“Emerging market” is not just a euphemism for “poor”, says Karthik Sankaran in Barron’s. An emerging market is supposed to converge with income levels in wealthy countries. The US was a fast-growing “19th-century emerging market that first converged and then surpassed the UK”.
But they don’t always make it: 19th-century investors regarded Argentina as an exciting new economy. Today the investment category encompasses a jumble of Asian manufacturers, Latin American commodity exporters and Eastern European states.
Policymaking is improving
A key difference between developed and emerging markets is that the former have reliable legal, political and economic institutions that give investors confidence. Happily, the quality of policy making in many emerging economies is improving. Central banks in Poland, Russia, Mexico and Brazil have been raising interest rates to get ahead of global inflationary pressures, says the Financial Times.
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Higher rates protect these countries against a repeat of the 2013 taper tantrum, when tightening US monetary policy prompted a rush of capital out of emerging markets, sending EM currencies plunging. Asian central banks have yet to join the tightening trend, says Nicholas Spiro in the South China Morning Post. Policymakers in developing Asia are betting that vaccinations will enable them to reopen factories, easing inflationary pressure without needing to hike interest rates. But there are risks: amid soaring energy prices, almost “all the region’s economies are net energy importers”.
Investors are instead turning to commodity exporters, reports Bloomberg. Russia has become the “traders’ favourite investment destination”. The “oil and gas superpower” has healthy currency reserves and “an enviably low debt burden”. The rouble has been the best-performing emerging-market currency so far this month. Energy firms make up roughly half of the Russian stockmarket, so it is little surprise that the local MOEX index is up by 5% over the past month. Not that emerging market investors will notice.
The MSCI Emerging Markets index is now dominated by East Asia, says Sankaran. Chinese, Taiwanese and South Korean firms jointly make up 61% of the index. “Brazil comes in well behind at 4.5% and Russia at 3.7%.” The practice of lumping so many different economies into one investment category is “increasingly odd”, says The Economist. Some suggest alternative regional indices, but that doesn’t always work: “The Turkish and Saudi Arabian markets… have little in common.”
Even more confusingly, the index also includes countries, such as South Korea, with rich-country income levels, but whose markets are not deemed open enough to qualify for developed market status. It is “time to experiment” with other ways of investing in countries that make up 40% of the global economy.
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