What are emerging market economies and how can you trade them?

What is an emerging market?

An emerging market is a nation that is growing in productive capacity and is moving away from its traditional agricultural economy. An emerging economy is thought to be on its way to becoming a developed market, creating higher living standards, industrialising rapidly and adopting a free market economy.

The leaders of developing countries will be aiming to become more engaged with global markets, by becoming a more attractive investment opportunity for companies and investors alike.

There are over 150 emerging markets according to the International Monetary Fund (IMF). However, the definition of what constitutes an emerging market is somewhat up for debate.

The four most well-known developing economies are: Brazil, Russia, India and China. Although these are some of the largest countries in the world by GDP, the living standards within each economies are so varied that they’re often considered emerging markets. For example, China has the second largest GDP in the world but its GDP per capita puts it at 79^th, and India ranks fifth by GDP but its GDP per capita has it at 122^nd.

The characteristics of an emerging market economy

While each emerging market is different, there are few common denominators:

• A negative relationship to the US dollar
• A low income per capita
• High growth potential
• Market volatility

Emerging markets and the US dollar

Exchange rate fluctuations against the US dollar are an important factor shaping the outlook in emerging market economies, as much of their credit, trade, and debt is priced in dollars.

Typically, when the US dollar rises in value, emerging market currencies decline in value as their exports become less competitive and foreign investors go into a ‘risk-off’ state. A weak dollar on the other hand tends to boost emerging market currencies, giving them more freedom to adjust their fiscal policies.

Steep swings in exchange rates in emerging markets are often linked to capital outflows, tighter financing conditions and increased financial instability. However, the drivers of those moves are difficult to unravel, as global and national forces jointly determine the relative strengths of these currencies.

Emerging markets and income per capita

Emerging markets have lower-than-average per capita income. As the government pursues industrialisation and manufacturing activities, it’s hoped that the per capita income will increase with GDP. But as we’ve already seen for countries like China and India, this isn’t always the case. In a lot of emerging markets, the wealth disparity between the rich and the poor widens as the country grows.

This leads us to a common denominator of low income per capita, which is political instability. Overcoming this problem is one of the biggest challenges for an emerging economy.

Growth potential of emerging markets

The great growth potential of an emerging market economy is usually based on progressive industrialisation. In general, average growth will continue to be higher than in most developed markets. This is because the governments in emerging markets tend to implement policies that favour industrialisation and rapid economic growth. These policies lead to lower unemployment and better infrastructure.

This growth requires a lot of investment capital, but markets are less mature in these countries than they are in developed markets. This is why in the transition from an agriculture-based economy to a developed economy, countries often require a large inflow of capital from foreign sources due to a shortage of domestic capital.

Countries with a higher rate of industrialisation are more attractive to foreign investors due to the high return on investment they can offer.

Market volatility in emerging markets

The monetary policies in a lot of emerging market economies will make them vulnerable to volatility because they lack liquidity in their assets, causing slowdowns and sudden changes that can discourage investments. The volatility exposes investors to the risk of fluctuations in exchange rates, as well as poor market performance.

Volatility can be caused by a range of factors, such as political instability and supply and demand shocks due to natural calamities. When emerging market leaders undertake the changes necessary for industrialisation, different sectors of the population suffer, such as farmers. Over time, this could lead to social unrest, rebellions, and regime changes. Investors could lose everything if industries are nationalised or the government defaults on its debt.

The currencies of emerging markets are more susceptible to volatile exchange rate fluctuations. A clear example is that of the Argentine peso, which has been devalued against the US dollar at values higher than the country's inflation itself.

Emerging market currencies are also vulnerable to changes in commodities, such as oil or food stuffs. That's because the countries don't have enough power to influence these movements. For example, when the United States subsidised corn ethanol production in 2008, it sent oil and food prices skyrocketing. That sparked food riots in many emerging market countries.

What are the advantages of investing in emerging markets?

It is important that we ask ourselves the following question: why focus on emerging markets assets?

One of the main advantages is possible growth. The national companies, and foreign firms that take advantage of the landscape, will likely see revenue increases and share price gains as the company becomes more established. And as the economy stabilises and grows, the national currency will also strengthen.

