What's going on?

A broad measure of stocks in emerging markets (EM) hit another one-year high on Tuesday � EM stocks are now up more than 33% since their low in January!

What does this mean?

The term �emerging markets� is typically used to describe a broad range of countries that are still �developing� economically. They tend to exhibit different risks, including potential political upheaval (e.g. Turkey) and high exposure to commodity prices (e.g. Russia). The economic fundamentals, arguably, have improved in many EM countries (for example, as a result of a rebound in commodity prices). Also, EM generally underperformed other investments in recent years – and so now they are playing catch up.

Why should I care?

For the market: Low interest rates, globally, have helped push up EM investments.
With interest rates so low, it�s more difficult for many investors to generate their target return in developed markets. That can cause investors to look elsewhere for higher returns, e.g. emerging markets. Previously this year, for example, investors were able to purchase US dollar-denominated Argentine government bonds that paid a 7.5% interest rate vs. buying an equivalent US government bond that would pay less than 2% (obviously the risk levels are different!). Both EM stocks and bonds have benefited this year from the idea that they can offer compelling returns in a relatively low-return world.


For you personally: Riskier investments can be a good idea – but often require a thick skin.

Earlier this year, being invested in EM would have been quite painful: it was one of the worst performing investment areas for the first few months of the year. The recent rebound is partly a reflection of how much it sold off. But despite the volatility and risk, such investments might be appropriate as they add diversification to one�s investment portfolio (which is generally thought to be a good thing) – if the investor is willing and able to take such risks.