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Investing in emerging markets

Investing in emerging markets stocks are akin to investing in penny stocks. Even though you have short term history, there is still a great unknown about the potential upside. You are taking a risk that growth will continue and the emerging economy will prevail over the difficult and tumultuous world climate. But that upside is very tempting and, indeed, if you as an investor do your homework you can minimize the potential risks while reaping great rewards. There are a few things I like to do before emerging in emerging markets, I always tend to look at the country’s GDP. Also, I try to find out what the stocks are constituted of and if the country has a growing economy in those areas. It helps to look at these types of things carefully before taking any type of risk.

Ground floor

Investing in emerging markets is like getting in on the ground floor opportunity of a new, potentially major, corporation. Think Apple and Google. Stocks are relatively inexpensive because their potential is likely already factored into the price and all that is needed to move upward is a strong series of sales. And as an investor, that is what makes this a risky venture. What if the sales don’t come? One way to offset the risk is to buy into an index fund or mutual fund that invests solely or heavily in emerging markets. You are not taking the risk of just one company but as an economy as a whole. These are obviously not a short term trade but rather a long term investment that could grow substantially over the course of a few years.

population

Population

A common theme in emerging markets is the population. Most emerging markets have a population that is steadily increasing. This means that there is more consumption of goods and that the economy has a good chance of maintaining a steady growth. If the economy is strong, then consumer spending will also be strong and the bottom line of corporate sales will be healthy.

A growing economy usually means that companies are putting cash away with their strong sales. As a result, healthy companies are able to grow and increase sales without increasing debt. A low debt ratio makes for another healthy balance sheet. Look for sectors within the economy that are growing the fastest. It could be that the economy is booming because of the consumables produced for the population. Or it could be that the economy has a growth sector, for example, of technology related companies. Or perhaps the manufacturing and export sectors are driving the economy. Again, doing your homework will give you the upper hand as to how to invest specifically.

technology

Technology

As mentioned, technology is an important component to driving growth in today’s world economy. Not only in specific companies for investing, but for the infrastructure of the country itself. For instance, if there are sustainable energy components or high tech industrial goods being manufactured and consumed by the country itself, then these are strong indicators for investment opportunities.

If manufacturing companies are investing in technology, it could mean that their production capabilities will be higher and more efficient than their competition. Not only will this gain an advantage locally, but regionally this could attract more sales from neighboring countries.

Incentives

Emerging markets are usually looking to do business with larger sustained economies as a way to increase growth and drive their economies. They will often use incentives to lure foreign investors and foreign businesses into their export and manufacturing companies by offering tax breaks and lower prices for goods and services.

Incentives are usually a small price to pay for having an established company agree to do business because it will help guarantee a measure of employment stability, increased consumer spending and taxes, and an overall level of confidence in the economic stability of the country.

In today’s world wide economy, emerging markets are having to keep up with technology and advancements in energy in order to compete globally. But for those countries that have the vision, the capital, and the infrastructure to pull it off, the sky is the limit. And for those investors that do their homework, and take that chance, so is the opportunity for a nice return on investment.

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