Emerging markets Ι Risks involved in international investing

About emerging markets. Explanation of the risks involved in international investing.

Emerging markets

Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. The economies of China and India are considered to be the largest.

According to The Economist, many people find the term outdated, but no new term has yet to gain much traction. Emerging market hedge fund capital reached a record new level in the first quarter of 2011 of $121 billion.

The seven largest emerging and developing economies by either nominal or inflation-adjusted GDP are the BRIC countries (Brazil, Russia, India and China), as well as MIKT (Mexico, Indonesia, South-Korea and Turkey).

Features of Emerging Markets

  1. Markets and Culture Are Demanding: Dust and heat, lack of electricity, narrow highways, and low budgets all place strains on products in the developing world. 
  1. There Are High Rates of Emigration to the Developed World: The developing world is exporting not only products and services to the developed world but also to people.
  1. Markets Are Fragmented: Developing markets are highly fragmented, with few national brands that have a commanding presence. 
  1. There Are Limited Income and Space: Incomes and cash flows in the developing world are much lower. In rural and poor segments, low-income limits purchases.
  1. Infrastructure Is Weak: Most of the rural population of the 86 per cent markets is inaccessible by motor vehicles, and they lack good sanitation and electricity. 

Risks involved in international investing

  1. Changes in currency exchange rates – when changes occur between currencies, it can impact your investments dramatically. Canadian investors saw that extensively with their U.S. holdings in the past year.
  2. Dramatic changes in market value – foreign markets, like all markets, can experience dramatic changes in market value.
  3. Political, economic and social events – it is difficult for investors to understand all the political, economic, and social factors that influence foreign markets.
  4. Lack of liquidity – foreign markets may have lower trading volumes and fewer listed companies. They may only be open a few hours a day.
  5. Less information – many foreign companies do not provide investors with the same type of information as U.S. public companies. It may be difficult to locate up-to-date information, and the information the company publishes may not be in English.
  6. Reliance on foreign legal remedies – If you have a problem with your investment, you may not be able to sue the company in the United States. Even if you sue successfully in a U.S. court, you may not be able to collect on a U.S. judgment against a foreign company.
  7. Different market operations – Foreign markets often operate differently from the major U.S. trading markets.

Read about Assumptions of Capital Asset Pricing Model (CAPM)

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