Emerging Markets

An emerging market is an economy transitioning to a developing economy. It’s moving away from traditional economies which rely on the exportation of raw materials and agriculture to finance their economies to rapid industrialization.

Economies classified as such grow rapidly and get more integrated with the global economy, making them more attractive to investors. Emerging markets are also known by other names, like developing countries and emerging economies. Characteristics of Emerging Markets

Emerging markets have four defining characteristics:

1. High Economic Growth Rate

A telltale sign of an emerging market is the high economic growth rate. Leaders of these economies make policies that encourage industrialization to enhance investment, increase disposable income per capita, and reduce unemployment.

Projections conducted in 2021 showed that countries with emerging markets would experience economic growth by 6.4% compared to a mere 5.9% in advanced economies. Developed countries have low economic growth due to early industrialization.

2. High Returns

This is one factor that attracts many investors to invest in emerging markets. The transition to more industrialized economies means they need significant capital investment from foreign investors. And with rapid economic growth, the investors reap high returns.

Of course, most emerging markets have little or no track records of foreign direct investment, and it’s challenging to get information about companies listed on their stock markets. Investors willing to take on these risks and perform ground-level research are more likely to enjoy high returns.

3. High Market Volatility

Most emerging markets are incredibly volatile due to the external price movements, high political instability, and supply-demand shocks caused by natural calamities. They are also prone to commodity swings because they don’t have much power to influence such movements. These factors leave investors exposed to exchange rate fluctuations and low market performance.

4. High Income per Capita

Typically emerging markets that solely rely on agriculture and export returns realize low-middle income per capita. However, as the economy becomes industrialized, the income per capita increases along with the GDP. Examples of Emerging Markets

<a target="_blank" href='/countries/russia-population'>Russia</a>
<a target="_blank" href='/countries/china-population'>China</a>
<a target="_blank" href='/countries/brazil-population'>Brazil</a>
<a target="_blank" href='/countries/india-population'>India</a>
<a target="_blank" href='/countries/south-africa-population'>South Africa</a>

These are the biggest emerging markets worldwide. In 2009 leaders from Brazil, China, Russia, and India formed a summit to create an association (BRIC) that could improve trade and political relationships. South Africa joined the association in 2010 after achieving the emerging market status.

How Countries Achieve an Emerging Market Status

While the four defining characteristics play a critical role in determining whether a country is an emerging market or not, different organizations use their criteria. According to the International Monetary Fund, there are 23 emerging markets, but Dow Jones classifies 22 countries only as such. Other organizations like Stands and Poor’s (S&P) classify 23 countries as emerging markets.

What’s more, the organizations can add or remove a country from the list based on their criteria. This means an emerging country can be removed from the list by upgrading to a developed nation or downgrading to a frontier economy. Similarly, frontier markets can upgrade to emerging economies, and developed nations can downgrade to emerging markets.