Emerging markets

Question 1

Why invest in emerging markets?

Answer 1

• investing in developing economies
• these are risky markets
• offer high expected returns due to rapid industrialisation

Question 2

Factors to consider before investing

Answer 2

• current valuation market
• possibility of high economic growth and therefore increased wealth for investors
• currency stability and strength
• level of marketability
• degree of political stability
• market regulation
• restrictions on foreign investments
• range of companies available in the market
• communication and cultural problems
• availability and quality of information

Question 3

Attractions of investments in emerging markets

Answer 3

current market evaluations
* Existence of inefficiencies in the market, creating anomalies from time to time
* Give opportunity to buy assets cheaply
* Investments in emerging markets is often perceived to be risky than they are and that leads
to lower demand, and hence lower prices
* Main reasons :
o Inefficient markets – buy cheaply
o Perceived to be risky- buy cheaply
Better diversification
* Economies and markets of smaller economies are less interdependent than those in major
economic power
* May provide good diversification
* May invest in industries not available domestically
Rapid economic growth
* May grow at rates not attainable by the large developed economies
* Equity investors in fast growing economies share in this increase in wealth -provided share
doesn’t already reflect that

Question 4

Drawbacks in emerging markets

Answer 4

• Volatility
  o market can be significantly affected by large flows of money ,
  o leading to stock markets and currencies being highly volatile creating extra level of
  uncertainty
• Marketability
  o stocks issued here may be less marketable and create concern to investors
• Political stability :
  o some governments lack stability and this therefore increases volatility of returns to
  investors
• Regulation of stock markets :
  o Such markets are normally newer and smaller
  o There may be poor regulation of markets -less protection
  o This may lead to foreign investors losing out through fraud, insider trading
• Restrictions on foreign investments
  o some of the markets have tight controls on ownership by foreigners , there may be
  severe problems in repatriating funds ( both income and capital)
• Difficulty in getting quality information to determine whether investment is worthwhile
• Language barriers
• Time zones and
• How information is presented