Introduction to the Emerging Markets and some tips to trade them
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. Easy prediction, because 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
- South Africa
- South Korea
and 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. And in this article we want to introduce you some tips to trade them.
However, you first need to understand some key concepts and the risks that exist when investing in these countries. The main factor that you should understand is political risks.
What are emerging markets?
Emerging markets are a group of countries seeing strong growth that analysts and economists believe will transition themselves to developed countries. These countries often record strong economic growth.
The best-known EM countries are known as BRICS. These are countries like Brazil, Russia, India, China, and South Africa. Today, China is the second-biggest economy in the world with a GDP of more than $14.7 trillion. Russia is a leading producer of crude oil and natural gas while Brazil is a leading seller of key commodities like soybeans, coffee and corn.
Emerging market countries sit between developed and developing countries.
Examples of emerging market currencies
In addition to BRICS countries, there are many more countries that fall in that category as well. These include:
Emerging markets vs frontier markets
Another class of countries is known as frontier markets. These are countries that are slightly above least developed countries (LDCs) but are relatively smaller than emerging markets. There are about 82 frontier markets in the world according to the World Bank. They include countries like Kenya, Angola, Tunisia, and Chile.
A common theme about emerging markets is that there is significantly higher political risk than in other developed countries.
Let’s look at BRICS countries. In Brazil, there has been an erosion of democracy during the current president’s tenure. In Russia, there is the challenge of President Putin, who has crashed his opposition. On the other hand, in China, Xi Jinping and his administration have so much power such that they can crash key companies.
Elsewhere, in South Africa, political protests and violence are common. In Turkey, the president has crashed the currency by firing central bank officials. Therefore, in most cases, emerging markets are high-risk and high-reward places to invest.
Advantages of emerging markets
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!
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It is also possible trading 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 in 2016. 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 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.
Top emerging markets assets to trade
There are several emerging market assets that you can trade, including:
- Emerging market stocks - You can buy some of the top EM stocks that are listed in the US or other countries. The most popular ones are Alibaba, DiDi, and Baidu.
- EM ETFs - A simpler way of trading EM assets is to use ETFs that track EM assets. There are funds that track EM stocks and bonds.
- EM bonds - It is possible to trade EM corporate and government bonds.
- Currencies of EM countries - You could trade EM currencies like the Turkish lira, South African rand, and the Mexican peso.
- EM commodities - Most commodities come from EM countries. For example, most natural gas, platinum, and palladium come from Russia.
Emerging markets offer some of the biggest returns for traders and investors. For investors, firms like TenCent, Alibaba, and DiDi offer a good way to invest in some of the biggest firms in the world. At the same time, some of the emerging market currencies offer significant volatility that can make you strong profits as a trader.