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The Risks of Investing in Emerging Markets Despite its Boom

Emerging markets all over the world is back on track with an upward trend this year.

MSCI emerging market index shows a 6 percent gain since January 1 putting the trend to levels that have not yet been seen this year. Turkey and Indonesia saw a 14 percent gain in their Stocks, while India enjoys a relatively big 22 percent increase.

However, here are major risks that investors should be mindful about:

  1. The tightening of Federal Reserve is posing a major risk for emerging market investors. Just like last year, the market dropped because investors thought money would funnel back to the US assets since the Federal Reserve is reducing its easy money’s flow. Federal Reserve chair Janet Yellen said the right management of investment outflow is important to avoid possible big crisis in the emerging market.
  2. Some of the emerging markets will have their elections soon. Political races are risky for any investments, especially in emerging markets. Brazil, Turkey, and Indonesia are some of the major emerging markets that will have their election very soon. Some of the candidates are pro-business and welcome foreign investments in their country, while other presidential candidates are not very welcoming to foreign investors.
  3. Economic challenges are common to any country. But high inflation, slow growth, and a strong need for foreign capital could badly affect the economy of emerging markets such as South Africa, Turkey, Indonesia, India and Brazil. An increasing dependence on credit is a risk for countries like Thailand and Brazil; meanwhile as China cools down its property market, commodity exports in Africa and Latin America might be greatly affected.
  4. Rise in oil prices will affect emerging markets, especially Turkey and India, which are very dependent on oil imports. With the continuing conflicts in Iraq and Libya, this problem may pose a big risk for emerging market investors.

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