One of the reasons the U.S. markets are considered so stable is that the governmental and regulatory structures in which the markets operate are well established and extremely stable. Political turmoil can wreak havoc on a country's economy and on the value of investments in its markets. That's one reason that investors may shy away from some emerging markets with the most investment potential. And some of these nations carry high levels of debt, which has the potential to curb growth in the future or, in the worst-case scenario, result in default and economic crisis.
Reforms
Although developed markets may also be in need of reform, as illustrated by corporate scandals in the U.S. and Europe, they do tend to be more stable and less prone to political risk than emerging markets. Over time, the governments of nations with emerging markets have passed more reforms, in an attempt to emulate the transparency and the stability of the U.S. markets. But the process is uneven, with some countries advancing more quickly than others.
For example, only after a major crisis struck the East Asian markets, beginning in 1997, did transparency and Corporate governance in Asia become a major issue for policymakers. Since then, Asian markets have been implementing reforms to bring their governance and reporting standards more into line with developed nations. Prior to the crisis, many policymakers believed that regulation would hamper economic growth, rather than foster it. Similar reform efforts are underway in Latin America, following crises in Mexico, Brazil, and Argentina. And in Russia the government has begun to crack down on financial corruption.
Your rights as an investor may not be the same when you invest outside the U.S. You may not be able to sue a non-U.S. company in the U.S., for example. You may have to go through the courts in the company's home country. Furthermore, different countries use different methods to process trades. And if there's a problem with your trade — for example, if the firm clearing your trade has a malfunction or goes bankrupt — you may not be as well protected as you are when you trade in the U.S.
Jeffrey Rosensweig, Goizueta Business School, Emory University
Dr. Rosensweig of the Goizueta Business School of Emory University discusses the impact of the East Asian and Latin American financial crises on economic regulation.
After the East Asian and Latin American financial crises of recent years, policymakers and international agencies called for better regulation and oversight of the world's financial markets. Reforms are ongoing and include greater transparency in the financial markets, better oversight of corporate practices, reduced government spending and deficits, stronger controls of short-term government debt, liquidity, and volatility, and attempts to bring accounting practices up to world standards. While many countries have made significant progress, policymakers need to remain vigilant and continue to advocate reform — in the U.S. as well as abroad.
Jeffrey Rosensweig, Goizueta Business School, Emory University 