Emerging markets have been an intriguing choice of investment, notably known for their “high risk, high returns” scheme. But the years have proven that the definition of emerging markets has evolved.
These markets have high risks due to volatility in currencies, instability in political and economic situations, and a lack of constraining regulations. However, it may yield high returns, possibly due to its fast-growing economy. Investing in emerging markets can also be beneficial to diversify one’s portfolio.
Defining Emerging Markets
There are several ways to define emerging markets. The IMF classified emerging markets based on three factors: systemic presence (size of a country’s economy and share of exports on a global scale), market access, and income level (GDP per capita). On the other hand, the MSCI index defines emerging markets by identifying corporate governance and reporting capability.
Ana Paula Picasso interviewed André Havas, CEO of Swedish Fintech CIMalgo, in the Emerging Markets Today podcast. André gave some educational insights on the future of emerging market investment. Moreover, he emphasizes how determining an emerging market is necessary to assess its opportunity.
The underlying mechanics and structure of the emerging market economy is always a high productivity rate and a tendency to be an export-driven country ” , explained André.
Beyond BRICS: The Hope of Growth for Emerging Markets.
One group of countries that used to be defined as emerging markets is acronymized as BRIC: Brazil, Russia, India, and China. This acronym was coined by Goldman Sachs, an investment bank, in 2001 with the vision that these countries would transform the global economy. In 2010, South Africa was included in this, changing the acronym to BRICS.
However, this definition is not applicable in today’s context as emerging markets encompass other countries outside of BRICS. Additionally, the countries are deemed too distinctive culturally to be grouped.
Identifying emerging markets has to be done with high granularity as each country differs from the others in various aspects. This includes political attribution, culture, and historical background.
When we do invest in emerging markets, it is still a macroeconomic play: it’s a play on currencies, politics, culture, and education”, added André.
Analysing these factors is crucial, noting that investing in emerging markets has its own unique risks. In addition, André also highlights that education that leads to financial excellence is important for an emerging market to open up more investment opportunities.
How the Pandemic Affected Emerging Markets
COVID-19 has affected the growth of emerging markets, especially due to the loss of human and other physical resources, leading to a descending level of productivity. This lasting damage is expected to decrease economic growth by 3 % by 2024.
With the pandemic subdued, emerging markets have been starting to rehabilitate in a variety of ways. For example, the UAE was able to restrict the virus’ transmission and rebuild its economy earlier than other countries. On the other hand, the Philippines imposed fiscal support, courtesy of its adequate fiscal buffers and market access. Again, this represents the difference in each country’s policy decisions and economic situation.
Want to know further about the future of emerging markets investments?
Listen to André’s insightful takes on this in our podcast below.
Main Photo By Ministério da Ciência, Tecnologia e Inovações - https://www.flickr.com/photos/sintonizemcti/48751144887/, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=118303492
