What Are Emerging Markets (EM)?
‘EM’ was coined in 1981 by Antoine van Agtmael1 who had decades of experience successfully anticipating and acting on global EM trends. The International Monetary Fund classified2 the world into advanced and developing economies on the basis of:
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per capita income level (i.e. how much citizens of a country earn)
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export diversification (i.e. how diverse a country’s exports are)
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degree of integration into the global financial system (i.e. a country’s level of financial sophistication)
Reclassification only happens when a significant change occurs or the case for change in terms of the three criteria above becomes overwhelming. The Morgan Stanley Capital International (MSCI) EMs Index3, launched in 1988, is another type of classification used for EM countries. Reviewed quarterly, it reflects changes in the underlying equity markets. EM countries are economies that are moving toward becoming what are known as developed markets. These countries are crucial to driving global economic growth. Examples of advanced markets include the US and Western Europe, including the UK. Examples of developing economies include countries across the Asia–Pacific region and Latin America. They have lower levels of liquidity, less established markets and lower levels of per-capita income.
Figure 1. Gross domestic product (GDP) per capita in the main industrialised and EM countries (2019)
Although there are many EMs worldwide, the four largest are Brazil, Russia, India and China (BRIC), as depicted in Figure 1. Many investors believe that these markets are relatively stable and may eventually replace the G7 as the world’s next superpowers. This makes them essential for any international investor’s portfolio (Kuepper, 2019). The BRIC economies differ greatly from each other in many ways:
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Brazil: nothing short of an economic miracle over the past decade. In fact, the country is now the second-largest producer of iron ore in the world and produces more ethanol than Asia and Europe combined.
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Russia: a leading exporter of oil and natural gas to Europe. It has benefitted from the secular growth of commodities and continues to expand.
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India: its demographic dividend and significant farm output (second in the world) creates an economy that investors regularly add to their portfolios.
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China: the third-largest economy after the US and the European Union by measure of GDP and is the biggest exporter in the world. It is expected to surpass the US in the coming years. However, the country’s communist government and related controversies presents key risks.