August 28, 2014

Emerging Markets

What is an Emerging market?

Simply put, an Emerging Market is one which has significant growth potential over the long-term and is subject to restructuring. The term was first invented in 1981 by the International Finance Corporation and refers to those economies with low to middle per capita incomes. These economies are believed to follow the ’80/20′ rule, in that these ‘emerging’ markets represent approximately 80% of the world’s population but just 20% of the global economy.

To put this further into context, current powerhouses (like the UK and US) could have been considered ‘emerging markets’ prior to the Industrial Evolution. But now they have truly ‘emerged’ and as such the likes of China, India and Brazil are now flying the ‘emerging markets’ flag.

Distinctions between Emerging markets

While a large number of economies can be collective grouped under the term ‘Emerging Markets’, there have been distinctions and categorisations made. For example, the FTSE distinguishes between Advanced and Secondary emerging markets based on their national income and market infrastructure and development. Therefore, the likes of Poland, Brazil and Mexico are considered to be ‘Advanced’ emerging markets while China, Columbia and India are considered to be ‘Secondary’ emerging markets.

However, you may here the investment management industry commonly referring to ‘BRICs‘. BRICs are a grouping together of emerging markets which are potentially seen as having the greatest growth potential. This refers to Brazil, Russia, India and China (BRIC).

Most recently, HSBC launched the ‘CIVETS’ investment fund which covers Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. And in HSBC’s view, the ‘CIVETS’ will become an eventual successor to the ‘BRICS’.

Risks of Emerging Markets

Investing in emerging markets is incredibly risky, but with the high risk comes the potential for high rewards. It is important to understand that emerging markets are in a state of transition and are not as stable as the more emerged markets are. Factors such as a civil war could result in a collapse of the capital market, while any number of other factors could unsettle the unstable emerging markets.

But on the other hand, the rewards can be truly great if you back a ‘winner’. Imagine if India becomes a dominant economic force within the next 15-20 years, and your early investment shown faith in that from today.

However, it is also important to understand that it is not just a question of growth or collapse for emerging markets, there may frequently be difficult and stagnant periods within the economy.

Typically, investors utilise emerging markets as a way to diversify their investment portfolio and at the same time add risk.

Emerging Markets Further Explained

To further found out more information on Emerging Markets, Investoo recommends reading through our BRICs example. This example looks at why the ‘BRICs’ are viewed as potentially promising investment opportunities by some investment houses.

It is also possible to view why some investors view the MINTs emerging markets as promising here.