In addition, the fundamentals of an emerging market stock may look good, and there may be many reasons to believe the market is stable, but there can still be market surprises. The collapse of the Russian market in 1998 was a shock to most investors, who believed such a thing would never happen due to the country's importance to industrial nations. In contrast, Hungary and Poland previously struggled to surpass emerging market status and are now critical to the European Central Banking System. Both countries contemplate perhaps participating in the European Union at a later date. Emerging market risk, which includes the possibility of political instability and changes in national policy, may not always be favorable to foreign investors.
Currency markets can also affect returns.
High returns from stock appreciation can turn into a loss due to unfavorable exchange rates. Also, the entire market capitalization of one emerging market country may be equivalent to that of a single large U.S. company. Emerging market equity prices, driven by rapid growth, offer appealing potential growth opportunity for long-term investors. If sudden volatility makes you weary and provokes you into making a redemption order, then this is probably not the appropriate investment opportunity for you. The diversification these markets provide can actually reduce the amount of volatility in your overall portfolio, but emerging markets change quickly and along the way to developed nation status, despite the inherent growth potential, there will be some turbulence.