What are emerging markets?

www.mscibarra.com/products/indices/global_equity_indices/definitions.html#EM): Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Most professional investors let MSCI Barra do the work of figuring out which markets are emerging and then allocate funds accordingly.

The longer answer is that these are the nations that are at an intermediate stage of economic development – and they are growing rapidly. They have an emerging middle class of citizens who can tackle complex work, start new businesses, and buy everything from toothpaste to appliances. The economies in these countries are growing internally and externally. The worlds hot investment opportunities are in the emerging markets.

What are some of the differences between emerging and developed markets?

There are three main differences. First, situation of the people may be very different. As a general rule, emerging markets have younger populations than developed countries, with less education and health care, and with far more out migration. These are just generalizations, though; Russia and China have aging populations and excellent educational systems, for example.

The second difference, which is really the biggest, is growing consumer demand, and not as in a one or two percentage point increase in holiday spending like we have in the U.S. The people who live in emerging markets have not had much historic access to consumer goods, usually because their markets were closed or because the average income levels were so low. Now, the people have access to goods (both imported and made at home), and they have the money to spend on them. They want phones, refrigerators, cars, and all the other comforts of a modern life.

The third key difference is that emerging markets generally have less political stability then developed ones. They may have hostile neighbors and internal divisions, or they may be undergoing a transition from a closed economy to an open one. This is one reason why emerging markets investments tend to have more risk than those in developed countries.

Why is China an emerging market when its economy is so big?

China has the third-largest economy in the world, behind the European Union and the United States, but it is considered to be an emerging market. Why? Two reasons: first, China has a lot of people, so its economy per person is quite small. Divide Chinas $8.2 trillion GDP by its 1.3 billion people, the result is a GDP of $6,700, ranked 130th in the world, right between El Salvador and Turkmenistan. To the average Chinese person, the country has a long way to go to be developed.

Second, Chinas infrastructure is still developing. The country needs roads, schools, electric power lines, airports, and all of the other niceties of a modern nation. The major cities are mostly set right now, but the nations vast rural areas are playing catch up.

How does a country get promoted or demoted from the emerging markets list?

MSCI Barra moves one or two nations on or off the list every year. Some nations, especially those that have experienced extreme economic or political turmoil, are demoted. Others that have shown consistent growth are promoted to from frontier to emerging status or from emerging to developed market status.

When this happens, any investors that have to maintain a weighting relative to the benchmark – which would include many mutual funds that concentrate on emerging markets – have to buy and sell securities to get back into alignment with the MSCI Emerging Markets index. It creates some short-term disruption in the market, but in almost no time, everything is back to normal.

Arent emerging markets risky?

Look whats happened in the U.S. economy in recent years. Is this a safe market?

The risks in emerging markets are different from the risks in developed markets, and investments in these markets are more volatile. However, you can reduce risk through diversification, and even small allocations to emerging markets can help reduce your overall portfolio risk. Emerging markets probably shouldnt be your only area of investment, but they can me a good portfolio addition for many people.

What are some ways to invest in emerging markets?

Most individual investors have three ways to invest in emerging markets to take advantage of professional market analysis and diversification: Mutual funds, exchange-traded funds, and shares in multinational corporations based in developed markets.

The first two are pretty obvious, and most of the really large mutual fund and ETF companies have emerging-markets choices for you to consider. These funds invest in companies headquartered in emerging markets that serve local customers and that export products elsewhere.

The multinational corporation alternative is a good one for investors who like to pick stocks. The largest corporations are growing from sales in emerging markets. General Motors now sells more cars in China than in the United States. Coca-Cola cant get Americans to drink more pop than they already do, but few people in Vietnam have my diet Coke addiction – at least not yet. Companies that sell food, consumer products, pharmaceuticals, automobiles, agricultural and construction equipment, and other products are seeing huge growth from emerging markets, and investing in them is a way to pick up that exposure.

Ive traveled to a lot of emerging markets. Will that help me make better investments?

Thats hard to say. What you saw on your trip may not be typical of the country, especially if you stayed at a resort or hung out with fellow backpackers rather than locals. You may have talked to people who wanted to give you the best possible view of their homeland rather than the painful truth. And, you may not have picked up any context about how things have changed over time and how much better than can get. That doesnt mean travel is worthless. I think travel is a great way for anyone to learn more about the world, and that includes learning more about investments. Your trip may well have exposed you to some of the good and the bad to help you make a better decision.

A professional money manager needs to spend some time on the ground doing research. As an investor, though, you dont even need a passport. In effect, you can delegate the jet lag to the managers of mutual funds or ETFs that you may use to invest overseas.

Comments are closed, but trackbacks and pingbacks are open.