Risks and opportunities in emerging markets
Analysis of growth markets and investment opportunities (Luxembourg)
Emerging markets (EM) offer investors the possibility of higher returns than developed markets. Companies in these markets are often undervalued compared to their counterparts in developed markets, offering potential return advantages.
But is it all doom and gloom? Are investments in emerging markets always profitable? Let’s clarify.
Growth opportunities in emerging markets
Encompassing more than 80% of the world’s population, emerging markets are responsible for almost 80% of global GDP growth. China, for example, has shown extraordinary growth, becoming the world’s second largest economy. Other emerging countries show significant potential due to advances in education, technology, favourable market policies and positive demographic trends.
Companies in these markets, often small and medium-sized enterprises, can benefit from powerful economic headwinds. Compared to their counterparts in developed markets, many of these companies have the potential to increase earnings at a faster pace, thanks to rising living standards in their home markets and growing global demand. However, it is crucial to recognise that investing in emerging markets carries risks.
The growth potential in emerging markets is often higher than in developed markets. This implies that companies located in these markets can grow faster and generate higher returns for investors. Furthermore, investing in emerging markets helps to diversify a portfolio, reducing overall risk, as these markets tend to move in different directions than developed markets.
Equity valuations in emerging markets are often lower than in developed markets, suggesting that they may be undervalued and have significant potential for future appreciation.
Risks of investing in emerging markets
If you think that investing in emerging markets is always an optimal decision, you are on the wrong track.
Emerging markets are often subject to greater political and economic instability than developed markets, resulting in fluctuations in share and currency prices and potential operational difficulties for companies. Investors may have limited access to reliable and publicly available information on companies, increasing investment risk.
Exchange rate risk is another critical factor, as currencies in these markets can fluctuate significantly against those in developed markets, negatively affecting foreign investors’ returns.
A further obstacle is the lack of liquidity in emerging stock markets, which can make it difficult to buy and sell shares quickly without affecting the price. Regulations and corporate governance standards in these markets are often less stringent than in developed countries, increasing the risk of fraud and corporate mismanagement.
Volatility is another key consideration. Over the past two decades, the MSCI Emerging Markets index has experienced higher volatility than the MSCI World index of developed markets, while generating higher returns. This suggests that a well-considered mix of emerging and developed market investments can improve risk-adjusted returns.
Is Luxembourg an emerging market?
Luxembourg is not classified as an emerging market, but is one of the most advanced and prosperous economies in the world. According to the International Monetary Fund (IMF), Luxembourg boasts the highest GDP per capita in the world at USD 140,000, positioning it as an extremely prosperous economy. In 2022, Luxembourg recorded a GDP growth rate of 6.7 per cent, above the eurozone average, demonstrating the dynamism and resilience of its economy.
As a global financial centre, Luxembourg manages a total of EUR 2.8 trillion in assets in its investment funds, positioning it as the world’s second largest in this sector. It is home to more than 100 banks, testifying to its attractiveness as a first-rate financial hub.
Luxembourg’s labour market is extremely dynamic, with 60% of workers coming from abroad, highlighting the country’s ability to attract international talent. Every day, some 58,000 cross-border commuters come to Luxembourg for work, demonstrating its strategic location in the heart of Europe.
The quality of life in Luxembourg is exceptional, ranking 9th in the UN Human Development Index and 4th in the ranking of cities with the best standard of living in the world, according to Mercer.
Luxembourg offers numerous advantages for companies, including a competitive tax regime with a 15% corporate income tax for holding and royalty companies. The Luxembourg government provides a number of incentives for innovative and start-up companies, such as tax credits, subsidies and incubation programmes. In addition, the country has a well-developed capital market and a growing venture capital ecosystem, facilitating access to finance for companies. Business support is provided by government advisory services, networking and location assistance.
These factors combined make Luxembourg an ideal destination for professionals and families seeking new opportunities, while offering a high quality of life and a welcoming, international environment.
