What are emerging markets? Also known as developing countries, emerging markets are countries in the process of rapid growth and industrialization. According to the International Business Times, the emerging markets definition is this:
“an undeveloped country with high-growth potential, in tandem with high risks and significant market volatility”
Countries that may be developed markets in the future or were in the past are considered emerging markets. Emerging markets are drivers of global economic growth. In recent years, emerging markets have attracted significant attention from investors because they offer a prospect of high returns.
Emerging markets generally don’t have the same level of market efficiency and strict security regulations and accounting standards as advanced economies, such as the US, Europe, or Japan. However, emerging markets do have a physical financial infrastructure that includes banks, a stock exchange, and a unified currency. Emerging markets typically have a stable currency and are experiencing an increase in living standards as well as rapid income and economic growth. Many countries in Africa, Asia, Eastern Europe, Latin America, and the Middle East are considered emerging markets. According the International Monetary Fund, emerging economies are expected to grow two to three times faster than developed nations.
Why Invest in Emerging Markets?
Emerging markets provide a number of benefits to investors, including higher expected returns and diversification benefits. Because emerging markets perform differently than developed markets, they help investors diversify their portfolios and ride out the long-term problems posed by mature economies in the West.
Although emerging markets are more volatile than developed markets, investing in emerging markets actually decreases your portfolio’s overall volatility. Emerging markets have many favorable attributes that contribute to their growth, including the following:
- Large, young, and urbanized population
- Growing consumption
- Room for productivity gains that feed economic growth
- Low debt levels and citizens with high savings rates
- Political instability
- Currency volatility
- Inflation risk
- Less liquidity
- Limited equity opportunities
- Increased chance of bankruptcy
- Domestic infrastructure problems