Put your money where the emerging market is

If you only read the front page of the newspaper you’d think any country outside of North America is on the verge of collapse. While Greece’s financial problems are real, and the worry that its debt problems could damage the entire European economy is significant, there are still investment opportunities beyond Canada’s borders.

Specifically, emerging markets like China and Brazil have plenty of opportunities, as does non-BRIC (Brazil, Russia, India, China) countries like Bangladesh and Dubai. I wrote a story on emerging economies for Canadian Business magazine on where you might be able to find cheap investments, and why the market’s valuation is relatively low these days.

There are two main reasons why a lot of investment managers like emerging markets. The first is that people are still concerned about the global economy, so they’re not eager to jump into a market that’s not their own. Investors see developing countries as risky, and it’s hard to blame them. Most Canadians don’t know a heck of a lot about China, and especially not about smaller countries like Bangladesh or Nigeria. Political climate is also a concern. One portfolio manager I spoke to in the story doesn’t invest in Russia — he says the “political agendas” make it difficult for corporations to run effectively. However, another manager has no qualms about investing in the country. The risk and uncertainty makes valuations cheap.

Another reason why emerging markets are, generally, a good place to invest is because they have a low debt-to-GDP ratio — around 40% compared to 80% to 120% for developed countries. (This, of course, is a pretty sweeping generalization — debt-to-GDP can vary wildly depending on the country, but this is still a useful comparison.) Emerging markets had debt-to-GDP problems years ago, which caused fiscal defaults in a number of countries. But, many world leaders have learned from past mistakes and have made a concerted effort to avoid the issues they faced in the past.

According to Mark Mobius, executive chairman of Templeton Asset Management, emerging markets will grow four times faster than developed countries in the coming years. That’s a pretty big number and yet another reason why you may want to capitalize on this space.

Buying into emerging markets is fairly easy. Most mutual fund companies offer global funds and emerging market funds (the most popular of which invest in BRIC). There’s also country specific funds, like a China fund, and while it’s rare right now, you can invest in Frontier funds, which cover countries in Africa, the Middle East and some up-and-coming European and Latin American locales. (This latter category is risky — it’s not recommended that a newbie investor buy into something like this until they’re better versed in non-domestic investments.)

Whether you want to start investing outside of Canada or not, it’s worth looking at other markets. Domestic markets will hopefully continue to rise, but if you want to see your money grow a bit faster, you may have to look beyond this country’s borders.

Read my Canadian Business story and find out more about emerging markets.