Emerging markets are, effectively, the outer limits of investment. Investors who tackle them essentially know that they are heading into a financial jungle in which they may lose a lot of their capital, but they do so in the hope that they will be amongst the first to find treasure worth a fortune – literally. This may sound very romantic and, indeed, it can be but it can also be challenging and nerve-wracking, which is why investing in emerging markets is definitely not for everyone all of the time, especially, when conditions start to become particularly challenging. With everything which is happening both locally in the UK and on the global stage, it is completely understandable that at least some investors will be asking themselves the age-old investment question “should I stay or should I go?”. Here is the case for each.
The case for exiting emerging markets
A rising tide floats all boats, but when the waters get rough, good, solid, ships have a much better chance of survival than flimsy ones. In other words, if investing in emerging markets is living on the investment edge at the best of times, it becomes even more risky when the global economy goes through periods of readjustment. You could make a case for arguing that the global economy has been in a state of flux ever since the announcement that Donald Trump had won the last U.S. presidential election and he still has slightly over two years of his current term of office left to run, plus there is still the possibility that he will be able to win a second term of office. At current time, it is anybody’s guess how the U.S. will choose to deal with emerging market economies as time progresses, but at the moment, it is engaged in ongoing spats with both China and Russia and has already taken steps to stop the former from leveraging its technological expertise to compete for IT contracts issued by the U.S. government, which may well have the domino effect of discouraging other countries from using software developed in China, or with input from Chinese developers, in case it results in their products and services being blacklisted by the U.S. government. The cautious move, therefore, would be to make a strategic withdrawal now, let the dust settle and then reappraise.
The case for continuing to invest in emerging markets
Exiting emerging markets completely due to concerns about the global economy is arguably a case of throwing out the baby with the bathwater and, possibly, a sign that an investor’s emerging markets’ strategy could have done with some improvement in the first place. While there’s no denying that some emerging markets are places all but the boldest investors might want to avoid right now, Argentina and Turkey being good examples of this, the fact still remains that solid fundamentals are solid fundamentals regardless of short-term market or political conditions. It therefore follows, that investors who rush for the exits have to accept the strong possibility that once the political situation settles down again, they may find themselves having to buy back investments at a higher price than when they sold them. Similar comments apply to investors who are looking at the current market turbulence as an opportunity to sell before prices reach their lowest point and then buy back into the market when investments are at their cheapest. This may be fine in theory, but can require outstanding timing to put into practice and the reality is that if there is an obvious “buy” signal for a particular investment, then there is a distinct likelihood that it will be obvious to other people too and hence drive up prices just when you want to buy back into the market.