Invest in emerging markets?

The rewards of investing in emerging markets

Since emerging markets are highly volatile, investors find that the rewards outweigh the risks. A typical example is China, where investors returned 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 stocks with the highest growth and profitability are increasingly found in emerging economies.

Growth with moderate volatility

Investors can easily add the potential of emerging markets to their portfolio by taking only moderate risks. You can make huge profits by putting all your 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 financial services professionals and companies that help investors select the right type of investments in specific markets. In addition, many companies are going global, so their stocks offer favorable exposure to emerging markets. As a result, investing in such stocks or ETFs can increase returns in emerging markets with moderate risk exposure.

Private equity investment in emerging markets

Private equity is a method by which listed and unlisted companies raise funds privately as opposed to public equity in foreign exchange markets. This mechanism works well for unlisted companies whose risk is perceived as high. Private equity investors buy stakes in a company and share its returns and risks. Like the public equity industry, the private equity industry has its own challenges. Before the recent global financial crisis, the world enjoyed a decade of cheap finance. This period ended with the freezing of the financial markets that caused a credit crisis. The private equity industry is going through the aftermath of the crisis as it is struggling to maintain an attractive level of profitability. As a result, private equity investors are looking for investment opportunities in emerging markets such as Asia, BRIC (Brazil, Russia, India and China) and Africa.

However, private equity investors face a number of challenges in these new markets. These include unfavorable taxes and legal and regulatory impediments. Therefore, investors must act with due diligence before putting their money in these markets. With investment mobility between old and new markets, investors realize that tax issues need to be addressed and the preferred route is to structure investment holding vehicles in offshore jurisdictions such as Mauritius. Mauritius is the most preferred jurisdiction for channeling private equity investments in Africa and Asia over the last decade due to its various double tax treaty agreements with emerging countries.

Emerging markets are clearly very risky; however, the benefits of investing in them can significantly outweigh the risks. There are opportunities for investors to take advantage of rapid growth and returns while at the same time taking reasonable risks.

The good news is that many of the emerging markets are increasingly investing in institutional and legal reforms to create better business environments for foreign direct investors.