6 Reasons Why Emerging Markets Look Cheap Right Now
Date: 8 June 2016 Share on Twitter Share on Facebook
Emerging markets might look like a good investment due to cheap prices, but they have always been less attractive to investors – and there’re many good reasons for this. Developing economies such as China, India and Russia might be among the cheapest emerging markets, but they are considered high risk and any investment will be needed for the long term if you wish to eventually see the rewards.
What are emerging markets?
The term refers to countries that are still developing and going through transition. Investors in these markets would need to be prepared to tie their money down for a longer period of time, and while the rewards can be considerably higher, this is due to the increased risks involved.
Why do emerging markets look cheap?
Many factors influence the price of emerging markets. As outlined below, there are numerous reasons why emerging markets look cheap at the moment.
Higher risks involved
With higher returns come increased risks, and there are a number of reasons why investments in emerging markets are such a gamble at the moment. As the experts explain, first, there are the natural fluctuations in currency to consider, and the unpredictable nature of the local economies. In addition, political instability shouldn’t be overlooked either. Problems controlling inflation, war or a sudden change in taxes all have the potential to hit the value of investments. The unregulated markets of these developing economies also contribute significantly to the risks, and monetary policies can all play a part in increasing the dangers of investing in such markets. Due to the changing political arenas of many of these countries, it can also be difficult to enforce legal contracts – if these are used – to try and protect an investment.
The influence of commodities markets
Many of these cheap emerging markets are dependent on commodities. As an example, Brazil is a leader in coffee and cocoa production and China depends greatly on oil, and while a strong demand for these commodities can lead to a surge in prices, a fall in demand will inevitability hit prices – and China is a good example of that. As analysis shows, growth in China has been slow, and it has often fallen below its predicted expectations. Measures have been put in place to try and encourage stability, but this has resulted in a softening of commodity prices, and many remain unconvinced by government moves to stabilize the economy.
Another reason why emerging markets remain on the cheap side is they are currently offer failing returns. Investors would rather plough their money into markets that offer stronger rewards than tie their money up in an emerging market. The price of stocks were further hit this year when Chinese shares in Hong Kong fell. Added to that, there were also losses for Turkey, China and South Africa, and a fall in manufacturing in China also lead to further uncertainty in the developing markets.
Emerging markets are known for their volatility as they are often going through a transitional phase. China especially has faced uncertain times, with a number of stock crashes, which is perhaps one of the reasons why it is one of the cheapest emerging markets. Most people will recall how China’s recent stock market crashes send shockwaves around the world but it’s not alone in its instability. Countries like Turkey and Argentina are also known for their economic turmoil, and the same could be said for other emerging markets. While this volatility can help to keep prices cheap, it also significantly adds to the risk.
Strong U.S. Dollar
A further factor in the low price of emerging markets is the strong performance of the U.S. dollar in May. This is obviously good news for U.S citizens – and the U.S. economy as a whole – but it can have a negative impact on developing economies. For one thing, it affects capital inflows – or the amount of investment coming into emerging markets from other countries – and if interest rates increase in the United States, so will the cost of managing debts that were taken out in the dollar currency.
BRIC Nations slowdown
A slowdown in the BRIC nations – China, Russia, India and Brazil – is also partly responsible for the low prices of emerging markets. There have been recessions in both Russia and Brazil, and the World Bank issued a word of warning regarding a potential slowdown in other emerging economies, all of which makes these markets less appealing to the investor at the moment.
Despite the many risks involved – and the volatile performance of some of the cheapest emerging markets – some experts argue that long term investors could benefit from the developing markets growth potential, provided of course, they are willing to accept the volatility that inevitability comes with the possible higher returns on offer.