Developing nations, also known as emerging markets, is one of those investing terms that even the least-informed investors have likely heard. It refers to nations that are in the process of rapid growth, on their way to becoming industrialized nations like the United States, France and Canada.
There is disagreement over which countries should be considered emerging markets. The International Monetary Fund (IMF) has a list, as do the FTSE, Standard and Poor's and Dow Jones. Although many nations are labeled, "emerging" or "developing," some are more economically and socially healthy than others.
Some believe that the term, emerging markets, is antiquated, because there is no guarantee that these countries will one day become developed markets, although many of the nations on the IMF list are growing.
Debt Is Deceiving
In recent months, Spain made headlines because of its skyrocketing bond yields. Some economists estimate that above a certain rate, often around 7%, countries like Spain will be unable to service that debt. A yield of 7% is low, however, compared to one developing country, Vietnam, which currently has a bond yield of 9.6% on its five-year bonds.
Although the yield is higher, Vietnam's national debt is only 38% of its gross domestic product compared to the United States, which has a five-year bond yield of 0.8% (though its debt accounts for 70% of the country's GDP), and Spain, which has a debt-to-GDP ratio of nearly 69%.
Not the Whole Story
Some countries may divert funds from essential expenditures like infrastructure and other social needs in order to service debts, which are often left over from past rulers. These debt payments have a direct impact on the country's ability to increase its GDP. Vietnam may have a manageable debt level relative to its GDP and an unemployment rate below 3%, but the 18.7% rate of inflation and the fact that 40% of its GDP comes from state-owned industry has made its emergence into a developed nation more difficult.
Debt Relative to Risk
Although most emerging markets have a debt-to-GDP ratio much lower than developed nations, bond yields are higher because of factors like default risk. InvestmentNews reports that countries that default have lower debt-to-GDP ratios than countries considered to be healthy, making the risk to the investor higher and just like corporate bonds, the higher the risk, the higher the yield. Some investors believe that investing in emerging markets becomes too much of a risk once debt to GDP is higher than 40%. If that's true, which countries should you avoid?
Hungary has a debt to GDP of 80.6. Although foreign investment in Hungary is widespread and 80% of its GDP comes from private firms, Hungary holds the distinction of having one of the highest debt to GDP ratios of any emerging market country.
Brazil's debt to GDP may be 54.2, but this South American country's economy outweighs every other economy on the continent. Its economy is largely based on agriculture, mining and manufacturing.
China's debt to GDP is currently at 43.5, but data coming from within the country isn't always seen as accurate due to the way it reports. Some argue that China shouldn't be considered an emerging market country since its total GDP is over $11 trillion.
Another emerging market, Argentina, has a debt to GDP of 41.4%. Much of its GDP comes from the exporting of crops. Argentina was once one of the world's richest countries but numerous financial events including a severe depression have left it crippled economically.
The Bottom Line
Most portfolio managers agree that emerging market exposure is still appropriate for most portfolios despite the challenges of the sector. For added security, consider investing using exchange traded or mutual funds instead of trying to gain individual stock or bond exposure. Although debt to GDP is an important metric, it is only one that should be considered when evaluating the health of countries from which information is difficult to obtain.
EconomicsAfter the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
EconomicsLearn how Baidu and CloudFlare's agreement to work together has tackled China's digital firewall, and how the partnership improves Internet access in China.
EconomicsLearn about virtual joint ventures and how these agreements may promote the entrance of American companies into China's vast markets.
EconomicsWe share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
Stock AnalysisMost trading in the Indian stock market occurs through its two exchanges – the Bombay Stock Exchange and the National Stock Exchange.
SavingsHave your paperwork in order and be sure to shop around.
Chart AdvisorCopper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
EconomicsLearn about the top five states ranked by their real gross domestic product (GDP) per capita as of 2014: Alaska, North Dakota, New York, Connecticut and Wyoming.
EconomicsFind out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
EconomicsNow that China has eliminated its one-child policy, how will the new policy impact businesses?
Israel is considered a developed country, although it has substantial poverty and large income gaps. The International Monetary ... Read Full Answer >>
Spain is a developed country. Nearly all organizations that analyze development status classify it as such. Spain has a strong ... Read Full Answer >>
Despite undergoing rapid economic development over the past five decades, Malaysia is not considered a developed country, ... Read Full Answer >>
As of 2015, Chile is the only country in Latin America that is generally recognized as a developed country. In 2010, the ... Read Full Answer >>
Australia is one of the most developed countries in the world. The nation's per capita gross domestic product (GDP), one ... Read Full Answer >>
Nigeria is not a developed country by any reasonable standard. The country's per capita gross domestic product (GDP) is much ... Read Full Answer >>