What is an emerging market? | CNBC Explains

Summary

Emerging markets, including countries like Indonesia, India, Brazil, and Russia, are crucial for global economic growth. These nations offer fast growth opportunities but also come with significant risks, such as volatility and high debt. The term 'emerging markets' was coined in the 1980s to attract foreign investment, replacing the less appealing 'third world.' While these markets experience rapid economic development, they are often vulnerable to currency devaluation and financial crises. Despite the uncertainties, emerging markets continue to attract investors, as they play a growing role in the global economy.

Takeaways

• 😀 The term 'emerging markets' was coined in the 1980s by Antoine van Agtmael, a World Bank employee, to attract foreign investment into developing countries.
• 😀 Emerging markets, like Indonesia, India, Brazil, and Russia, are crucial for global economic growth and often present investment opportunities with higher risks.
• 😀 There's no definitive list of emerging markets, as the classification can vary depending on the criteria used by organizations like the IMF and MSCI.
• 😀 The IMF classifies 96 countries as emerging markets, using factors such as income levels, exports, and the sophistication of financial systems.
• 😀 MSCI classifies 24 countries as emerging markets, focusing on how investable a country's stock market is.
• 😀 Emerging markets are typically characterized by lower income per capita compared to developed countries, although some, like the UAE and South Korea, now exceed developed nations in income levels.
• 😀 Rapid growth is a common trait of emerging markets, with some outpacing developed countries and experiencing faster GDP growth over extended periods.
• 😀 High volatility is a significant risk in emerging markets, with currency fluctuations and economic instability often causing significant disruptions.
• 😀 Since 2007, total debt in emerging markets has soared from $21 trillion to $63 trillion, exacerbating the risks faced by these nations.
• 😀 Currency devaluations, debt crises, and investor flight can trigger vicious cycles that negatively affect emerging economies, even damaging banking systems and economies.
• 😀 Despite the challenges, emerging markets continue to attract investors due to their growth potential, though their status can shift between being 'emerging,' 'developed,' or 'frontier' nations.

Q & A

What is the origin of the term 'emerging markets'?

The term 'emerging markets' was coined by Antoine van Agtmael, a World Bank employee, in the 1980s. It was created to attract foreign investment into developing countries, as the term 'third world' did not inspire confidence in investors.

How do different organizations classify emerging markets?

The IMF classifies 96 countries as emerging markets based on criteria like income levels, export diversity, and financial system sophistication. Meanwhile, MSCI classifies 24 countries based on how investable their stock markets are.

What is an index in the context of financial markets?

An index is a list of stocks that measures specific financial features. For example, the Dow Jones Industrial Average tracks the performance of 30 large U.S. companies, while MSCI's Emerging Markets Index tracks countries like Brazil, China, and Turkey.

What is the common income level in emerging markets?

Emerging markets are often characterized by lower income per capita compared to developed nations. However, this is not always the case, as some emerging markets, like the UAE and South Korea, have higher income levels than certain developed countries such as Spain and Portugal.

Why are emerging markets attractive to investors?

Emerging markets are attractive to investors due to their potential for rapid growth. Many countries in this category have demonstrated impressive growth rates that outpace developed nations, making them promising for investors seeking high returns.

Which countries have shown exceptional growth in emerging markets?

Countries like China, South Korea, and Indonesia have demonstrated growth exceeding 3.5% per capita GDP over long periods. India, Ethiopia, and Cambodia are more recent examples with growth rates around 5% or higher in the past two decades.

What are the risks associated with emerging markets?

Emerging markets are known for their high volatility. They can experience significant fluctuations in currencies and stock markets, as evidenced by sharp declines in the value of currencies against the U.S. dollar and rising national debts in recent years.

How does volatility affect emerging markets?

Volatility in emerging markets can lead to currency devaluation, struggles in raising funds, investor flight, and potential economic and banking system crises. These effects tend to spiral, exacerbating financial instability.

What causes an emerging market to lose its status?

An emerging market’s status can change based on its economic performance. It could either step up to become a developed nation or fall back to a frontier market, depending on factors such as growth, debt management, and market sophistication.

Why do investors keep an eye on emerging markets despite their risks?

Investors continue to watch emerging markets closely due to the potential for substantial economic growth. Despite the volatility, these countries play a critical role in the global economy and offer opportunities for high returns, making them a key focus for international investors.