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Mr. Hassan has a fairly large portfolio of stocks and bonds of Pakistani companies. In a social gathering he came across a financial planner who suggests Mr. Hassan to enlarge his portfolio by investing in emerging market stocks. Discuss how this investment can be fruitful or dead end for Mr. Hassan?

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Emerging Markets Defined

Emerging markets are those of lesser-developed countries, which are beginning to experience rapid economic growth and liberalization. Examples of emerging market countries include China, India, and Mexico. Generally, these countries are described by a growing population experiencing a substantial increase in living standards and income, rapid economic growth, and a relatively stable currency.

Often, emerging market countries impose strict limits on foreign investment in an attempt to limit foreign ownership of domestic companies. Investors may be prohibited from owning more than a fraction of any one company, and they may also be restricted from repatriating profits from investing activities.

Emerging markets continue to attract the attention of investors the world over. Economic reforms, the expansion of the European Union, and changing political climates worldwide may create more investment opportunities as well as pose additional challenges and uncertainty in the years to come. If you are a long-term investor with a high tolerance for risk and the need for added diversification, you may want to explore the potential benefits of making emerging markets a part of your portfolio.

Along with high potential returns, emerging markets also offer diversification benefits. Because these markets tend not to move in tandem with those of developed countries, they may be rising while other markets are falling. Hence, they can help reduce the overall risk of a portfolio. Based on these factors, many financial advisors recommend long-term investors allocate 3% to 10% of their stock portfolio to emerging markets, depending on their investment goals and tolerance for risk.*

no thanks

What Are Emerging Markets?

Simply put, emerging markets describes economies that are between the stages of "developing" and "developed." Much like a teenager who is between childhood and adulthood, the emerging market phase occurs when economies see their most rapid growth - as well as the greatest volatility.

The Risks Of Investing In Emerging Markets

1) Foreign Exchange Rate Risk

2) Non-Normal Distribution 

3) Lax Insider Trading Restrictions

4) Less Liquidity

5) Difficulty Raising Capital

6) Poor Corporate Governance System 

7) Increased Chance of Bankruptcy

8) Political Risk 

Points To Remember

  1. Emerging market investments can offer higher potential returns to long-term investors but also carry higher potential risk.
  2. Depending on your individual goals, objectives, and risk tolerance, allocating 3% to 10% of your stock portfolio to emerging markets may help optimize diversification.
  3. Emerging market investments entail higher political and liquidity risks than domestic investments, and as such may be more volatile.
  4. Currency risks also affect emerging market investments. If the value of the dollar declines against the currency of the emerging market country, your return will be lower. The currencies of some emerging market countries are pegged to the dollar and usually do not fluctuate wildly.
  5. You can help manage risk by holding emerging market investments among different countries and regions of the world.

Emerging markets also have attractive attributes that could contribute to strong future growth:

  • Favorable demographics: The populations of nearly every developed country—with the significant exception of the U.S.—are expected to begin shrinking before mid-century. While some developing countries face similar futures, many have large, young populations that are increasingly moving to urban areas for employment opportunities.
  • Growing consumption: Emerging markets' economies historically have tended to focus on exports—producing goods to be shipped abroad to wealthier countries. Many economists predict a shift away from this model toward domestic consumption-led growth as incomes rise and populations migrate from poor rural areas into cities.
  • Relatively low debt levels: Emerging markets tend to have lower debt burdens than developed countries. Thanks to robust growth and spending restraint, many emerging market governments and corporations have healthy balance sheets. Citizens of emerging markets also tend to have high savings rates, which bodes well for future spending should savings rates eventually fall to levels closer to their developed market counterparts.
  • Room for productivity gains: Productivity in emerging markets has greatly lagged that of mature economies. Analysts predict that better infrastructure and technological advances in emerging markets could greatly boost productivity, a major factor in sustainable economic growth.

What are some of the risks of investing in emerging markets?

Emerging markets offer the potential for above-average investment returns. Of course, one of the basic tenets of investing is that higher returns entail higher risks. Among the risks that investors in emerging markets must consider are:

  • Currency risk: When investing in any international market, investors face the risk that exchange rates will move in an unfavorable direction. For instance, if the foreign currency in which an investment is denominated declines in value relative to the dollar, it could reduce gains or magnify losses for U.S. investors in dollar terms.
  • Inflation risk: A mix of strong economic growth and insufficient monetary restraint can result in high inflation, a problem that has periodically cropped up in emerging markets. Runaway inflation can devalue currencies, hurt corporate profit margins, and abruptly slow economic growth.
  • Institutional risk: The nascent capital markets in much of the emerging world lack the accounting standards and regulatory framework seen in more-advanced economies. As a result, investors may have limited protection from fraud or inadequate disclosure of material information.
  • Liquidity risk: Emerging markets typically have much lighter trading volumes and a smaller number of participants than developed markets, which creates the risk that investors wishing to sell will not be able to readily find a buyer for their shares at a desired price. Illiquid markets can result in wide price fluctuations in a short period of time.
  • Political risk: Investors in international markets face the risk that political changes could adversely affect investment returns. Many emerging markets have a history of government instability or have only recently opened their capital markets to foreign investment. Political uncertainty, geopolitical conflicts, or unexpected government actions could weigh on returns or, in a worst-case scenario, result in the inability to sell an investment.

Risks such as these, along with investor speculation, have led to historically higher volatility in emerging markets.

it means investing in emerging market is fruitful for Mr. hassan?????? kindly tell

I think it is fruitful to Mr.Hassan to investing in the emerging stocks. Because emerging markets offer many benefits as Asif described....

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