Emerging Markets

When concerned with the global economy, it’s important to look beyond the powerhouses that are often in the spotlight, and to look at the various emerging markets operating just off stage.

Today’s biggest emerging markets (BEMs), include Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey. Not as big, but still making impact, are Egypt, Iran, Nigeria, Pakistan, Russia, Saudi Arabia, Taiwan, and Thailand.

These countries are likely to influence the world markets in the short- and long-term. Read on to discover the best ways to profit from the meteoric rise.

What does it mean, an emerging market?

An emerging market economy is an economy that is progressing toward becoming advanced. This can be seen by the level of liquidity in local debt, equity markets, as well as the existence of a market exchange and a regulatory body.

An emerging market has some of the characteristics of a developed market but does not meet enough standards to be classified as one. These include countries that may have been developed markets in the past or are truly in the running to become one in the future.

How do you spot one? Well, they have a few characteristics.

Firstly, they tend to have a lower-than-average per capita income.

The World Bank defines developing countries as those with either lower or lower middle per capita income of less than US$4,035. Low income is the first important criteria because it provides an incentive for the country to pursue the second identifying characteristic — rapid growth.

Rapid social change then leads to the third characteristic — high volatility. This can come from natural disasters, external price shocks, and domestic price instability.

Such traditional economies that are reliant on agriculture are especially vulnerable to natural disasters, such as earthquakes, tsunamis and droughts.

Emerging markets can also get caught in the wind of volatile currency swings, especially those using the dollar. They are also susceptible to market swings in commodities, such as oil or food. Why? It’s because they don’t have enough power to control or influence these movements.

But if they are successful, rapid growth in an emerging market can also lead to the final, and most exciting characteristic — a higher than average return for investors.

Many developing countries focus on an export-driven strategy. Such a demand isn’t a priority back home, so they produce lower-cost consumer goods to deliver to the developed world.

The companies that fuel this growth profit the most, equalling in higher stock prices for their investors, and a higher return on bonds to cover the additional risk of emerging market companies.

You can see, then, why emerging markets are so attractive to investors.

But be warned — not all emerging markets are good investments.

When doing your research, you need to pick your investments carefully.

When looking at emerging markets, you should only pick markets that have little debt and a growing labour market.

Want to know more? Well, read on. At Money Morning, we provide you with all the latest news and insights into this area, to keep you well informed and in front of the masses.

Bond Yield Breakout

Here’s a general gist of the headlines over the past week or two… Global capital is flowing out of emerging markets. Bond prices in this sector are falling (meaning yields are rising) along with currencies and equity markets. Argentina has had to jack interest rates up to 40% to protect its currency, and then they still had to bring in the IMF for a bailout package.

Should You Be Keeping an Eye on Emerging Markets?

Remember back in 2007 when stock markets peaked out in October? Oil, on the other hand, continued surging higher. It peaked in July 2008, when it was clear the US financial system was in all sorts of trouble. If the global economy is slowing down, look to equity markets for clues, not the oil price.
Money Morning Australia