Emerging Market

Updated on April 8, 2024
Article byNanditha Saravanakumar
Reviewed byDheeraj Vaidya, CFA, FRM

Emerging Market Meaning

An emerging market is a developing country that depicts overall economic growth and progress. It develops domestically and globally. Emerging economies show a high growth rate, increase in GDP, improved FDI flows, greater business prospects, and better living standards. These markets are highly competitive and play an important role in globalization.

Emerging economies expand beyond agricultural activities and start actively manufacturing and trading globally. Due to their rapid growth, investors often find such markets attractive. However, there is a risk factor associated with emerging economies. Some examples of emerging market countries include India, China, Brazil, Mexico, etc.

What are emerging market

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Key Takeaways

  • The emerging market is a global economy or a country transitioning to a developed nation.
  • This transition helps bring out the maximum potential of the country. Therefore, these markets work efficiently and are productive.
  • A lot of competition exists between the emerging economies as they are all in the same race to become developed countries. Hence, they try to attract international businesses and trade with other countries.
  • Developing countries portray impressive economic and financial growth. They also show some characteristics of developed economies.

Emerging Market Explained

Emerging markets are countries growing from less developed to more developed economy. As they expand, their focus shifts from agriculture to industries, technology, services sector, trading, etc. Hence, they show rapid economic growth and provide domestic and international benefits.

The emerging economies are always looking for opportunities to develop and expand. The primary objective of these countries is to become developed nations and provide better living conditions to their citizens. This explains their high volume of exports and imports. Emerging countries also have trade agreements with many other countries, promoting global trade.

Emerging nations also welcome business prospects. These countries usually have a high population of youth. Alone, the government will find it difficult to generate employment opportunities for this large population. Hence, they attract MNCs to set up businesses and factories in their country by offering cheap resources, labor, minimum restrictions, etc.

The immense productivity of emerging economies increases the national income. As a result, businesses prosper and make better profits. Hence, they will be able to provide higher financial returns to investors. It is one reason why foreign investors keep investing in emerging markets and find them attractive.

That said, investors must evaluate the risk of investing in emerging markets. Firstly, they are not familiar with the economy. Secondly, emerging economies are going through the developmental phase, which makes them highly volatile. That is, there might be political tensions and social issues which will affect the economic and financial situation of the country. Therefore, investors must carefully assess a country before investing in it.

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Characteristics

Most emerging markets display major economic characteristics of developed countries. Let’s look at these characteristics and also some features unique to emerging economies:

Characteristics of emerging market

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  1. Attractive markets – Emerging economies are rich in natural resources like raw materials, land, valuable minerals, etc., most of which are unexploited. Also, these countries have huge populations. Therefore, they draw businesses by offering these resources and cheap labor. The companies then provide job opportunities and capital for the country.
  2. International trade – Using the abundant natural resources, the developing countries engage in trade, exchanging resources, technology, knowledge, and capital. However, these countries tend to be export-oriented and maintain a positive trade balance. Higher exports denote capital inflow, whereas higher imports mean capital outflow.
  3. Higher economic growth – With high economic activity and maximum efficiency, emerging countries generate higher income. As a result, most developing markets show positive growth in gross domestic product. Further, these countries have a moderate per capita income, lower than developed countries but higher than the under-developed countries. Hence, these economies are among the fastest-growing.
  4. Good investment options – Owing to these factors and the scope of these countries’ economic activities, they give investors better returns. Moreover, even businesses profit from cheap resources, labor, and incentives. As a result, most foreign investors find emerging nations profitable.
  5. Moderate to high-risk markets – However, it is important to remember that a level of risk is associated with such markets. As they are just on the way to development, these markets can be highly volatile. Therefore, foreign investors should first become familiar with these countries and their economic conditions before investing in them.

Examples

Let’s look at some examples of emerging economies.

Example #1

The case of India is worth mentioning. India is the fastest-growing emerging economy. The UN predicts that the country will have a growth rate of 6.4% in 2022. Being a developing country, it trades with many nations, net exports being the focus. Many developed countries invest in India. Many MNCs have opened factories in India, including Volvo, Toyota, Samsung, etc. The financial market, too, performs well, giving better returns to investors. Also, India ranks 6th in investor protection, according to Forbes.

Example #2

Here is a recent example of the financial market in emerging countries. The stock markets in the emerging countries have suffered in the first half of 2022 owing to inflation worldwide, the Russia-Ukraine war, and the COVID-19 pandemic. Consequently, it is estimated that foreign investments in emerging market stocks can fall by 42% in 2022. However, most emerging nations’ currencies have performed better than the USD.

Frequently Asked Questions (FAQs)

Which countries are emerging markets?

The fastest-growing emerging market countries are India, China, Brazil, Mexico, South Africa, South Korea, Philippines, Malaysia, etc.

Why invest in emerging markets?

Investing in emerging economies can be an attractive option for foreign investors with years of experience. Emerging economies offer better investment returns, owing to their growth and high GDP. However, investors should exercise caution and study the market before investing big.

What are emerging market stocks?

These are the stocks offered by companies in developing countries. Generally, they are considered good investments as they give higher returns. It includes emerging market exchange-traded funds (ETFs), mutual funds, and other securities.

What is emerging market debt?

The government of an emerging nation issues debt instruments like bonds, bills, and other treasury securities. These constitute a part of the country’s debt. However, it doesn’t include borrowings from other countries or global financial institutions.

This has been a guide to Emerging Market and its meaning. We explain the primary objectives of emerging markets, their characteristics, and examples. You may learn more from the following articles –

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