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Emerging markets: what investors need to know

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Most people have heard of emerging markets, but what exactly are they, and what makes them different to developed economies?

Emerging markets are economies that are transitioning from reliance on agriculture or producing raw materials to a more modern, broad-based structure with a growing ‘middle class’ of consumers.

They typically have young populations and low average earnings, but are in the process of industrial change, with this development reflecting by growing numbers of people moving from rural to urban areas move to seek work.

Many emerging markets have provided investors with outstanding returns. The process of building transport infrastructure and homes for people to live in, then producing consumer goods for an increasingly wealthy population, means that there are many rapidly growing companies with potentially enormous markets because they are starting from such a low base. Millions of people begin to earn better wages and want to spend their money on the trappings of modern life, creating a virtuous cycle.

For example, China’s long boom was highly connected to the migration of many people from its countryside to its cities – one of the great migrations in human history.

Guy Foster, Head of Research at Brewin Dolphin, says this urbanising population is one of the key characteristics of an emerging economy.

“This process is where you really see a country transform from a developing economy to what we truly call an emerging market, because it is when a “middle class” starts to form, using their new-found spending power to buy the trappings of modern living, from white goods to computers, mobile phones and cars. That is when you see the economy really take off” says Foster.

“Developed economies such as the UK and US already have these things in place - there are generally enough homes and roads and most people have a mobile phone or computer and most industries are mature, so the prospects for growth are by definition more limited.”

How you spot an emerging market

  • A young population

Young people are good for economic growth because young people tend to spend more than older citizens, and provide the workforce to fill the jobs created by economic expansion.

  • Low average income relative to developed markets

This helps emerging markets compete on the world stage because lower wages mean they can provide goods and services at lower prices than developed markets. In the early stages of an emerging market’s journey, this is a big advantage.

  • A broadening range of commercial activities.

As capital markets mature, investment becomes easier and safer - emerging markets usually have functioning capital stock markets, but their financial systems tend to be less sophisticated.

Be prepared for volatility

The modernisation process for emerging markets can be bumpy, and involves more than just commerce. Emerging markets are all too often characterised by political systems that are prone to corruption, or lack experience in managing economic transitions.

However, despite the volatility they can exhibit, positions in emerging markets can be part of an enduring growth story. As part of a balanced portfolio they can offer significant returns in the long run, and can be useful routes to diversifying your holdings.

Meanwhile, BPS portfolios are carefully calibrated to an investor’s risk appetite, and their exposure to emerging markets will be determined accordingly.

 

 


The value of investments can fall and you may get back less than they invested.

If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.

Past performance is not a guide to future performance.

No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.

The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

The opinions expressed are not necessarily those of Brewin Dolphin Ltd.

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