What is an emerging market? It’s a question most investors will ask at some point, given how often the term is used.
After all, understanding what you are investing in is absolutely vital, while spreading your risk across different assets ‒ and with it different markets ‒ is an important tactic for any investor looking to protect their portfolio.
So what do we mean by ‘emerging markets’?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
What is an emerging market?
Emerging market is a term used to describe countries which are not yet classed as being developed.
When it comes to investing, countries are split into two broad categories: ‘developed markets’ and ‘emerging markets’.
Developed markets are mostly the ones you’d expect – wealthy, advanced economies with large, well-regulated financial markets. The UK, the US and Japan are obvious examples.
Meanwhile, the term emerging market is used to describe countries that are becoming wealthier and more economically advanced, but which are not yet classed as developed economies.
Who decides what counts as an emerging market?
The most influential bodies in deciding on a market’s status are index providers– the companies that compile and calculate stock market indices, such as MSCI or FTSE Russell.
As with many terms in investment, however, there is no universal definition of what exactly separates an emerging market from a developed market. Some countries – such as South Korea – might be viewed as emerging markets by one provider, and developed by another.
Index providers don’t just look at economic development. They also take into account the size of local financial markets, and how easy it is to trade in and out of them.
For example, most Gulf nations are classed as emerging markets, despite having high income per head, because their markets are smaller and less easy to invest in than those in developed markets.
Can countries move between developed markets and emerging markets?
A country can also move between the categories of developed market and emerging market.
For example, in 2013, as a result of the eurozone sovereign debt crisis, most index providers moved Greece from developed to emerging market status.
Another term you may encounter is ‘frontier markets’. These are developing economies that have not yet reached emerging status.
While some of these countries are much poorer than those in the emerging markets index, others – such as Vietnam – are classed as frontier markets only because they impose restrictions on foreign investors.
Why invest in emerging markets?
Investing in emerging markets is an important consideration for all investors.
While these markets are naturally riskier, this is offset by the fact that they also tend to be faster growing. The idea is that investors will be rewarded for taking this higher risk with the potential to enjoy higher returns.
What’s more, there is also the fact that investing some of your portfolio in emerging markets helps you diversify, opening up the potential to see some sort of growth even if the developed markets go through a sticky period.
For more on the best ways to invest in emerging and frontier markets, subscribe to MoneyWeek magazine.
-
Half of UK homeowners will need to tap housing wealth to pay for retirementUnlocking property wealth could inject £21 billion each year into UK economy by 2040, according to new research
-
When will M&S take online orders again?Shoppers have not been able to place orders on the M&S website for more than two weeks, following a cyberattack. Meanwhile, the retailer’s share price has plummeted by 15%. When will things get back to normal?
-
What is a dividend yield?Videos Learn what a dividend yield is and what it can tell investors about a company's plans to return profits to its investors.
-
Fiscal drag could cost millions of earners thousands – what is it, and how can I protect my money?Videos The government froze tax thresholds, which will drag employees into higher tax bands as wages rise with inflation. We explain what fiscal drag is, and how to avoid it.
-
What is a deficit?Videos When we talk about government spending and the public finances, we often hear the word ‘deficit’ being used. But what is a deficit, and why does it matter?
-
Too embarrassed to ask: what is moral hazard?Videos The term “moral hazard” comes from the insurance industry in the 18th century. But what does it mean today?
-
Too embarrassed to ask: what is contagion?Videos Most of us probably know what “contagion” is in a biological sense. But it also crops up in financial markets. Here's what it means.
-
Too embarrassed to ask: what is stagflation?Videos Traditionally, economists and central bankers worry about inflation or recession. But there is one thing worse than both: stagflation. Here's what it is
-
Too embarrassed to ask: what is the metaverse?Videos The term “metaverse” sounds like something out of a science fiction novel (and it is). But what does it actually mean?
-
Too embarrassed to ask: what is the gold standard?Videos These days, most currencies are "fiat" currencies backed by the economies of the countries that issue them. But in days gone by currencies were on the "gold standard". Here's what that means.
