Investments in Developing Countries

Today, the sheer range of investment instruments is astonishing. It is possible to profit from currency exchange, shares, derivatives, or ETFs. These instruments can be linked to developed or developing economies. Here are the basics of dealing with emerging market systems.

Classification Overview

There are 200+ countries on the planet today, and they can be classified based on the soundness of their economies. The largest Western systems are classic examples of developed states, as they are fully formed and stable. Younger states, such as Thailand, can fall into the categories of developing, less-developed, or emerging markets. Their economic models can also bring profit to international investors.

Many countries in Asia are classified as developing. Aside from Thailand, the category includes Indonesia, Malaysia, and the Philippines. BRICS members are included in the same group (Brazil, Russia, India, China, and South Africa), along with Turkey and Mexico.

Classification is multi-level, with different criteria of economic and social nature. For instance, literacy rates, per capita income and life expectancy are all factored in. Countries with lower ratings do not qualify as developed.

Developing or LDC?

The wording used by international investors has received its fair share of criticism over the years. However, even to this day, the least developed nations belong to the categories of “less economically developed countries” or “frontier markets”.

Countries placed between well-established developed economies and the weakest systems of LEDC are states with a decent standard of living. Their gross domestic product per capita is relatively high. Generally, ‘development’ can be measured in many ways.

So Many Definitions

Classifications in use today vary between organizations. Here is an overview of the most common definitions. In each case, the grouping is based on a specific methodology and set of criteria.

• The United Nations sees any country as developed or developing based on its conventions. The category of the least developed includes states where incomes are low, employment systems are weak, and the economy is vulnerable due to population displacement or insufficient reserves of natural resources.
• The World Bank has changed its approach, classifying economic systems as “low-income”, “lower-middle-income”, etc. The key criterion is GNP (gross national income) per capita. In 2018, the first group of countries included states with per capita income below $1,025. Meanwhile, the same threshold was $12,376 or more for high-income ones.
• The International Monetary Fund (IMF) uses the most comprehensive system. In addition to per capita income, the general level of the country’s inclusion into the international financial system plays a part. The IMF will also assess how diversified its exports are.

Investment Opportunities: Overview

So, how is an investment done? For retail traders, the most popular way is to buy and sell local currencies. It is important to note that not all systems are accepted on the global exchange. Residents of Thailand can learn Forex basics and trade majors, minors and exotics through reliable brokers like FXTM. Today, online trading is booming.

ETFs: Attractive Instrument

The easiest way to invest is by using ETFs, or exchange-traded funds linked to the emerging markets. These are pooled investment instruments, and their value is based on a basket of securities. Another notable feature is higher volatility in comparison with instruments connected to large economies. Popular examples are the iShares MSCI Emerging Markets ETF (EEM) and Vanguard MSCI Emerging Markets ETF (VWO).

These ETFs are high-risk/high-return tools, so investors who focus on long-term gains are most likely to be attracted. As developing systems are growing faster than their wealthy counterparts, the profit potential is impressive.

The second important benefit is that ETFs are widely used for diversification of investor portfolios. Those who manage a range of assets reduce their overall risks by spreading them across a set of tool. As a result, losses from any single asset are much less harmful. Investors with securities from developed states will often add emerging market ETFs for balance.

It is also possible to buy securities on foreign stock exchanges, which is complicated due to regulation and taxation issues. Finally, American Depository Receipts (ADRs) are limited to U.S. exchanges. These are linked to specific companies within the emerging economies.

The Bottom Line

Foreign investors need to keep a balanced portfolio of assets. To diversify the selection, they may use ETFs linked to emerging markets. Although these systems are still on their way to maturity, they may bring high returns as a result of higher volatility. When making investment decisions, it is necessary to consider the specifics of the developing nations and the risks they are most vulnerable to.