Defining Emerging Markets and Their Growth Potential
Emerging markets refer to countries that are in the process of economic development and where high growth rates are expected. The MSCI Emerging Markets Index includes 24 countries such as China, India, Taiwan, South Korea, and Brazil, representing approximately 40% of global GDP and about 80% of the world's population. According to IMF forecasts, real GDP growth in emerging markets is running at roughly twice the pace of developed nations, and by 2030, the emerging market share of the global economy is expected to exceed 60%.
Multiple factors drive emerging market growth. These include abundant labor forces from young populations, expanding consumer markets driven by urbanization, and technological 'leapfrogging' - the adoption of technologies that skip development stages seen in advanced economies. In India, the middle class is expanding rapidly among a population of 1.4 billion, enhancing its appeal as a consumer market. Indonesia and Vietnam are also attracting attention as destinations for manufacturing relocation.
Unique Risks of Emerging Market Investing - Country Risk and Liquidity
Emerging market investing carries risks not found in developed markets. Country risks such as political instability, sudden regulatory changes, currency crashes, and the imposition of capital controls can significantly impact investment returns. After Russia's invasion of Ukraine in 2022, Russian equities were removed from MSCI indices, and investors were effectively unable to recover their capital. In China, the 2021 regulatory crackdown on technology companies caused share prices of Alibaba and Tencent to fall by more than half.Books on country risk analysis provide a systematic framework for evaluating these risks.
Specific Ways to Invest in Emerging Markets from Japan
The most accessible way for Japanese investors to gain exposure to emerging markets is through emerging market equity index funds. eMAXIS Slim Emerging Market Equity Index tracks the MSCI Emerging Markets Index with an expense ratio of approximately 0.15% per year. For those who want concentrated exposure to a specific country, country-specific funds such as India equity funds or Vietnam equity funds are also available. However, emerging market funds tend to have higher expense ratios compared to developed market funds, so cost comparison is important.
A reasonable approach is to target emerging market exposure at around 10-20% of your portfolio, leveraging the diversification benefits with developed market equities.Books on selecting emerging market funds can also help with product selection.
Next Steps for Starting Emerging Market Investing
If you are considering emerging market investing, start by reviewing the geographic allocation of your portfolio. If you are heavily concentrated in Japanese and US stocks, adding 10-15% in emerging market equities can improve geographic diversification. The simplest approach is to set up a monthly systematic investment in eMAXIS Slim Emerging Market Equity Index through your NISA tsumitate allowance. With an expense ratio of approximately 0.15% per year, it provides broad diversification across equities in 24 emerging countries.
If you are focused on a specific country, develop the habit of regularly checking that country's economic indicators (GDP growth rate, inflation rate, current account balance, foreign exchange reserves). The IMF's World Economic Outlook and the World Bank's databases are freely accessible and useful for understanding each country's economic outlook. Since emerging market investments are subject to sharp short-term price swings, approach them with an investment horizon of at least five years and the resolve to continue systematic investing even during market downturns - that is the key to success.