Emerging Markets; Risks and Challenges

Topics: Developed country, Emerging markets, Developing country Pages: 20 (5929 words) Published: November 27, 2011
RISKS AND CHALLENGES OF EMERGING MARKETS

The above stated reasons, means and advantages of investing in emerging markets have resulted in the emergence of these economies on the global stage. The BRIC economies, Turkey, Poland, Czech Republic, Tunisia, Republic of South Africa, Chile, Peru, Argentina, and Indonesia are increasing their share of global trade and serving as the main engines of growth in the world economy. Trade among these countries has also grown by a staggering amount in recent years and their multinational companies are now competing with those from the developed economies.

There remain, however, significant risks and challenges to investing in these countries. They are discussed here under these broad headings; Political, Economic, Legal and Socio cultural. They affect the different countries in different ways and sometimes interact in different ways to produce different results. For example, political processes more often than not drive economic, legal and social policies of governments. China and India, two of the largest emerging markets operate very different political processes and therefore have two very different sets of political institutions. Chinese communism and Indian democracy vary significantly, and their political systems ultimately affect the choice of economic, legal and social policies. The first step to emerging market status for most of these countries can be traced to political reforms and/or movements, examples being the transition from authoritarian to democratic governments and economic liberalisation. It can also be argued that social reforms and/or popular movements brought about the downfall of the authoritarian governments in the first place, allowing for reforms in the political and economic systems in place (the political economy), thus paving the way for economic gains witnessed today. Despite the often complex interactions between these factors, we’ve attempted to simplify them by grouping them in broad categories.

Emerging markets also face challenges as they come to grips with economic prosperity and their new status in the global community. These include maintaining economic growth and development and leveraging economic growth into national transformation in order to improve the lives of its citizens.

Data for the map was gathered in December 2010 and January 2011. Emerging market rewards are worth the risks, http://www.marketwatch.com/story/emerging-market-rewards-are-worth-the-risks-2011-02-10.

Take a look at the diagram below at this year: shares of Chinese stocks have fallen around 30%, much steeper than the S&P 500’s 17% dip. iShares FTSE/Xinhua China 25 Index (FXI), down 20.3% year-to-date, Vanguard Emerging Markets (VWO), down 12.8% year-to-date, iShares MSCI Emerging Markets Fund (EEM), down 11.8% year-to-date, PowerShares FTSE/RAFI Emerging Market Portfolio (PXH), down 11.5% year-to-date.

Rewards Could Come With Risk in Emerging Markets ETFs, http://www.etftrends.com/2008/07/rewards-could-come-with-risk-in-emerging-markets-etfs/.

RISKS OF INVESTING IN EMERGING MARKETS

POLITICAL

Financial Times, BeyondBRICS, http://blogs.ft.com/beyond-brics/2011/03/04/political-risk-a-heat-map/#axzz1aVKYxTsi.

Eurasia Group

http://blogs.worldbank.org/miga/political-risk-perceptions-and-the-financial-crisis

ECONOMIC
LEGAL
SOCIOCULTURAL

CHALLENGES FACING EMERGING MARKETS
POLITICAL
ECONOMIC
LEGAL
SOCIOCULTURAL

POLITICAL RISKS OF INVESTING IN EMERGING ECONOMIES

POLITICAL INSTABILITY

This poses a serious threat to any firm interested in investing in emerging markets. As mentioned above, one of the key characteristics of emerging markets has been their political instability over the years. The successful emerging markets are those who have undergone the political transformation necessary to engage meaningful economic reform. The threat of government nationalization of economic assets (seemingly unlikely today) was a serious...
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