The term emerging market is frustratingly ambiguous. Disconcertingly, it contains some – but not all – of the characteristics of a developed market. Practically speaking, it means the country in question has at least some liquidity in debt and equity markets. But how much? We generally apply the term to places that aren’t the U.S., Japan or Europe, and we invest there despite the risks because the returns are higher.

But development is a very complicated picture. There’s no one rubric for it. For instance, India is smaller than China, has slower GDP growth, and far fewer cities with at least a million people. But it also has much lower income inequality than China does, indicating it’s done a better job of distributing its wealth. When we compare it to a country like China, whose citizens are richer but whose growth has also been faster, how do we tell which is more “emerged?”

Characteristics of Emerging Markets

We decided to look for some reliable characteristics that we see in emerging markets that experts see as desirable. To do that we spoke to two fund managers with experience investing in and following the growth of these large Asian countries. Rob McIver of Jensen Investment and Christopher Tsai of Tsai Capital both emphasize long-term thinking, stability and exposure to Asian markets. Together we came up with four qualities that characterize emerging – or in some cases emerged – markets.

1. Ability to produce “aspirational products”

One of the foremost distinctions we noticed was the ability to produce, as well as the desire to consume, what McIver calls “aspirational products.” You can see this, perhaps surprisingly, in the success McDonalds’s Corp. (MCD) has had in China.

McIver thinks Chinese consumers still place a “’premium perception on dining at McDonalds,” he said, “and there are, in fact, parts of the world where the food at McDonalds is actually quite expensive relative to local options. And we see this continuing.” (For more on this topic, see: Luxury for Everyone.)

The performance of Nike, Inc. (NKE) in China tells a similar tale. The Chinese equivalent is probably the apparel company Li-Ning Co. Ltd., named for the famous Chinese gymnast. They rank third behind Germany's Adidas AG and Nike in terms of revenue generated in China. A lack of social capital is part of the reason Li-Ning has trouble competing with western brands. Nike, for instance, has more famous athletes representing them than you can count. And because Li-Ning’s “L” logo looks like the Nike swoosh, many Chinese felt that the brand – despite showcasing Chinese athletes – is an imitator.

2. A Middle Class

The size and growth of a country’s middle class is another important feature of maturing markets. Tsai believes the middle class is a smart way to play the long-term trend of emerging markets, where he believes food is a place to focus. “People, as they get more wealthy, want a higher quality of life. To most people, where that starts is by eating better, eating more protein and more meat.” It's no wonder that since liberalizing in the late seventies, China’s meat consumption has increased about seven-fold.

"Middle class" means different things in different places, but it generally refers to the subset of your population that can spend between $10 and $100 a day. Depending on where you are, that is the amount of money that is enough to buy durable goods like cars and refrigerators. Now, middle classes are growing everywhere, but most of the growth is in Asia where the middle class is expected to triple over the next four or five years. (For more on this topic, see: The Finances of the Global Middle Class.)

3. Urbanization

One of the first things we think about when we think about development is the growth of cities, and this correlation is surprisingly strong today: the nations widely considered more “developed” have a much larger percentage of their population in cities. This trend played out gradually over the course of the 19th and 20th centuries; people slowly migrated to cities where employment is more diversified and hence often easier to find. The United Nations projects that this trend will continue until 2050, when more than 80% of the developed world is expected to live in an urban center.

Urbanization, particularly Asian urbanization, is one focus of McIver who has an interesting and subtle way of gaining exposure to it in his fund: elevators. The stock is United Technologies Corp. (UTX), but he’s most interested in one of the conglomerate’s subsidiaries – Otis Elevators – as a way to play China’s rapid urbanization. When it started to liberalize in in the late 70s and early 80s, the urban population in China grew by about a third, likely the fastest urban migration in history. It now has 59 cities with at least a million people.

4. Emphasis on top-line over bottom-line

A final, and more nuanced, development is definitely the delineation between top- and bottom-line goods. McIver sees a growing emphasis on the top-line products, particularly for healthcare equipment in China. One of the stocks in his portfolio is the syringe manufacturer Becton, Dickinson and Co. (BDX). When the company released a new, higher-end product with a device to keep doctors from pricking themselves, McIver noticed that Chinese hospitals were buying them in bulk over the cheaper alternatives. “We’ve been surprised at the prevalence with which some Asian firms have pushed high-end goods. [With Becton] we saw the Chinese leapfrogging the lower-end needles for the better ones.”

The Bottom Line

The term "emerging market" has been debated and is a notion that has evolved considerably over time. Some may call the term out-of-date entirely, an affectation of Western chauvinism. However, it’s clear that there are extremely long-term, observable trends at work that are hard to ignore. China hasn’t emerged yet, but the numbers show that it's on its way. By 2025 China will have twice as many cities with over a million people as the United States. The question then becomes how much longer until Chinese products, or Indian products or Turkish Products become “aspirational?” When will we get a Chinese invention like the iPhone? According to Tsai: “it may not be a telecom or technological innovation like the iPhone, but it’s only a matter of time.”

Related Articles
  1. Bonds & Fixed Income

    Why Now May Be The Right Time For Emerging Market Bonds

    The emerging markets fixed income space continues to see some volatility, but there are some potentially attractive entry points.
  2. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  3. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
  4. Forex Education

    China's Devaluation of the Yuan

    Just over one week ago the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the yuan, knocking over 3% off its value.
  5. Economics

    Explaining Market Penetration

    Market penetration is the measure of how much a good or service is being used within a total potential market.
  6. Economics

    Calculating the Marginal Rate of Substitution

    The marginal rate of substitution determines how much of one good a consumer will give up to obtain extra units of another good.
  7. Fundamental Analysis

    Is India the Next Emerging Markets Superstar?

    With a shift towards manufacturing and services, India could be the next emerging market superstar. Here, we provide a detailed breakdown of its GDP.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
RELATED TERMS
  1. Substitute

    A product or service that a consumer sees as comparable. If prices ...
  2. Equity

    The value of an asset less the value of all liabilities on that ...
  3. Brazil, Russia, India And China ...

    An acronym for the economies of Brazil, Russia, India and China ...
  4. Fast Fashion

    Definition of "fast fashion."
  5. Duty Free

    Goods that international travelers can purchase without paying ...
  6. Caribbean Community and Common ...

    The Caribbean Community and Common Market (CARICOM) is a common ...
RELATED FAQS
  1. Do penny stocks pay dividends?

    Because of the small market capitalization and revenues typical of most penny stocks, there are very few that offer dividends. ... Read Full Answer >>
  2. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  3. Are Social Security payments included in the US GDP calculation?

    Social Security payments are not included in the U.S. definition of the gross domestic product (GDP). Transfer Payments For ... Read Full Answer >>
  4. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  5. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  6. Can my child have an IRA/Roth IRA?

    One of the best assets a person can have is an individual retirement account (IRA), and children can have one as long as ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!