What is an emerging market anyway? It isn’t the new grocery store on the corner. Emerging markets generally refer to places where investors not only endure company risk (that the company won’t execute well), market risk (that the whole market tanks)… but also endure COUNTRY risk (that the whole country “fails”) How does a whole country fail? The Godfather gives a great example when the rebels take over Cuba as Michael Corleone was investing in a series of gambling casinos on the island. Country risk ranges from military coups as in the case of Castro to inflationary. In the 1980’s, investors in Latin America were crushed when hyperinflation took hold. The countries there tried to print money as fast as they could. In any event, debt obligations were worse a lot less.
In return for this country risk, investors expect much higher rates of return on invested dollars.