Business Insights

In perspective

Emerging markets, an opportunity for investors

October 06, 2017

Emerging markets attract businessmen and investors with a high-risk tolerance who are willing to invest in the long term because of their high consumer potential and rapid economic growth.

Before deciding as to whether it is convenient to diversify and invest in emerging markets, it is important to understand what emerging markets are.

Emerging markets refer to developing countries which, due to their liberalizing policies, experience accelerated economic growth that underpins the living standards and income of their growing population.

Which ones are they?

Although there is no international organization that determines which countries are emerging markets, Morgan Stanley International (MSCI) utilizes reference points such as economic indicators (indexes). In its most recent listing, it cites the following emerging markets:

  • In America: Brazil, Colombia, Chile, Mexico, and Peru.
  • In Africa, Europe, and Middle East: Egypt, United Arab Emirates, Greece, Hungary, Poland, Qatar, Czech Republic, Russia, South Africa, and Turkey.
  • In Asia: Korea, China, Philippines, India, Indonesia, Malaysia, Thailand, and Taiwan.

Although emerging market economies often place limits on private property ownership by foreign companies, it is true that these types of opportunities are still attractive for many investors and businessmen due to expectations of accelerated growth. 

Risks to consider

Nevertheless, the economist Ashoka Mody advises against uncertainties that emerging markets entail. Among those are its inherently volatile nature and transitional characteristics such as fertility rate, life expectancy, and education level. 

Risk-seeker investors who seek to diversify their portfolios bet on high returns associated with volatile markets. They obtain positive results when their investments are for ten years or longer, and they do not allocate more than 10% of their portfolio.

The case of Mexico

Mexico, which has a growth rate of two percent, a low fiscal deficit, and relatively healthy public finances, classifies as an emerging market. 

Despite the fact that GDP per capita exceeds similar emerging market economies, it does not reach the level of indexes in economic and human development that would regard it as a developed country within the world economy.

Nevertheless, it stands out within the emerging market economies as a good investment opportunity. This is in part due to its high value-added exports to the United States, one of the fastest growing economies in the world of today.

Its stable fiscal and macroeconomics management, in addition to the continuation of policies that enable and promote private investments in a global isolationist environment, are also key factors that attract investments. ­­­­­­­­­­­­­­­­­

The economic sectors with the best investment options in Mexico include automotive, mining, banking, and financial services.

The role of family enterprises

Christine Blondel, adjunct professor at the Wendel International Center for Family Enterprises at the INSEAD Business School in France, considers that these types of organizations are a fundamental component of emerging markets and refers to them as the natural means to do business. 

Investors seem to agree with her, since they have a preference for Mexican family enterprises as an opportunity that will increase their wealth in the long term.

The accounting firm KPMG, in a study from 2014, reported that 92% of investors that elected this option were satisfied with their decision.

In general terms, there are advantages to the structure of these family enterprises in emerging markets, according to Tarun Khanna, professor at Harvard Business School. In his opinion, “specifically in volatile times, family enterprises can result in a very solid structure…because there is a mutual environment of trust in the firm and everyone is prepared to survive.”