The Emerging Trend For High Risk Investments

By Lewis Humphries | February 14, 2013 AAA
The Emerging Trend For High Risk Investments

Although the U.S. Federal Reserve continues to maintain interest rates as low as 0.25%, investors are clamoring to move their money into fixed income exchange traded funds (ETFs). During the last 12-month period, fixed income funds have accumulated aggregate inflows of more than $40 billion, with a significant portion of this capital invested into emerging and frontier market products. This trend suggests that investors are continuing to embrace supposedly high-risk investment opportunities as a way of maximizing their eventual returns in uncertain economic times.

Top Investment Trends For 2013: We go over a few investment trends for you to think about for 2013.

The Drive for High-Risk Investments
Given that the global economy continues to wallow in recession and sluggish growth, it may come as a surprise that investors are embracing high-risk strategies. This was certainly not the case in 2011, when the global recession had forced U.S. investors to seek flight and adopt an increasingly risk averse approach. A timely survey conducted by TD Ameritrade confirmed this market trend, with 62% of respondents confirming that they had changed their investment strategy to reflect a more cautious philosophy and the impact of the recession.

Such an ethos is difficult to sustain, however, as lowering interest rates and enforced periods of austerity force investors to consider greater risks in the pursuit of tangible rewards. This is especially true for professional investors, as while deposits are perfectly viable for those with short-terms goals, they do little to deliver long term gains or a viable income. So despite the fact that the fiscal crisis in the eurozone continues to have a negative impact on the financial markets, for example, bonds, ETFs and other products associated with European nations became increasingly popular investment options during 2012.

SEE: 4 Misconceptions About The Eurozone Crisis

The Changing Nature of Emerging and Frontier Markets
As the pressure to increase risk and achieve greater returns has weighed heavily on investors, the appeal of emerging and frontier markets has improved considerably. While established nations such as the United States and the United Kingdom have suffered genuine fiscal hardship in the wake of the recession, emerging economies have assumed greater responsibility as drivers of the global recovery. So while the rapid growth experienced by nations such as China may continue to court controversy and skepticism, they do offer the potential for long-term gains and portfolio diversification.

In fact, the prevailing mistrust of emerging economies and the sustainability of their development are currently helping to optimize potential returns through ETFs and bonds. Although the gross domestic product of China rose by 7.7% during the first three quarters of 2012 and a similar rate of growth is forecast for 2013, valuations of the region's stocks and equities remain well below long-term averages. This means that investors can commit their money to supposedly higher-risk products in the early part of this year, and they can look forward to tangible returns that are delivered over a prolonged period of time.

These low valuations are unlikely to continue indefinitely, however, as relentless economic growth in Asia, Eastern Europe and South America will cause the value of equities and ETF products to soar. Forward-thinking investors have already identified this trend, and have instead turned their attention to supposedly higher-risk frontier markets. Including ‘pre-emerging' and concentrated economies such as Sri Lanka and Nigeria, the frontier market has historically been feared due to prominent political risk, social instability and volatile commodity price movements. The prevailing trend for high-risk investment has changed this perception, however, especially among individuals who wish to diversify their portfolio and incorporate options outside of the established global market.

SEE: The Risks Of Investing In Emerging Markets

An Issue of Risk Vs. Financial Market Evolution
While the growing popularity of emerging and frontier markets seems to support the idea that investors are adopting an increasingly high risk strategy, it is also fair to argue that the nature of risk itself is changing in the financial markets. For instance, since January 2008, the MSCI Frontier Index has showcased a realized risk of 23.6%, which contrasts sharply with the corresponding rate of 29.7% for the emerging markets. Additionally, the MSCI Developed Markets Index has recorded a figure of 21.4%, and these statistics suggest that social, political and economic evolution is continuing to alter the perception of risk in the modern financial markets.

That said, U.S. equity ETFs have once again experienced strong inflows at the beginning of 2013 and continued the upward trend established during 2012. Reaffirming the market's progressive move toward risk, the current run rate has already outperformed the corresponding figures for 12 months previously, with daily flows up by a significant 66%. These figures suggest that investors will continue to take risks against the backdrop of economic uncertainty, focusing on fixed income funds and high-yield commitments.

The Bottom Line
The financial markets and its numerous products are continually evolving, and as a result the nature and perception of risk is vulnerable to change. While it may be argued that this is responsible for creating the impression of a move toward risk, there appears to be little doubt that investors are indeed adopting higher-risk strategies in the quest for sizable financial reward. This trend has its foundations in the global recession, and is likely to inspire greater interest in emerging and frontier market ETFs throughout 2013 and beyond.

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