WTF Are Emerging Markets?
Emerging markets are countries that are poorer and less developed than the almighty U.S., but that are undergoing rapid economic growth and industrialization. China, Mexico, and Turkey are notable examples. They’re part of a few dozen “emerging markets” in Asia, Africa, Eastern Europe, Latin America, and the Middle East.
If you been following the news lately, you may have heard the term or read about it. We can thank Donald Trump for that, as well as his $100 billion in tariffs (or import fees) that he has imposed on goods and products from the three countries I just mentioned, among others. These countries have responded to Trump’s tariffs, as predicted, with retaliatory tariffs of their own on American-made products. There you have it: Emerging markets have been pushed into a pointless and costly trade war with a bullying White House.
These kinds of countries face a very cloudy economic outlook as Trump’s trade war (which also involves wealthy countries like Canada and Germany) runs its course. This nutty trade war has already hurt the economies and currencies of several emerging-market countries, which feel pain much more quickly and severely than developed nations.
Nobody knows what the final damage toll will be, but the story of emerging markets is one you’ll be hearing a lot more of, given that these countries will be the main drivers of future global economic and stock-market growth. What happens in these less-developed nations affects economies (and consumers like us) in the developed world of North America, Western Europe, Australia, New Zealand, Israel, Japan, Hong Kong, and Singapore
What Factors Define Emerging Markets?
In a nutshell, these countries have lots of poor, but optimistic and hard-working citizens led by politicians eager to appease them with policies and programs that generate rapid economic growth.
Workers earn lower-than-average per capita income (about $4,000 annually). Those paltry wages pressure governments to launch massive job-creating public works projects and bring in global manufacturing operations and foreign investment.
Of course, these countries are held to U.S. standards, which highlights their other problems like high unemployment rates, volatile food and energy prices, political corruption, and chaotic social change. But when it comes to economic growth, emerging-market countries have Western economies beat.
The countries’ low wages, coupled with a yearning for some stability and order, incentivize strong, fast-paced growth.
In turn, this growth attracts two kinds of investors: those who stick their money directly in the country (perhaps by building a hotel), and those (like me) who indirectly purchase shares in the stocks of companies headquartered in emerging markets.
This brings me to an important point: Export-driven emerging economies are known for producing above-average returns for investors. The U.S. manages to eke out about three-percent growth a year. Meanwhile, emerging economies can produce growth in the high single digits year after year. And naturally, that’s the tradeoff for those who don’t mind the added investment risk.
What Countries Are Classified as Emerging Markets?
In the investment world, not all emerging economies are the same. China, for example, has the world’s second-largest emerging economy, while Qatar the smallest.
Investors have a strong appetite for stocks and bonds of companies based in emerging markets, despite the risks. (They also like the respective governments’ bonds.) Taking high risks does lead to high rewards.
To make investing in developing countries more precise, the investment community has created a separate sub-category called “frontier markets.” These so-called emerging underperformers suffer from immature economies, corruption, poor natural resources, and limited opportunities for investors to make money. For example, MSCI creates a variety of indexes — or benchmarks — that track the performance of stocks in emerging-market countries. It groups developing nations as follows:
- Brazil, Chile, Colombia, Mexico, and Peru
- The Czech Republic, Greece, Hungry, and Poland
- Egypt, Qatar, Turkey, Saudi Arabia, and the United Arab Emirates
- China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Taiwan, and Thailand
- Russia and South Africa
- Argentina, Jamaica, Panama, and Trinidad & Tobago
- Croatia, Estonia, Lithuania, Kazakhstan, Romania, Serbia, Slovenia, Bosnia, Herzegovina, Bulgaria, and Ukraine
- Kenya, Mauritius, Morocco, Nigeria, and Tunisia
- Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, and Togo
- Bahrain, Jordan, Kuwait, Lebanon, Oman, and Palestine
- Bangladesh, Sri Lanka, and Vietnam
How to Invest in Emerging Markets
The best, safest, and cheapest way to bet on these countries is to invest in exchange-traded funds, or ETFs. It’s easy to purchase them online through companies like Personal Capital. Many are built around the MSCI Emerging Market Index, a benchmark of stocks of corporations in emerging economies. An ETF’s value is based mainly on the average price of each share it holds.
Thanks to MSCI’s research and number-crunching, some ETFs can slice and dice how investors want to place their bets. For example, some break down markets according to regions like West Africa or South America. Other ETFs focus exclusively on just one nation, like India. There’s even an ETF for an investment strategy endearingly called BRIC. This is an acronym for emerging economic and geopolitical heavyweights Brazil, Russia, India, and China.
Interested in gambling on frontier markets? There’s an ETF for that, too.
For investors new to emerging markets, I suggest purchasing shares in the iShares Core MSCI Emerging Markets ETF. I own the ETF as part of my individual retirement account, or IRA. It offers a simple way to own some of the biggest and most profitable internet, banking, and energy companies outside the developed world, namely in Asia. The ETF is also inexpensive, costing just $14 a year per $10,000 invested.
Why You Should Care About Emerging-Market Countries
Emerging markets are important for both consumers and investors. Consumers can thank emerging markets for all your cheap electronics and sporting gear, among a zillion other things made overseas by poorly paid factory toilers. You also can thank them for higher beer, meat, and gas prices. Don’t forget Walmart and the thousands of factory closures throughout our country. It’s a long list.
Meanwhile, for investors, emerging markets are the next gold rush. The appeal of making money is too strong to ignore. Countries with huge populations and annual economic growth rates nearing 10 percent will do that.
In China, India, and other rapidly developing nations, hundreds of millions of people are being lifted out of poverty and into the ranks of the working and middle classes. They’re becoming consumers, a trend that will ensure healthy corporate profits and hefty market gains for shareholders. These emerging consumers will be the main drivers of global economic growth going forward. That’s why we should care.
Many emerging economies (such as Argentina and Turkey) are currently hurting thanks to outside forces such as rising interest rates and Trump’s trade war, as well as internal challenges.
Investors are hurting, too. That ETF I hold in my IRA is down more than 10 percent since January. But to me and many other investors, now is the time to stay calm and invest more in emerging markets.
Billionaire investor Jeremy Grantham agrees: “Emerging markets look the best. They’ve underperformed the U.S. market by 10 percent, making it 10 percent better. Emerging looks to me like the future. The [stock] prices are cheaper. What’s not to like?”