International positions can be a good diversifier for your trading account or investment portfolio, as economic downturns in one country or region, including the US, can be offset by growth in another.

It’s important to remember, that when you trade with CFDs or spread bets, you’ll be able to speculate on whether emerging market assets - including shares, currencies and indices - are going to rise or fall. So, you can take advantage of the growth, and any volatility, that comes each country’s way.

What are the risks of investing in emerging markets?

While emerging markets offer exciting opportunities, it is important to be aware of the different risk factors too. These include:

• Political risk: Emerging markets can have unstable, even volatile governments. Political unrest can have serious consequences for the economy and investors
• Economic risk: These markets can often suffer from insufficient labour and raw materials, high inflation or deflation, unregulated markets, and weak monetary policies. All these factors can present challenges for investors
• Currency risk: The value of emerging market currencies compared to the dollar can be extremely volatile. Any profit can potentially be diminished if a currency devalues or falls significantly

List of emerging markets

Here’s the total list of emerging markets as set out in the International Monetary Fund World Outlook 2021.

Emerging markets by region
Asia
	Bangladesh
	Bhutan
	Brunei Darussalam
	Cambodia
	China
	Fiji
	India
	Indonesia
	Kiribati
	Lao PDR
	Malaysia
	Maldives
	Marshall Islands
	Micronesia
	Mongolia
	Myanmar
	Nauru
	Nepal
	Palau
	Papua New Guinea
	Philippines
	Samoa
	Solomon Islands
	Sri Lanka
	Thailand
	Timor-Leste
	Tonga
	Tuvalu
	Vanuatu
	Vietnam
Europe
	Albania
	Belarus
	Bosnia and Herzegovina
	Bulgaria
	Croatia
	Hungary
	Kosovo
	Moldova
	Montenegro
	North Macedonia
	Poland
	Romania
	Russia
	Serbia
	Turkey
	Ukraine
Latin America and the Caribbean
	Antigua and Barbuda
	Argentina
	Aruba
	The Bahamas
	Barbados
	Belize
	Bolivia
	Brazil
	Chile
	Colombia
	Costa Rica
	Dominica
	Dominican Republic
	Ecuador
	El Salvador
	Grenada
	Guatemala
	Guyana
	Haiti
	Honduras
	Jamaica
	Mexico
	Nicaragua
	Panama
	Paraguay
	Peru
	St. Kitts and Nevis
	St. Lucia
	St. Vincent and the Grenadines
	Suriname
	Trinidad and Tobago
	Uruguay
	Venezuela
Middle East and Central Asia
	Afghanistan
	Algeria
	Armenia
	Azerbaijan
	Bahrain
	Djibouti
	Egypt
	Georgia
	Iran
	Iraq
	Jordan
	Kazakhstan
	Kuwait
	Kyrgyz Republic
	Lebanon
	Libya
	Mauritania
	Morocco
	Oman
	Pakistan
	Qatar
	Saudi Arabia
	Somalia
	Sudan
	Syria
	Tajikistan
	Tunisia
	Turkmenistan
	United Arab Emirates
	Uzbekistan
	West Bank and Gaza
	Yemen
Sub-Saharan Africa
	Angola
	Benin
	Botswana
	Burkina Faso
	Burundi
	Cabo Verde
	Cameroon
	Central African Republic
	Chad
	Comoros
	Democratic Republic of Congo
	Republic of Congo
	Cote d'Ivoire
	Equatorial Guinea
	Eritrea
	Eswatini
	Ethiopia
	Gabon
	The Gambia
	Ghana
	Guinea
	Guinea-Bissau
	Kenya
	Lesotho
	Liberia
	Madagascar
	Malawi
	Mali
	Mauritius
	Mozambique
	Namibia
	Niger
	Nigeria
	Rwanda
	Sao Tome and Principe
	Senegal
	Seychelles
	Sierra Leone
	South Africa
	South Sudan
	Tanzania
	Togo
	Uganda
	Zambia
	Zimbabwe