What are emerging markets?

Chances are, if you’re interested in investing, you’ve heard about emerging markets. But what exactly are they, and why are they important?

An emerging market is the economy of a developing nation. Typically, it’s a country at a transitional stage of growth, such as China, India, Malaysia, Taiwan, Mexico, Brazil and Egypt, where the economy is becoming increasingly engaged with the global market.

Emerging markets are in the process of moving from a low income, often pre-industrial style economy focused on agriculture and the export of raw materials into a modern, industrialised economy. This change in direction provides the population of an emerging economy with an improved standard of living comparable to that experienced by people living in developed economies such as those found in North America, Western Europe and Australasia.

Why are emerging markets important?

Investors are always looking to grow their investments, and emerging economies offer a strong potential for significant growth. On top of that, diversifying your portfolio through investments in emerging markets can be a smart move. That’s because if one country experiences an economic downtown, losses can be offset by growth in another economy.

To put this into perspective, in 2019, the economic growth of most developed countries sat below 3%, compared to China, whose economy grew by 7%. Figures for 2020 will be skewed due to coronavirus, but this pre-pandemic data illustrates a significant difference in growth.

Is an investment in an emerging market worth the risk? 

The answer is yes. It can be. Rewards can most certainly outweigh the risks, but you need to tread with care. That said, despite the volatile nature of emerging economies, you’re likely to benefit from far higher growth and a better return on your investment.

However, it’s important to bear in mind that because of the additional risk it may be wise to take a longer-term view. That way, you’ll have a better opportunity to ride the peaks and troughs of the market and fully benefit from the growth potential.

Why are emerging markets volatile?

Emerging markets will often experience volatility due to unstable governments, natural disasters and economies based on a small handful of industries. Additionally, emerging markets are more likely to experience high inflation together with deflation or currency devaluations, which can damage both their economies and securities markets.

The significance of lower per capita income

Income per capita measures the income earned by each person in a defined place. It’s a measurement used to estimate a person’s earning power and illustrates the standard of living in that area.

In an emerging market, the per capita income is lower than that of a modern economy. In a country where most of the population earn a low income, you’ll often find leaders keen to drive rapid change towards industrialisation. That’s because many governments want to make their country more prosperous and help their people increase their income and improve their standard of living. Plus, there’s the added incentive of staying in power!

What emerging market industries should I invest in?

Because an emerging market is slowly becoming more affluent, the growing middle class have an increasing disposable income. Therefore, consumer goods such as health and beauty products, white goods, packaged foods, and high-quality apparel grow in demand, making them good stocks to invest in.

A good example of a growing industry in an emerging economy is Top Glove in Malaysia. This company specialises in making PPE gloves, which are now in huge demand across the globe. What’s more, banks and technology companies can prove to be good investments as emerging economies grow.

How much of my portfolio should I invest in emerging markets?

That’s a question for our fund managers. In our portfolios, the estimated percentage of holdings in emerging market funds currently range from 10-12%.