Emerging markets not for faint of heart
Joel Dresang: Marc, in a global economy, it makes sense to have at least part of your investment portfolio in international markets. Let’s talk about a subset of that – emerging markets. How do you characterize what emerging markets are?
Marc Amateis: When an economy starts out, we call them a frontier market. They’re in a stage of infancy. They move into an emerging or developing economy or an emerging market. They’re kind of in a state of adolescence, if you will. Their economy is not mature yet.
Joel: What’s attractive about these investments?
Marc: The big attraction I think in emerging markets is their capacity for growth. You have countries where literally hundreds of millions of people are moving into the middle class over the next decade. That’s a very powerful force when it comes to investing: Being able to take advantage of that growth, being able to take advantage of that additional consumer spending.
Joel: What are some of the risks involved in emerging markets?
Marc: There are definitely more risks with emerging markets than there are with developed economies. They don’t have the mature legal framework that you have in the developed world. They don’t have the mature financial systems. Their transparency is not as good as you find in the developed world.
Joel: And then there are also currency risks and geopolitical risks, and emerging markets are dependent on more developed countries?
Marc: Right. A lot of these emerging markets currently are dependent upon China. So goes China’s economy, so go the emerging markets. So you have to be aware of that if you’re going to think about investing in emerging markets.
Joel: Do you have approaches for, or strategies for, mitigating some of those risks?
Marc: One of the ways that we really like to invest in emerging markets is by investing in multinationals from developed nations that just have big footprints in the emerging markets. That enables you to get exposure to those markets, take advantage of the middle class development in emerging markets but without all of the inherent problems of investing directly in companies that are located in those emerging markets.
Joel: Is this an occasion where you’d want to have an active manager?
Marc: Yeah. Absolutely. You want to invest in a manner where you’ve got an active manager who’s got feet on the ground, who knows what’s going on in those markets, who can pick and choose good areas to invest and avoid some of the inherent problems of companies in those markets.
Joel: Given the risks and rewards of emerging markets, are there some investors that are better suited for this investment than others?
Marc: First of all, you want to have a long time frame. It’s going to take time for some of these markets and some of these countries to really develop and to be able to take advantage of the long-term growth potential. So you want to have a time frame of say, eight to 10 years if you’re going to invest in developing markets.
Joel: So, it’s not for the faint of heart, probably not for retirees.
Marc: You get into the latter stage of your investment life, and you want to reduce your risk. You want to be able to sleep at night, so you’re probably not going to want to do much, if any, investing in emerging markets. But for those who are younger, for those who have the risk tolerance, having a small piece of your portfolio in emerging markets can be a good diversifier as well as give you extra opportunity for growth.
Marc Amateis is vice president and an investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted April 1, 2015)