3 emerging markets for stock investors to consider, and 3 to avoid!

Let’s take a look at Emerging markets for stock investors in Australia to consider. Australians looking to offshore markets may consider the US and New Zealand first, with perhaps Western Europe thereafter.

However, if investors expand their horizons to emerging markets, there’s plenty of additional opportunity. Investors can buy these companies directly or can invest in ETFs that offer exposure to them.

 

Why look to emerging markets in the first place?

We think it boils down to higher growth potential. Many emerging markets experience faster economic growth compared to developed markets. These regions are often undergoing industrialisation, urbanisation, and increasing consumer demand, leading to potential high returns on investments.

Many emerging economies have young, growing populations, which can drive long-term growth through increased consumption and labour force expansion. India has an average age of 29 and Vietnam just 33. And also, their incomes are rising as these countries’ economies grow

They also help investors diversify their portfolio and mitigate risk. It is true that they can be more risky than developed markets for some reasons including more volatile economies and uncertain regulatory situations. But this lower correlation with developing countries can help reduce overall portfolio risk by providing diversification. When developed markets are underperforming, emerging markets may still present opportunities for growth.

We also note that investing in emerging markets often means exposure to local currencies, which can be a hedge against inflation or economic weakness in the investor’s home country. Some currencies can be weak relative to the Aussie dollar and can help investors ‘buy more with less’.

And finally, as goes without saying, all the factors above can mean that emerging market stocks are undervalued compared to those in developed economies. Investors who can identify these opportunities early may benefit from strong capital appreciation as markets mature. Even if companies have a dominant market position, they can expand as their market grows.

 

Our point illustrated

Consider Indigo in India for instance. It is the largest airline by market share there. But the air travel market in India has a lot of room for growth. If it can maintain a market share as the market grows, there is a great opportunity.

Indian passenger numbers in 2024 were estimated to be 225m during the year, but to grow to 510m by 2030 (more than double in 6 years). Yet, there were 6.2bn railway passengers and just 6.5% of Indians hold valid passports. You can imagine there’s a big opportunity if the population’s income increases, develop a desire for travel, and seek a more convenient way.

 

3 emerging markets for stock investors to consider

Vietnam

In 2023, Vietnam was the only country in the world to receive state visits from both the US and China. We want you to think about that for a moment, how important the country must be so far as emerging markets are concerned.

The country is politically neutral in the US-China ‘Cold War’, has over 100m people and is forecast to grow over 6% in 2025, according to the World Bank. Companies with exposure to China have upped their exposure to Vietnam to ‘hedge their bets’ – just look at ASX infant formula stocks like Bubs (ASX:BUB). Or look at South Korean manufacturer Hana Micron which is investing US$1bn in manufacturing. The main stock market indice VN-Index grew 13% in 2024.

Granted Vietnam isn’t the easiest situation from regulatory and corruptions perspective, but is arguably better than neighbouring countries like Thailand and Cambodia. One burden eased for investors in 2024 was exempting foreign institutional investors from the minimum fund requirement for share purchases. Although local securities firms will need to do due diligence – it is a matter of their discretion rather than a hard ‘yardstick’.

 

India

In 2023, India surpassed China as the world’s most populous country. You could argue it is not an emerging economy, but its economy and economic development trails China. This being said, India has a younger population than China (one fifth of the world’s total working age population), a democratic system (at least in theory) and is at an earlier stage of development than China while still having companies representing an opportunity. So in that sense, we think we can categorise India as an emerging market.

We mentioned Indigo above. Another example is IT player Infosys that is a big name on a global basis. Infosys has a big opportunity as India digitises – there’ll be 850m internet users by the end of the decade.

Looking to India’s stock market performance, As of December 27, the BSE benchmark Sensex has gained nearly 8% per cent while the NSE Nifty climbed nearly 10%. The economy is expected to grow by over 6% in 2025 by the IMF.

 

Argentina

Argentina has 46m people and a $600bn economy. There are plenty of listed companies with big market positions including Telecom Argentina, Aluar and Banco Marcal.

We are big fans of Argentine president Javier Milei. Argentina’s stock market gained over 150% in 2024. He took over at a time of high inflation and a weak currency. It is way too early to say ‘job done’ because there’s work to do and the economy took a short-term hit to some of these policies.

But we like that he has been able to eliminate the budget deficit through a 30% cut in spending – for the first time in 123 years. We wonder if Donald Trump and Elon Musk would even had thought of the ‘Department of Government Efficiency’ had this experiment not been undertaken. Inflation fell from 211% to 2.4% (monthly). The challenge is that this has not yet translated to material living standards for the population.

 

3 emerging markets for stock investors to avoid

China

China has 1bn people. That’s the only reason why you’d consider investing in it. The economy is slowing after several years of high growth pre-pandemic, it is so difficult to repatriate money out of the country and there is so much red tape around. We wouldn’t altogether dismiss the prospect that investors could profit from investing in certain China-focused ETFs, but we’d steer well clear of Chinese stocks unless they were listed in the US or perhaps Hong Kong.

 

Mexico

Sorry Mexico, but we think the country is in the worst of both worlds. Caught in the middle of Donald Trump’s tariffs, but not reliant enough on China that it can just turn off the tap altogether.

We mentioned above that Korea is a country investing heavily in Vietnam. It has investments in Mexico (led by Hyundai, Kia and LG factories), but is backing down by restructuring investments and halting new ones. It is not just Korea, but even Elon Musk’s Tesla is doing likewise (is this an omen or what?).

Beyond this, if Trump follows through on his plans to deport millions of migrants, this would put huge pressure on Mexico’s economy and society. Maybe things may not be as bad as investors fear, but its a case of wait and see for now.

 

Brazil

There are some things to like about Brazil as a potential emerging market to consider. These include its population and the fact that it is a mining-friendly jurisdiction. But its economic growth is weaker compared to neighbouring countries (at just 3%). Luiz Inácio Lula da Silva hasn’t been as anti-business as investors have feared, and passed major tax reforms in the first year of his presidency.

This being said congress is a lot more interventionist than it has been in years gone by, and political polarisation persists. The nation has also made fighting climate change a major priority and some resources sector investors will be watching closely.

 

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