What is an Emerging market?
The International Finance Corporation of the World Bank, who coined the term in 1981, define an emerging market as any economy where the per capita gross national product is less than $9,385 a year. In this sense, it’s just a polite or aspirational term for any poor country, and covers around 80% of the global population, including the world’s great economic powerhouse, China.
However, for investors, an emerging market generally means a low-to-middle income nation which is pursuing substantial economic and political reforms and thus becoming more integrated into the global economy.
An emerging market might have an underdeveloped or developing commercial and financial infrastructure and a recent history of rescheduling or even defaulting on sovereign debt. But it should also have a recent record of economic liberalisation, functioning equity and debt markets, and significant potential for both economic growth and capital market investment by foreigners.
In short, an emerging market is a poor country that provides considerable and rapid exonomic growth.
Aren’t emerging markets risky?
Yes. In the worst-case scenario, an emerging market might plunge back into political chaos or civil disorder, sparking a change in government and a swing back to nationalisation, expropriation of foreigners’ money and the collapse of the capital markets.
Even in less dramatic circumstances, investments in emerging markets are more vulnerable to everything from exchange-rate fluctuations to speculative panics like the Asian crisis of 1997. But all of these risks come with the territory.
Adding risk to one’s portfolio – and chasing higher returns – is the whole point of investing in emerging markets.
Potentially, the rewards can be spectacular.