Emerging markets are a risky place to invest for many reasons. Not only is there the risk of political upheaval, but currency exchange rates often play a role in how these markets function. That aside, the emerging markets offer a wealth of opportunity for investors, and 2023 looks like a good time to get into the game. Emerging markets are characterized by low-to-middle income per capita and fast earnings growth. The takeaway is that this combination leads to a healthy consumer and increased consumption, which drives these markets.
Emerging Markets Have a High Growth Potential
Emerging markets come with a high growth potential. The rapid advancement of income, spending, infrastructure growth, and inflation combine to produce world-leading growth. The outlook for EMs in 2023 is for expansion to triple the developed world and deliver competitive returns for investors. Guyana, a neighbor to Brazil, is expected to have the hottest growth this year, about 38%.
Guyana is supported by record oil reserves discovered in 2015. The discoveries put Guyana's resources at roughly 1/3rd of global reserves, which is a highly significant figure. With oil prices rising, Guyana can expect its growth to continue well into 2024. As it is, the country will double in GDP between 2022 and 2024 and is expected to sustain a high double-digit pace for the next several years and top the list of fastest-growing countries. Growth will be driven by oil but is not tied to it completely. The country's current leadership is working to diversify the economic base, including a lean into education to improve its workforce. Non-oil growth is running near 5% for Guyana, which is also above the expected global average for 2023.
Get Ultimate Diversification with Emerging Markets
Diversifying with US equities and investments is possible but incomplete without emerging markets. Emerging markets not only give exposure to other countries and political environments but can also help offset the impacts of FX conversions. Emerging markets will benefit when the S&P 500 (NYSEARCA: SPY) suffers from FX headwinds. As it is now, the FOMC is on track to continue hiking rates in 2023 and may do so more than 1 more time. This has the dollar index rising and strengthening the FX headwind for US companies. Meanwhile, emerging market central banks were less hesitant to hike rates when inflation spiked and are closer to cutting rates now. That split will provide an economic boost for emerging economies.
China Policy Shifts Support EM Growth
Believe it or not, as big as it is, China is still an emerging market and significantly affects emerging market growth in 2023 and 2024. The country's tilt toward tight market control and the 0-COVID policy led to emerging market weakness over the past 2 years. The MSCI Emerging Markets Index Tracking ETF (NYSEARCA: EEM) is down more than 30% from its 2021 peak, while the S&P 500 is up versus the same period, but the balance is shifting. Not only has China ended its zero-COVID policy, but the government has begun to tweak policy to boost demand, improve confidence, and stimulate growth.
Dividends Can Compound Returns in Emerging Markets
Dividends are well known to compound returns for investors and can be found in emerging markets. Many tend to pay out higher percentages relative to their share prices as an incentive for the risk. Others, like Infosys (NYSE: INFY), listed on the NYSE, pay better-than-average yields for similar reasons. Infosys provides exposure to India and the world via its outsourcing services. Its stock yields about 2.4% and has grown annually for nearly a decade. India's economy, by the way, is expected to double over the next 7 years.
The MSCI Index Bottomed and a Reversal is in Sight
The MSCI index is down compared to its peak, but the bottom is in, and a reversal is in sight. The market shows clear support at $37.50, with indicators to match. The stochastic and MACD confirm the bottom but have yet to signal the complete reversal. The critical resistance point is near $42; a sustained rally will likely form if this market moves above.
