Before You Invest in Emerging Market
Investors looking for lucrative returns on their investments are increasingly aware that developing countries are fast becoming the drivers of global wealth, a trend that every investor worth his or her salt should be well aware of because this is, in many ways, the essence of investing – to invest where growth is taking place, now and for the foreseeable future.
According to the Forbes article linked to above, the International Monetary Fund (IMF) predicts that emerging economies are expected to grow two to three times more rapidly than the US and other developed economies, so it should come as no surprise that savvy investors are looking to emerging economies like those in BRIC (Brazil, Russia, India and China) for high ROI.
The article goes on to explain that emerging markets generally offer better outstanding investment opportunities because they offer greater diversification, and also that the reason behind the high growth of US companies over the past year is because of their investments in non-US markets, most notably emerging markets.
Understanding the potential for top ROI and the risks involved
What this means for investors is that emerging markets have much to offer in the way of both short and long term returns, however, due to the nature of emerging markets and the fact that business is often conducted and regulated in a very different manner to what investors are used to at home, investors need to keep their wits about them when selecting companies to invest in.
Investors need to understand that whilst there’s the potential for top ROI, there are also some risks they need to be aware of. For example, although a company might be well managed from top to bottom, the way companies operate and are regulated in emerging economies often differs from the way that companies operate and are regulated in developed economies like those of the UK and US. Moreover, there are also cultural differences, legal and political differences, and issues associated with distance to take into account.
Before investing in a company in an emerging market
There are a number of questions that you’ll need to ask yourself before investing in a company based in an emerging market, like the BRIC countries for example, starting with ‘Where are the company’s major assets held?’. In addition to this important question, there are a number of additional questions you’ll need to seek answers for, including:
- How complex is the company’s structure and does this pose problems pertaining to understanding where its assets are held and who controls them?
- If you don’t understand the way the company is structured or it’s so complex that you have no idea where its assets are held and who exerts control over them, you should either a) seek clarification with assistance, or b) look at investing elsewhere.
- Where are the directors and management level employees located, is there a person central to the company’s dealings and operations, moreover, how much control and influence do they exert?
- You need to understand who’s running the company you’re investing in and where they’re located; moreover, you also need to understand their exact role in the company and how much power within the company they wield.
- Where are the company’s major assets held and does the company hold them directly or through a foreign partner?
- By seeking an answer to this question you’ll be able to a) ensure the company actually possesses the major assets they claim to hold and b) better understand the manner in which the company operates internationally.
- Is there evidence of substantial loans to or from companies that are affiliated with or related to the company?
This can prove tricky to ascertain, though many have found that searching the prospectus for material contracts and related party contracts helps them to cut to the chase.
These are far from the only questions you’ll need to ask yourself when investing, so if you’re new to investing in emerging markets and would like to protect yourself you’re advised to discuss your investment ideas with a financial planner like Jelf (http://www.jelfgroup.com/) to gain a more comprehensive understanding of what you should be looking for when investing in companies in emerging markets.
About Jelf:
Jelf in the UK is a company supporting businesses by providing them advice relating to commercial finance, financial planning, employee benefits and insurance. More information can be found at www.jelfgroup.com.
