Risks Of Dealing In Emerging Markets
It’s always interesting to see how different rules and common business practices are between here and emerging countries. One major reason why I usually stay away from picking single stocks in emerging countries is that it’s very difficult for me to compare these companies. Why? When rules are different, it changes everything. Take financial statements [...]

It’s always interesting to see how different rules and common business practices are between here and emerging countries. One major reason why I usually stay away from picking single stocks in emerging countries is that it’s very difficult for me to compare these companies. Why? When rules are different, it changes everything. Take financial statements as an example:

I personally like to look at many financial ratios such as the P/E ratio but when earnings are calculated in very different ways based on different rules, it makes it nearly impossible to compare them together.

Even North American/European Companies Are At Risk

Doing business in emerging countries has a lot of benefits (opportunities, high growth, less competition, etc) but it also carries risks that we can sometimes forget.

Last April, when the government of Argentina announced that it was taking control of a gas company that was owned by Spain’s Repsol YPF SA, it was a huge surprise for the Spanish company. Why did the Argentina government take such a decision? I guess part of it is because they can make the laws in their own country. They also face a lot of domestic issues and in all honesty, some governments around the world think they have the right to take such actions. I can’t imagine something like this happening in the US but in some other countries, it’s just another option for a government that is struggling financially. It’s kind of ironic that this happened to a Spanish government. As if things were not going badly enough for Spain.

Diversification Is King

I think it’s important to keep such issues in mind when dealing with companies that are either based in emerging markets or that have a lot of business there (many energy companies operate in such markets as well). For dividend investing, that can mean not having too much of your money in one specific company or that operates in one emerging market.

ETF’s are also a good alternative that make it easier to get great diversification not only among companies but also markets.

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