The Rise And Fall of Emerging Markets

In 2009, emerging markets were seen as the "hottest investment ticket around" by most analysts and advisors. Taking a hit in 2008 and bottoming out in 2009 with the rest of the developed markets, emerging markets rebounded with a vengeance gaining 130% compared to the developed market rebounds of 90% on average.

What is an Emerging Market?

According to Wikipedia, " Emerging markets are nations with social or business activity in the process of rapid growth and industrialization." As of now there are over 40 individial emerging markets with China and India considered the largest.

The Reactionary Roller Coaster Ride

The market recovery in 2010 and now 2011 has sparked new enthusiasm for international investors in China, India, Latin America and other developing nations, creating somewhat of an emerging market bubble. Unfortunately, due to recent world events, this bubble may have just been popped as emerging market investments have been very volatile, particularly since the Japanese earthquake and tsunami and also in reaction to political unrest in many developing regions.

So although there are many pros to investing in developing markets, such as growth potential, younger worker population demographics,  lower debt to GDP ratios, and better stock market performance as the world investors embrace these markets --there are a plethora of political, environmental and even industrial  barriers that lead to reactionary roller coaster rides for potential investors.

Still a Sound Investment Inspite of Volatility?

Eighty percent of the world’s population produces nearly 50 per cent of the world’s gross domestic product yet are significantly underrepresented in the world markets. Economies of the emerging markets like India, China and Brazil are growing faster at 6 or more percent annual the growth of western economies at 2 to 3 percent. Industrialization brings workers to cities leading to increased demands for infrastructure and therefore more demand for industrialization which leads to a cycle of inherent economic stimulation to support growth.

Unfortunately, although these markets possess impressive growth potential and opportunity for market boom, they possess an element of risk that can lead to overreactive meltdowns in magnitudes significantly larger than reactionary market dips in the developed world. Some examples of world events correlating with mini-meltdowns for emerging market indexes:

Riots in the streets of Cairo. Unrest in Libya.  Japan's unfolding nuclear crisis. Continuing unrest in the Middle East. Civil wars in African countries.

What Do the Analysts Say?

Well, in addition to the "Gold and Oil will rise and fall" commentary, there is some uncertainty about emerging market investing as a whole since volatility correlates so closely with any political, economic or environmental uncertainty in these countries. Some believe this is the top of the emerging market bubble and it's downhill for awhile until world attention wanes from war, earthquake, tsunami and terrorism back into the mundane issues of greenhouse gases, unemployment, pollution, and entertainment industry gossip. Although I'm not sure this will happen anytime soon, global uncertainty seems to have a significant effect on emerging market performance which is predicted to fall lower before it rises yet again with the rest of the world markets.

How To Invest in Emerging Markets

In addition to mutual finds and individual stocks that you can indentify through the TSX, TSXV, and NYSE, there are many exchange traded funds (ETF's) available that allow for focused or diverse, narrow or broad, and even geographical choices in emerging market investing. Here are some options for Canadian Investors:

iShares: XEM: Emerging markets Index.
Claymore: CHI: China. CWO: Broad emerging markets. CBQ: Bric
BMO: ZEM: Emerging markets equity. ZID. India hedged equity. ZCH China.
Horizons: HJU: Emerging markets bull. HJD: Emerging markets bear.

Disclosure: at time published, the author does not own any of the ETF's listed in this article.