Guide to Emerging Markets
What are emerging markets?
Emerging markets are economies that possess some of the qualities of developed countries and are transitioning from a low income, often pre-industrial economy towards a modern, industrial economy with a higher standard of living. Though the classification used to qualify emerging markets varies, levels of income, quality of financial systems, and growth rates are all popular criteria. Some current examples of emerging market economies include India, Mexico, Russia, Pakistan, Saudi Arabia, China, and Brazil.
How do you invest in emerging markets?
The easiest way to invest in emerging markets is through an ETF or mutual fund that is designed to track the performance of top companies in emerging market countries. Investors looking to buy global stocks can invest in an ETF that follows the MSCI Emerging Markets Index, an index that tracks mid-cap and large-cap stocks in 25 countries that can be classified as emerging.
The largest ETF available to U.S. investors to track the MSCI Emerging Markets Index is the iShares MSCI Emerging Markets Index ETF, which invests at least 80% of its assets in stocks and American depositary receipts included in the index. Investing in emerging markets is considered a risky investment, with outsized potential for losses and gains.
What countries are considered emerging markets?
The four main emerging market economies are Brazil, Russia, India, and China (BRIC). Other countries considered emerging markets include Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa. While the criteria varies among different entities, the IMF identifies a total of 40 countries as “emerging market and middle-income.”
Is Mexico an emerging market?
Yes, Mexico is frequently classified as an emerging market economy. One of Mexico’s strongest emerging markets characteristics is the pace of its development over the past twenty years. Mexico has also become a strong manufacturing economy, has substantial trade deals with the U.S. and Canada, and its high rate of poverty continues to recede. Still, the country faces significant impediments to becoming a bonified developed nation, particularly in its vulnerability to corruption and the drug trade.
An entrusted loan is a lending arrangement common in China in which a private company (the trustor) lends its idle cash to an agent bank (the trustee. Entrusted loans allow companies with idle cash (including those owned by the state, such as in China and other emerging markets) the opportunity to earn interest income by allowing an agent bank to loan out the funds. Though entrusted loans helped provide liquidity to Chinese companies, concern over a lack of transparency in reporting such loans caused the Chinese government to scrutinize entrusted loans more closely, beginning in 2018.
Emerging Market Bond
Emerging market bonds are fixed income instruments issued by developing countries or large companies within developing countries. Emerging market bonds tend to have higher yields than bonds issued by the U.S. government, but are also much riskier investments. It can be difficult to directly purchase emerging market bonds, but many mutual fund companies in the U.S. offer emerging market ETFs, which allow investors to diversify positions in emerging market bonds.
CIVETS is an acronym for the countries Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa. The countries that make up CIVETS—a term coined at the 2008 Economist Intelligence Unit (EIU) meeting—are considered to be the next tier of emerging market economies behind BRIC (Brazil, Russia, India, and China).
Least Developed Countries (LDC)
Least developed countries (LDCs) are nations identified by the UN that face significant challenges to economic and structural development. LDCs have access to special international funding not available to more developed nations due to their high vulnerability to adverse economic and environmental events.
Multilateral Development Bank (MDB)
A multilateral development bank (MDB) is an international financial institution that provides low-cost loans to developing countries for projects like infrastructure, energy, education, and environmental sustainability. MDBs are chartered by member nations from developed and developing countries and are created to encourage economic development in poorer nations.