Following EM Geopolitical Hotspots While Keeping All Options Open
Investing in emerging markets, while certainly a viable diversification option, has a unique set of challenges. Those challenges can become magnified when targeting geopolitical flash points, where accelerated growth and easing of tensions can amplify financial gains but instability typically engenders asset-price volatility.
While we cannot control international tensions and conflicts, we can at least reduce our exposure to risk though a well-considered allocation approach. As always, cautious, data-driven, and emotionally neutral investing should outperform in the long run irrespective of geopolitical vicissitudes.
Focus on Growth
Though it's impossible to distill the prospects of prosperity down to one key metric, GDP growth is as good a barometer as any when attempting to gauge a turbulent region's likely future progress. I'm not recommending GDP growth as an absolute proxy for economic health or productivity, but extreme readings can serve as a cautionary indicator.
Venezuela provides an instructive example: as of this writing, the International Monetary Fund estimates that Venezuela's current-year real GDP growth is -35%, a rather startling figure. In light of that, even if recent Latin American protests and riots don't spread to Venezuela, investors may choose to wait for an uptick in the nation's economic output before taking a financial stake in Venezuela's future.
In contrast to Venezuela's sharply negative GDP growth is Vietnam, whose real GDP growth for this year stands at a robust 6.5%, according to the IMF. Often considered a frontier market, Vietnam has one of Asia's fastest-growing economies; some claim that the country has actually benefited from the protracted Sino-U.S. trade war.
Granted, allegations of human-trafficking raise both economic and ethical concerns as Vietnam strives to compete with China and other economic power players. Still, Vietnam's GDP growth provides a rough-and-ready measure of an emerging market of today that could become a manufacturing hub of tomorrow.
Beware of Isolation
Mitigating headline risk in emerging-market investments means understanding that in an increasingly interconnected world, no nation can afford to be an economic island. Even if you're prepared to take on the risks associated with allocating towards potentially unstable regions, avoiding politically and/or economically isolated nations is a logical de-risking strategy.
North Korea is widely regarded as a textbook example of such isolationism, as this nation has, to its own detriment, alienated a number of potential trading partners and political allies. With a leader seemingly immune to the influence of public opinion and a questionable commitment to publishing fully accurate information, North Korea remains frustratingly insular and seemingly impenetrable to the data-driven investor.
Interestingly, the neighboring South Korea stands as an exemplar of globalism - and as a result, that country is now among Asia's most active exporters. Even if South Korea were to undergo changes in leadership over the coming years, its culture tends to support engagement over protectionism - a virtue in a time when tariff tensions place the importance of international trade in stark relief.
Be Amenable to Reform
Keeping your options open involves seeing not only what's happening today, but where these events are leading. After all, the most lucrative opportunities in developing markets often stem from regions that are facing issues but are working towards solutions.
Egypt may prove wary investors wrong, for example, despite the citizens' understandable discontent - and anti-government protests - amid high unemployment and a persistent wealth gap. Unrest is undoubtedly a concern for multinational investors, to be sure, but risk-tolerant speculators may relish the prospect of taking a position in one of the Middle East's most economically viable regions.
At the very least, such investors would have recent World Bank data on their side: they're forecasting Egypt's fiscal-year 2019 economic growth to come in at an impressive 5.8%, with the comment that "Egypt is sustaining its robust growth, fiscal outturns are improving, and external accounts are stabilizing at broadly favorable levels."
Economists have also hailed Egypt's debt reduction, declining inflation rate, and strengthening currency; if the nation can address its employment issues, stabilization may follow - a potential setup, perhaps, for strong financial returns.
Above All Else, Seek to Understand
Beyond parsing the barrage of data and mapping out a long-term international investing strategy, the greatest challenge might actually be resisting the temptation to apply local mind-sets to economies abroad. With an open mind and an eye towards a better future - though always tempered with due caution - investing in emerging-market hotspots may never be a mastered science, but it can at least be a profitable passion.