Global investors face the dilemma of investing in emerging markets. These are, on the one hand, regions with massive growth opportunities due to their young population, fast-paced urbanization, and increasing domestic demand.
However, conversely, due to political uncertainty, poor economy, and ineffective systems of law and regulations, investments in these countries are often seen as risky or difficult to sustain.
Therefore, does it imply that investing in developing countries is a venture that involves risk for the investor, or does it hold opportunities for the future?
Why Emerging Markets Attract Global Investors
According to data from the World Bank, developing countries accounted for more than 60% of global economic growth over the past decade. This indicates that the world’s financial power is gradually shifting from developed to developing countries.
“Emerging economies are the engine of global growth today, but to capitalize on that opportunity, investors must understand that fluctuations and volatility are part of the journey,” said Carmen Reinhart, former Chief Economist of the World Bank, in an interview with The Financial Times.
One of the primary benefits of investing in emerging economies is their high growth rates. For example, countries such as India, Indonesia, and Vietnam have recorded economic growth of over 5% per year even amidst global uncertainty.
Sectors such as financial technology, renewable energy, and infrastructure are experiencing rapid growth due to government support and enormous domestic market demands.
“Foreign investors can get much higher returns compared to developed countries, provided they can manage risks appropriately,” said Simon Baptist, Chief Economist at The Economist Intelligence Unit (EIU).
The Risks You Should Watch Out For
However, risk remains a significant issue. Dependence on commodity prices, vulnerability to exchange rate volatility, and inconsistent economic policies make emerging markets volatile. For example, the currency crisis in Argentina or the political uncertainty in Turkey has led many investors to withdraw their capital, causing sharp market fluctuations.
“One of the main risks in emerging markets is that government policies can change drastically, even in a short period,” says Mohamed El-Erian, economic advisor at Allianz and former CEO of PIMCO.
However, this risk is not always a deterrent. Many institutional investors such as BlackRock, JPMorgan Asset Management, and Singapore’s Temasek continue to hold emerging markets as part of their long-term portfolios.
In its annual report, BlackRock states that “emerging markets remain a critical pillar of global diversification, especially as developed markets face stagnation and demographic challenges.”
Is It Worth the Risk?
In addition, the emergence of international frameworks, such as Environmental, Social, and Governance (ESG), has also helped mitigate risks in emerging markets. With stricter standards on corporate governance and socio-environmental impact, many local companies are now more ready to accept foreign investment.
This creates a more transparent and credible ecosystem for investors. According to a McKinsey & Company report, companies in emerging economies that apply ESG principles exhibit more stable financial performance and attract a greater number of foreign investors.
In the current geopolitical context, emerging economies are also becoming a new strategic terrain for technology and manufacturing investments. The diversification of supply chains from China to Southeast Asia, driven by US-China trade tensions, for example, presents significant opportunities for countries such as Vietnam, Malaysia, and Indonesia to become new production centers.
This shift has spurred a growing wave of foreign direct investment (FDI) into these regions.
“Investors are now increasingly attracted to developing countries that can offer relative political stability and competitive labor,” explained Deborah Elms, founder of Asia Trade Center, in an interview with CNBC.
In conclusion, while investing in developing countries involves notable risks, the growth potential they offer is equally compelling. Investors who can read political dynamics, understand the characteristics of local markets, and apply the principle of diversification can achieve significant long-term profits.
As Larry Fink, CEO of BlackRock, says, “Risk and opportunity are two sides of the same coin-emerging markets are where that reality is most vividly on display.”
