The Case for and Against Investing in Emerging Markets Now

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Emerging-markets stocks have outpaced developed-market shares over the past 12 months, making them a tempting investment option. So is now a good time to take the plunge, or should investors stay away?

On the plus side, economic growth in emerging markets is expected to surpass growth in developed markets in the next few years. And emerging-markets stocks can be useful to U.S. investors for diversifying a portfolio, since they don’t move in lockstep with U.S. shares.

But emerging-markets shares come with higher volatility than developed-market stocks and an array of risks, including political risk, currency risk, liquidity risk—and economic risk, despite the rosy projections. And investors can get exposure to emerging markets more safely with a portfolio of U.S. stocks that includes companies doing business in those markets.

“Investing in emerging markets is a high-risk, high-reward proposition,” says Eswar Prasad, a trade-policy professor at Cornell University. “Many emerging markets have done well growth-wise, and their financial markets have had periods of success, but it tends not to last too long.”

With that in mind, here’s a closer look at the cases for and against investing in emerging markets now.

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