Emerging Market Risks

This post relates to the issue of what is an emerging market and what general risks are associated therewith. Please keep in mind that this post is being provided for educational purposes only and is not designed to be complete in all material respects. Thus, any of the information provided herein should not be considered as legal or investment advice. If you have any questions concerning matter discussed in this post, you should contact an experienced legal or financial advisor.

Many financial writers define an emerging market economy (EME) as an economy with low to middle per capita income. Such countries constitute approximately 75 percent or more of the global population, and represent about 20 to 25 percent of the world’s economies.

The term “emerging market” is loosely defined. The countries that generally fall withing this category range from China to small African countries. The reason for this is that EMEs are considered transitional, meaning that they are in the process of moving from a closed economy to an open market economy. Consequently, investing in an EME is ripe with numerous risks, many of which may be to extreme for the average investor.

EMEs offer numerous benefits to investors such as higher economic growth rates, higher anticipated returns and a relative degree of diversification for above average risk orientated investors. However, there are many important risks to consider before investing in EMEs. Some of these risks are:

• Foreign exchange rate risk
• Erratic distributions
• Tax insider trading restrictions
• Less liquidity
• Difficulty raising capital
• Political risk
• Poor corporate governance systems
• Increased risk of bankruptcy
• Difficulty raising capital
• Payoffs and other behind the scenes fraud

Finally, it is important to consider how you invest in these types of markets so that you have some relative degree of protection if you have to institute an action to attempt to recover your investment losses. At a minimum, you will want to be able to institute an action in the U.S. and collect from U.S. resident assets.