Investors: Don’t Ignore Emerging Markets

Boost your exposure to emerging markets with Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) and Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP).

| More on:
The Motley Fool

The economic upswing in developing economies triggered by firmer commodities caused the iShares MSCI Emerging Markets ETF to soar by just over 27% over the last year. This has garnered considerable attention from investors, as those markets continue to enjoy an improving outlook. What many investors don’t realize is that by investing in emerging markets, they can not only enhance returns because of those economies’ higher growth rates, but they also reduce risk. 

Now what?

You see, emerging markets are typically less correlated with developed markets, which means their stock markets don’t move in lock-step with the stock markets of countries such as the U.S. or Canada.

The Canadian market typically moves in lock-step with U.S. markets, which makes Canadian investors vulnerable to a U.S. market correction; heightened fears of a market slump are rising because of the latest turmoil. By investing in emerging markets, investors can reduce the vulnerability of their investments to such an event and reduce the volatility of their portfolios.

By investing in emerging markets, investors can geographically diversify their investment portfolios, further reducing their vulnerability to a downturn in any single market. This becomes apparent when considering the Global Financial Crisis, when many developed economies contracted, whereas a number of developing nations saw their economies grow. In 2009, when Canada’s gross domestic product (GDP) contracted by almost 3%, the developing nations of Colombia and Peru saw their GDP expand by 1.7% and 1%, respectively.

As a result, companies in both countries pulled through the crisis in relatively good shape, and markets did not fall as steeply as they did in Canada.

The ability to further diversify their portfolios is important for Canadian investors because of the concentrated nature of the Toronto Stock Exchange, which is dominated by banking, mining, and energy stocks. That reduces risk and the potential impact of any market correction.

Emerging economies are growing strongly, and there is considerable evidence that this will continue for some time, and the favourable economic outlook will act as a powerful tailwind for companies operating in those markets.

So what?

Among the easiest and best ways for Canadians to obtain exposure to emerging markets without leaving the comfort of Canada is by investing in Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), which is Canada’s most international bank. It has constructed an impressive franchise in the Pacific Alliance countries of Mexico, Colombia, Peru, and Chile, which are all expected to experience solid economic growth over 2018 and into 2019. The bank expects the combined revenue from those countries to grow at a healthy 30% clip over the medium term.

Bank of Nova Scotia remains focused on making accretive acquisition in those nations with it exploring the acquisition of Citibank’s Colombian consumer banking business, which includes 47 branches. In December last year, the bank announced that Banco Bilbao Vizcaya Argentaria S.A. had accepted its almost $3 billion offer for its operations in Chile. Once that deal is completed, it will make Bank of Nova Scotia the third-largest private bank in the Andean nation.

Another opportunity is Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP), which owns and operates a range of critical transportation and telecommunications infrastructure in developed and developing nations. It has considerable direct and indirect exposure to the rapidly growing economies of Brazil, Colombia, Peru, Chile, China, and India. That and the widening global infrastructure gap and the global economic upswing will act as powerful tailwinds for growth over the course of 2018 and 2019.

Clearly, investors that are ignoring emerging markets are doing so to their detriment. The advantages of having exposure to developing economies cannot be understated, and it can be achieved easily and without the discomfort of leaving Canada.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.  Brookfield Infrastructure Partners is a recommendations of Stock Advisor Canada.

More on Investing

Investing

Undervalued Canadian Stocks to Buy Now

Cineplex stock is one of my favourite undervalued stocks to buy now, as it continues to recover from the pandemic.

Read more »

Asset Management
Investing

2 Soaring Stocks to Hold for the Next 20 Years

These two stocks are poised to continue outperforming the broader equity markets.

Read more »

Hand Protecting Senior Couple
Retirement

These 2 Dividend ETFs Are a Retiree’s Best Friend

These two dividend ETFs could provide retirees with a diversified and stable income stream, while providing some price appreciation.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Tech Stocks

Shopify: A Must-Have Growth Stock for Your TFSA Now (and the Next 10 Years)

Shopify (TSX:SHOP) stock isn't just a top growth company, it's a titan worth owning in your decades-long TFSA fund.

Read more »

Investing

Have $1,000? Here Are the Best Stocks to Buy Right Now

These TSX stocks have solid growth potential and will likely deliver above-average returns in the long term.

Read more »

cloud computing
Tech Stocks

Best Stock to Buy Right Now: Manulife vs CIBC

Want the best stocks? These two are certainly the best options. But which is the better buy?

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Earn $2,000 in Passive Income in 2025 With Less Than $51,000 in Savings

You can invest in Canadian high yield stocks via the Vanguard FTSE Canadian High Yield Dividend ETF (TSX:VDY).

Read more »

Asset Management
Investing

Where Will Restaurant Brands International Stock Be in 1/3/5 Years?

Let's dive into where Restaurant Brands (TSX:QSR) could be headed over the near to medium term, shall we?

Read more »