Emerging Markets
While many emerging market economies are now increasing their size to become global players, as they are still in a vigorous growth phase, they are categorised as emerging markets. The main players in emerging markets include the BRIC countries, Brazil, Russia, India and China.
Brazil and Russia are mainly reliant on natural resources for the expansion of their economies. China is now seen as the global manufacturing base of choice for many of the world’s major brands due to the lower labour costs and proximity to other Asian countries which supply components (Taiwan, South Korea & Japan). India is recognised as the world leader for call centres, outsourced services and technology services.
Although these four nations are recognised as the main players in the emerging markets, there are many peripheral countries which are also experiencing rapid growth. These include South Korea, Taiwan, Turkey, Mexico, Egypt and Indonesia.
Why Invest In Emerging Markets?
Developed economy growth rates are typically around the low single digits. An average annual growth rate of 2.5% is seen as the long term growth potential of the developed world economies. In contrast emerging markets are achieving growth rates of greater than 8% and some frontier economies reaching growth rates of over 15% per year.
According to The World Bank, BRIC countries plus South Korea and Indonesia will lead the world’s economy with more than a half of all global growth by 2025.
With forecasts of such high growth rates, it would make sense for a long term investor to include an element of exposure to emerging markets. It should be noted that emerging equity and property markets are more volatile and risky in the shorter term. Regulation of companies and emerging stock markets would be less mature than the regulation of developed markets. China is still ruled by a communist government and this allows for the potential nationalisation of private assets.
Although in nominal GDP terms China is the second largest economy on the World it is still less than half the size of the US economy. Although the emerging markets will have a large say in how the world economy develops, it is within the developed nations that the established global brands and companies are based.
An alternative strategy to directly investing in emerging markets is to invest in global companies that are following a policy of expansion in the emerging markets. The emerging market middle classes want to consume recognised global luxury brands, not local imitations.
Access
Investors can access emerging markets by investing in ETF’s through their stockbroker account, through direct stock investment (although this may be difficult and expensive) and through managed funds. Many of the funds on the market will track an emerging market index, but there are some funds where active stock selection and management is followed.