Emerging market equities have taken center stage these days because, according to some, the key stock indices in the U.S. economy are reaching the overpriced mark. Investors' returns aren't going to be as robust going forward; there's a significant amount of noise about them taking the shape of a bubble.
With all this happening, investors are asking which emerging market economy they should invest in. Should they buy companies operating in India? Or is China still the best emerging market economy in which to invest?
The answer to this question is not as easy as it may seem to some. Investors have to keep in mind that each emerging market is unique—it presents different opportunities, risks, and rewards.
Take China, for example. As key stock indices in the U.S. economy have increased this year—the S&P 500 is up more than 23% so far—the stock market in the Chinese economy hasn't performed as well; in fact, the key stock indices there have declined. Please look at the chart below: the Shanghai Stock Exchange Composite Index has declined more than 6.4% between January and October.
Chart courtesy of www.StockCharts.com
Does this mean there's room for growth? Don't be too quick to judge. The Chinese economy is going through a bit of an economic slowdown. This year, the country's gross domestic product is expected to increase much less than its historical average; the growth of the Chinese economy is projected to be lower next year as well. At the same time, there's noise stating that there may be a credit crisis in the country.
If all of the trouble growing in the Chinese economy picks up speed, then China is certainly not the emerging market to invest in.
Investors need to consider that those investing in just one emerging market are exposing their portfolio to too much risk. To reduce their risks, they should diversify their holdings in multiple emerging markets.
The reasoning behind this is very simple: if their exposure is with different emerging market economies, their portfolio won't see as much fluctuation as it would have just by investing in one certain country. As mentioned earlier, investors would have losses in their portfolio if they thought China was the best emerging market to invest in.
Thanks to financial innovation, this process is much easier now. Through many different exchange-traded funds (ETFs), investors can add emerging market equities to their portfolio.
One ETF investors can use to expose their portfolio to the emerging markets is iShares MSCI Emerging Markets (NYSE/EEM). This ETF provides investors exposure to emerging market economies like South Korea, Brazil, Russia, India, and many others. In addition to all this, it also diversifies into different sectors. (Source: "iShares MSCI Emerging Markets ETF," iShares web site, last accessed November 7, 2013.)
This article Profit from Emerging Markets with Just One Investment by Mohammad Zulfiqar, BA was originally published at Daily Gains Letter