What are Emerging Markets?

When countries are making the transition from developing to developed, their economies are referred to as emerging markets. They’re usually undergoing notable economic growth and have characteristics of a developed country. Additionally, emerging market economies have low to middle per capita income – a measure of the average income each person earns in a country, city, or region. Examples of emerging markets include China and India.

The goal of emerging markets is to increase their production capacity to improve economic growth and the quality of life for their citizens. Emerging market economies can also be an attractive opportunity for investors.

Understanding Emerging Markets

There are several characteristics of an emerging market and some are listed below.

• Growth and Investment Potential: When economies are in a transitional period, they’re usually becoming attractive to investors. Foreign investors, in particular, may be attracted to investing in the country because of a potential high return on investment. Countries with emerging markets usually need that capital to transition into a developed economy since they tend to have a lack of domestic capital.
• Market Volatility: Emerging markets usually have some market volatility. Some causes of that volatility can include political unrest, domestic policy instability, changes in supply and demand that stem from external factors, or natural disasters. In terms of the latter, economies heavily dependent on agricultural exports may be affected when natural disasters take place. Market volatility can ultimately lead to fluctuating exchange rates and market performance.
• Young Populations: Some emerging markets have young populations, which can be beneficial to the labor market. Robust young populations can mean greater potential to produce goods and services. As their emerging market economies develop, younger populations may have the ability to support that growth via their labor.

High Economic Growth

An important characteristic of an emerging market is that the country puts policies in place to facilitate economic growth. Some of these policies can relate to industrialization or manufacturing. When said policies are put into place, they can create low unemployment rates and an increase in investments and disposable income. They may also experience rapid increase in gross domestic product or GDP.

Income Per Capita

When an economy begins to become developed, it usually integrates industrialization and manufacturing activities. This can lead to an increase in the country’s income per capita. The income per capita is a metric often used to show the standard of living of a population. Emerging markets typically have lower income per capita when compared to developed nations, which is because they often have lower household incomes.

Investing in Emerging Markets

Emerging markets can be a lucrative investment long-term if the economies continue to experience growth. There is potential for competitive long-term returns since investors may have access to rapidly growing economies, which can mean growth and high-returning stocks. However, emerging markets can be volatile, so the timing of the investment can be important.

There is a level of risk involved when it comes to investing in emerging markets as both internal and external factors can impede these countries’ economic growth. Other risks that come with investing in emerging markets are a lack of market regulation and or ineffective monetary policies.

Russia is an example of a country that has moved between an emerging market and developed economy. While they have natural resources like oil and minerals which have contributed to rapid economic growth, political conflict, trade sanctions, and fluctuations in oil prices have affected the country’s growth.

To minimize risk, investors may consider making emerging market investments a minimal part of their portfolio. If unsure what that looks like, it’s advisable to seek the help of a finance professional who can help develop a well-diversified and balanced portfolio.