What are emerging markets and why are they important?

by | Jan 13, 2017

Emerging markets are economies that are moving towards becoming what are known as ‘developed markets’. This usually takes place as they become more industrialized and embrace free market economics. Examples of advanced markets would be those of the U.S. and Western Europe including the U.K.

Conversely, examples of emerging markets would be countries across the Asia-Pacific region and Latin America, such as Indonesia, Chile and Vietnam. Developing economies do not yet meet the criteria to be considered ‘developed’. They usually have lower levels of liquidity, less well established markets and lower levels of per-capita income. The opposite is true of developed economies.

Why are they important?

The key is in the title – ’emerging’. These are the economies that will grow larger in the future and thus will have more and more of an impact on global trade and economics. For example, China was known as an emerging market many years ago before it started using a capitalist-style economy. Now it’s the third biggest economy in the world after the U.S. and E.U. (by measure of GDP). It’s also the biggest exporter in the world. The label of an ’emerging’ market applies less and less by the day as it’s influence grows.

Crucially, emerging markets will help the global economy to grow.

Robust growth and development can eventually lead to developing economies overtaking those which are considered to be more advanced. A prime example is that India overtook the U.K. in terms of GDP at the end of 2016, aided by uncertainty over Brexit which negatively affected business investment.

Why invest in emerging markets?

Emerging markets are attractive because they tend to grow faster than their developed counterparts. You can see this clearly when looking at how many of these markets have changed over the last decade. Economic growth since the 2007/8 financial crisis has been very stagnant in Europe and America, while investors have had to deal with very low interest rates and other factors that have made growth a very slow process. The focus was on keeping a lid on the fallout from the crisis and sheltering Western economies from the storm.  Since then, investors have looked elsewhere to reap the gains that Western markets used to offer and continue to do so.

In contrast, developing economies can offer excitement and promise because they can offer growth. Investment can help corporate profits, which means stocks go up too. This can then lead to further investment which leads to more opportunities in a positive feedback loop. When a country is becoming more industrialized it will be spending vast sums on infrastructure and other aspects that can encourage large amounts of foreign investment, leading to rapid growth and expansion in liquidity and capital. Industrialization can also have a myriad of benefits in terms of increasing the labor force for industries like manufacturing, which then leads to greater numbers of exports. Once again in the example of China, the move from an economy that was mostly based on agriculture to one became based on manufacturing changed the world as we know it today.

For reasons like this, emerging markets can provide golden opportunities for investors who are looking for an economy on the up and up.

What are the risks of investing in emerging markets?

There are many. A critical issue is political instability. Despite the fact that many emerging markets sit on vast wealth in the form of oil and other commodities, the economic potential for the country often isn’t realized because of major problems with governments.

There can be multiple issues at play – some governments of up-and-coming economies don’t have a firm understanding of economics. There can be barriers to entry for businesses who are used to dealing with more lenient and open systems of government, as well as vastly different cultures and customs which must be respected. These factors can make it harder to conduct business. Some emerging markets rely way too heavily on exporting their commodities to generate revenue (see Brazil). In many of them, there is civil unrest and frequent strikes and coups, as well as higher rates of natural disasters. Due to these factors and many more, some investors don’t have the stomach for investing in businesses in these countries and look to more established markets. But for those with a taste for risk, emerging economies can provide great promise.

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Risk Disclosure:
Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order. Brokerage services, including fractional trading of US securities, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here. Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.

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ALL RIGHTS RESERVED © INVSTR LTD. 2017

Risk Disclosure:

Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order. Brokerage services, including fractional trading of US securities, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here. Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.

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