What are emerging markets?
Emerging markets is a term that originated in the 1980s and is often used to describe countries or regions undergoing fast economic growth.
The term emerging markets describes countries that are undergoing growth and industrialisation. Emerging markets are a big and assorted universe of economies and markets each with their own political and economic cycles. They all have their own currency and bond markets.
Investors are attracted to emerging markets to capture potential growth opportunities.
Learn more about how emerging markets are defined, including a list of emerging markets.
Why invest in emerging markets?
Advantages of investing in emerging markets
Emerging markets account for close to 80% of global economic growth, almost double their share from two decades ago, according to the International Monetary Fund (IMF).
They also account for close to 85% of the growth in global consumption, more than double their share in the 1990s.
Almost 90% of the world’s population live in emerging and developing countries.
No single emerging market is the same as the other, but in terms of investing they have the following characteristics.
Stronger economic growth
Many emerging markets countries’ governments encourage industrialisation as they move away from being commodity-based exporters. They tend to have younger populations relative to developed economies, as well as government and private investments in technology, infrastructure, and education that can fuel growth and wealth.
In terms of sophistication, some of the best-run economies in the world are in emerging markets and while there are still poorly run emerging markets, there is an argument that many emerging markets are in better shape fiscally than some developed markets. COVID-19 and its aftermath provided a good example.
During COVID, developed markets went further into debt, worse still, when inflation came it was overlooked as ‘transitory’. Emerging markets’ central banks were generally ahead of the inflation curve and hiked interest rates earlier and more aggressively than developed markets. The result, emerging markets economies emerged in better shape than developed markets and policy makers could better manage turbulence. If needed, emerging markets central banks could hike interest rates without bankrupting the government, like we almost saw in the United Kingdom, but for the Bank of England’s unconventional intervention undertaken without consulting its Monetary Policy Committee.
Growth and investment potential
Emerging markets have a competitive advantage as exporters of low-cost and raw goods to richer nations, and many have adopted market-friendly policies to attract foreign investment.
Emerging markets are often at the forefront of technological revolutions.
Volatility
Emerging equity and bond markets are among the most volatile in the world. It is not uncommon for huge dispersions among stocks, sectors and countries within emerging markets. This creates opportunities for investors.
In terms of emerging markets economies, they usually have more boom-and-bust business cycles compared to developed markets, in part because many of these economies rely heavily on commodity exports, which have their own cycles. According to the St Louis Federal Reserve shows that raw materials comprise 71% of aggregate exports in the average emerging economy.
How to invest in emerging markets?
Investing in emerging markets is a way for investors to access positive demographics, a rising middle class driving consumer demand and higher long-term growth potential relative to developed markets. It also allows investors to diversify into countries that could be underrepresented in portfolios.
We believe emerging markets will continue to provide investors with benefits over the long term due to the potential for strong economic growth, favourable demographics and a growing middle class.
Taking the right approach to emerging markets is important
It is important to remember that emerging markets are not a monolith and domestic factors play a huge role. A pure passive approach, for example investing in an equity fund that tracks the MSCI Emerging Markets Index, means that you access the ‘bad’ and the ‘good’ of emerging markets.
We would argue, that being selective in emerging markets is important. It allows investors to avoid those countries with weaker fundamentals and prefer those emerging market economies that are better managed and therefore better insulated from geopolitical shocks that can occur in these developing nations.
At the company level, not all of emerging market corporates are desirable from an investment standpoint, many are state-owned enterprises and inefficiencies allow astute investors to take advantage of mispricing.
VanEck has two ways investors can access emerging markets:
Emerging markets equities
VanEck MSCI Multifactor Emerging Markets Equity ETF (ASX: EMKT) which provides investors with diversified access to companies that demonstrate four factors: Value, Momentum, Low Size and Quality, determined by global research giant, MSCI.
Read the latest quarterly commentary for EMKT.
Emerging markets bonds
VanEck Emerging Income Opportunities Active ETF (Managed Fund) (ASX: EBND) which takes an active, high conviction and benchmark agnostic approach to investing across the emerging market bond spectrum and has a targeted yield of 5% p.a.
Read the latest EBND commentary.