Emerging Markets

What are Emerging Markets?

India, Saudi Arabia, Mexico, China, Brazil, Russia, Pakistan . . . as diverse as these countries are, they have one thing in common: they’re emerging markets. Investors who want to invest in international assets to diversify their portfolio see growth potential in emerging markets—as well as potential risk.

Broadly speaking, “emerging market” describes a country that is making the transition from “developing” to “developed,” from an agricultural-based to an industrial-based economy. This shift fuels growth and opportunity, with an increasingly skilled labor force and outside capital jumpstarting production and export of raw materials like copper or lithium as well as lower-cost goods. This builds a burgeoning middle class and significant growth in the country’s Gross Domestic Product (GDP). Emerging markets can boast powerhouse economies, like South Korea with its world-leading tech industries.

Acronyms like BRICS, N-11 (Next 11), and MINT are how economists and investors group countries with similar emerging market economies. For example, the top five emerging market economies are grouped together as BRICS— Brazil, Russia, India, China, and South Africa. Formalized in 2010 when these companies represented just 11 percent of global GDP, these five countries have experienced tremendous growth since then. China and India have become major players in the technology sector. Brazil is the second largest food producer in the world, second only to the U.S. Russia and South Africa are home to rich natural resources. All are home to potential supply chains and new consumer markets. The International Monetary Fund anticipated that by 2030, the BRICS nations will make up over 50 percent of global GDP (1).

How many emerging markets are there? It depends. There’s no official rule about which nations qualify as emerging markets. Standard and Poor’s (S&P) classifies 23 countries as emerging markets, while Dow Jones lists 22. No matter the official number, these countries are a powerful driver of the world’s economy.

The International Monetary Fund (IMF), which classifies 20 countries as emerging markets, notes that the emerging market sector is a full 34 percent of the world’s GDP (2). In fact, merging markets and developing economies have become essential to the world’s economic growth, almost doubling their share over the past two decades to reach close to 80 percent. Emerging markets account for close to 85 percent of the growth in global consumption, more than double their share in the 1990s (3). Countries with emerging markets tend to have populations younger than richer countries—and a middle class with both the desire and the means to buy goods and services from around the world.

You don't need to be an expert to invest.

Why Invest in Emerging Markets?

The potential for high returns and the addition of diversification are two of the main reasons investors look to invest in emerging markets (4).

However, with high potential comes high risk. Stable governments and currencies as well as robust laws and regulations bolster emerging market economies—and political and financial crises can deflate them. Emerging markets can be prone to geopolitical instability. When the 2022 invasion of Ukraine prompted Western boycotts of Russian firms, investors who owned shares of Russian companies saw their money disappear.

Another risk is that a strong dollar makes it harder for an emerging market to fund dollar-based debts, and also might push the price of imports out of reach of a young middle class, slowing an emerging market’s growth. Additionally, emerging markets are often based on exploiting raw materials, and so their economies are vulnerable to price fluctuations in commodities markets.

For those reasons, investors usually include only a small percentage of volatile emerging market investments in their total portfolio—enough to complement more stable investments, but not enough to sink their portfolio’s value if, let’s say, the price of a country’s export, like oil or wheat, were to plummet. They can add funds that include emerging markets, or in the case of more experienced investors, an array of assets that track currencies, bonds, and more from countries with emerging market economies.

Having a solid financial plan and knowing your risk tolerance are key to finding the sweet spot between risk and reward in international investments like emerging markets. Experienced and professional investors use their risk tolerance to find the right mix of international and domestic assets, equities and bonds, commodities and currencies. Investors who are just starting out can ask their advisor how to include emerging markets. And investors who invest on Magnifi can ask their virtual assistant how to build a plan that includes emerging market funds.

How to Invest in Emerging Markets

Investing in the growth of emerging markets can’t be focused on just a few companies, because it’s such a large sector spread across many different countries. You can easily get diversified exposure to emerging markets through ETFs and mutual funds (5). Try these searches to get a better understanding of available emerging markets investments:

References:

Rana, Jayna, “Should you invest in the BRICS today? We take a look a decade after Brazil, Russia, India, China and South Africa were tipped for growth,” August 22, 2020, ThisIsMoney.co.uk, link.
Rupa Duttagupta and Ceyla Pazarbasioglu, “Miles to Go,” Finance & Development, Summer 2021, International Development Fund, link.

Disclosures:

Carlson, Debbie, “Why Emerging Markets Might Be Worth Owning in a Diversified Portfolio,” updated October 24, 2022, link.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
Exchange Traded Funds (ETF’s) and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.