Editor’s note: This article was first published in July 2010. The list of emerging regions and the suggestion that Spanish government debt was a high-return investment reflect the eurozone debt crisis of that year.
Emerging markets are nations that are in a development phase or will soon leave underdevelopment behind. Investing in these markets can bring our investment a high return. Which nations can we currently consider emerging markets?
Today we consider most of Africa, Eastern Europe, Latin America, Russia and much of Asia to be emerging markets. As we discussed a few weeks ago, we can also include Spain, not as an emerging market but as a high-return investment, if we decide to invest in Spanish government debt.
How to invest in emerging markets
Companies and governments in the countries we consider emerging markets generally issue two types of debt you can invest in:
- External securities, denominated in major currencies such as the US dollar.
- Domestic securities, denominated in the local currency.
When investing in a country’s debt, it’s wise to study that country’s ability to meet its debt obligations, which keeps the risks down. To help with this, there are professional sovereign rating agencies that assess how well a country can meet its obligations.
These agencies can be wrong in either direction, because a country is exposed to external factors that lie outside any investment analysis and that nobody can foresee, such as a coup, a war or a natural disaster.
In short: emerging market bonds are a very good investment option, since they can offer higher yields than Treasury bonds and their risk is not much greater.
Further reading
Featured image: Rafael Matsunaga, CC BY 2.0, via Wikimedia Commons.
