How to Trade the Emerging Markets Profitably – Introduction
If you are reading this, chances are that you have a lot of interest in the financial market and global economics. If so, chances are that you have heard the talk about the emerging markets or EM. Investors and analysts have always talked about the growth and the risks of emerging market countries.
As asset classes in the developed markets become pricey because of factors like quantitative easing, several investors have moved their funds to emerging markets. Emerging market economies include countries like India, China, South Africa, Nigeria, and South Korea among others. These are the countries that investors believe will be leading in the next few years.
As a trader, it is also possible to trade the emerging markets profitably. However, you first need to understand the risks that exist when investing in these countries. The main factor that you should understand is political risks. In most of these countries, the political risks are so much that many investors have lost money. For example, in South Africa, the current president has survived a vote of no confidence about two times this year. There is a lot of civil strife in the country as many natives fight against the immigrants who they accuse of taking their jobs. In South Korea, there is the issue of corruption that led to the removal of the then president and the jailing of the Samsung heir. The country is also exposed to North Korea conflict. In Russia and Nigeria, the countries are suffering the effects of low oil prices which have affected the economy.
Therefore, the emerging countries are risky places. Most of these economies depend on single sources of income. For example, Saudi Arabia, Nigeria, and Angola depend on crude oil while South Africa depends on the mining sector. They are not as diversified as the developed countries like Britain and United States.
However, despite the risks, it is possible to make money in the emerging markets by buying instruments like currencies, commodities, and stocks from their countries. The benefit of doing this is that the high risk brings about new opportunities that traders can take part in. For example, as the oil prices remain low, it creates opportunities to buy depressed companies at a low price. Then, when the recovery starts, you can make money as their prices race.
In fact, when the problems in the commodities market started in 2015, many investors exited these markets and went to the safer havens in the United States and Europe. Thus, they abandoned some of the best investments in search of yield.
It is also possible to trade the emerging countries currencies. As you can see below, the Mexican Peso was beaten down when it became clear that Trump would win the election. During the campaign, he had bashed the country, calling its people rapists and murderers. However, as the risk of Trump declined, so did the Mexican peso which has performed really well against the dollar as you can see below. You can apply this logic to other currencies. For example, you can be a contrarian and buy the South African rand which has been beaten down after the recent political instability.
You can also buy the bonds of some of these emerging countries. In the bond market, investors tend to buy bonds of countries that are highly rated. They ignore countries that are not highly rated. In turn, the yields of these countries go up. As a trader, you can take advantage of these risky events to trade on the bonds of emerging markets countries.