, even though they offer some real opportunities.

What's the solution? Tread carefully and don't make the mistake of conferring unduly high status on a country when your investment dollars are at stake.

Better yet: Put a professional on your side who knows the ins and outs of foreign markets and where to get the reliable investment information that results in profits.

I'm an advocate of investing in these markets, as it's where the money will be made. So I encourage you to check out Alexander Green's New Frontier Trader, which tracks overseas markets and stocks for investors who want to diversify outside of the U.S. stock market.

And stay tuned for tomorrow's issue, when Carl Delfeld will profile Singapore - a.k.a. the "Switzerland of Asia."

Good investing,

Karim Rahemtulla

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