By Harry Prabandham · Updated September 28, 2026
Investing & Markets
Emerging Markets Investing: Growth Potential and Key Risks
Emerging markets are developing economies with growth potential and more political, currency, governance and liquidity risk than developed markets.
Emerging Markets Investing: Growth Potential and Key Risks
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What are emerging markets?
- Emerging markets are economies with developing financial markets, middle incomes and less mature regulation than developed markets.
- Index providers classify countries by economic size, market liquidity and access for foreign investors, and their lists differ.
- South Korea, for example, is classified as emerging by some index providers and developed by others.
- Investors reach these markets through funds, U.S.-listed depositary receipts, or indirectly through multinationals.
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Full Guide
What are emerging markets?
- Emerging markets are economies with developing financial markets, middle incomes and less mature regulation than developed markets.
- Index providers classify countries by economic size, market liquidity and access for foreign investors, and their lists differ.
- South Korea, for example, is classified as emerging by some index providers and developed by others.
- Investors reach these markets through funds, U.S.-listed depositary receipts, or indirectly through multinationals.
Why do investors consider emerging markets?
- They add exposure to economies and companies not represented in U.S. indexes.
- Younger populations and rising incomes can support faster economic growth.
- Faster GDP growth doesn't necessarily mean higher stock returns, because returns depend on prices paid, share dilution and how profits reach shareholders.
- Valuations are often lower than in developed markets, frequently for identifiable reasons such as governance or political risk.
What are the political and governance risks?
- Policy reversals, capital controls, sanctions and expropriation are more common than in developed markets.
- Accounting and disclosure standards vary, and many foreign companies don't file reports with the SEC.
- Many U.S.-listed companies with Chinese operations use a variable interest entity structure, in which shareholders own a shell company rather than the operating business.
- State-owned enterprises may put government goals ahead of minority shareholders.
How does currency risk affect returns?
- For a U.S. investor, returns are converted back to dollars, so a weaker local currency reduces returns.
- Emerging market currencies can fall sharply during capital flight.
- Hedging is expensive or unavailable for many of these currencies.
- Local-currency bonds carry both credit risk and currency risk.
Practical considerations for investors
- Emerging market stocks have historically been more volatile than developed-market stocks, with deep drawdowns.
- Trading costs, fund expenses and liquidity are generally less favorable than in the U.S.
- Dividends often have foreign tax withheld; the foreign tax credit can offset it in taxable accounts but not in IRAs.
- Broad funds can still be concentrated, so country and sector weights are worth reviewing.
Key takeaways
- Emerging markets add different economic exposure, with higher political, governance and currency risk.
- Economic growth and stock returns are not the same thing.
- Corporate structures such as VIEs can limit what shareholders actually own.
- Costs, taxes and fund concentration affect net results.
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