In these economic downtimes here on the home front in the United States, many investors have begun to invest their funds in emerging markets. Economic advisors are very happy with the results, and man are encouraging others to invest in these up and coming economies as well. But before you jump in, you need a chance to test the waters. Here are some of the risks involved in investing in any emerging market.
- When you decide to invest in an emerging market, be aware that your investment will be subject to political decisions. The vast majority of developed nations have a relatively stable economic environment with a free market system ensuring a very low amount of government interference. There are always the possibilities for tax increases, war, changes in policy, and loss of subsidy. You will also face the risk of potential inflation, and perhaps even the shutdown of an entire industry. The level of each of these risks will vary depending on which foreign market you choose to invest in, but they are definitely worth considering before you make any significant move.
- Positive stock returns are more likely in a country with a sturdy structure of governance. In a lot of these emerging markets, you will see that the management, or even the government itself, has a bigger say in what goes on than the shareholders do. When businesses are constantly blighted with regulation and restriction, they have less of an incentive to perform well. Not every nation believes in the same standards as America, although many of these emerging markets have taken some steps to shape their own systems like that of the greatest nation in the world.
- Liquidity in emerging markets is significantly lower than the developed nations. These illiquid environments often prevent investors from receiving the benefits of a quick transaction. Investors will face an increased level of uncertainty and higher broker fees.
- The markets of North America have a history of normal distributions. Because of this pattern, economists can use a number of statistics and financial models to predict what the future will hold for equity prices. Due to the constant change that emerging markets endure, and their lack of history that can be used to project any kind of economic forecast, it makes things very difficult to predict. There is almost nothing certain in an emerging market.
- Another big risk is insider trading. In America, unfair trading practices are often prosecuted. However, the same cannot be said of most of the inside traders in emerging markets. Emerging markets tend not to aggressively enforce insider-trading restrictions. This, and the usage of a variety of market manipulation techniques, makes the system particularly favorable for those who can control it because they have the information needed to do so. Those investors, who do not have that information, would be wise to assess this risk before they stake their claim in any emerging markets.