Investing in emerging markets
Emerging markets refers to the economies of nations that are undergoing industrialisation as they move towards becoming more developed. The share of global GDP of these countries is growing rapidly. As of 2018 the 35 markets covered by OBG included around 21% of the population and accounted for around 10% of global GDP, as represented by the “yellow slice” of the pie in Figure 1. These are typically the most dynamic markets and they therefore present an exciting – high-risk, high-return – opportunity for investors. GDP within the OBG35 markets is predicted to grow by approximately 4.4% each year between 2021 and 2023. There is not one absolute definition nor categorisation of an emerging market – although some economists employ a formula using a country’s GDP and per capita income, while some indices consider a combination of factors including size, liquidity measurements and market accessibility to determine whether a market is emerging, or predict whether it will become emerging.
Emerging markets typically have a set of common characteristics. They often introduce regulatory reforms to progress towards becoming a developed nation. Such economies are characterised by an increasing reliance on industrialisation and manufacturing, which should help reduce their dependence on the agriculture and energy/resources sectors. These markets often focus on increasing exports and reducing imports to create a more favourable balance of trade and ensure food security. Many emerging economies have crafted national development plans to guide their progress towards these aims. Government reforms may liberalise, diversify and formalise a frontier market sufficiently for it to gain emerging market status.
Potential investors can use OBG materials to identify the best sectors to invest in emerging markets. We provide on-the-ground business intelligence, with insights from both public sector and private sector sources. Researchers and investors can track investment opportunities both by market and by industry/sector. Relying on global indices is not enough; the best way to take advantage of the opportunities in emerging markets is through reliable business intelligence, such as OBG materials.
How emerging global markets are changing
Emerging markets have changed considerably in the last decade: Financial inclusion has widened and technology penetration has increased, most notably as governments have introduced regulatory reforms across the economy in order to promote growth and mitigate risk.
Emerging markets lag behind more developed economies in terms of their financial sector, in particular. Many emerging economies have also had historically low levels of financial inclusion. In recent years governments in emerging markets have liberalised a range of sectors and introduced a host of reforms, including regulations surrounding financial services. For example, Argentina regained emerging market status in 2018 after its government removed foreign exchange restrictions and capital controls, eliminated cash reserves and monthly repatriation limits in the equity market, and abolished lock-up periods for investments.
Globally, foreign ownership restrictions have been relaxed across a host of sectors, including real estate, banking and education, and many governments have targeted improvements in the ease of doing business. This allows greater foreign participation and often presents an opportunity for partnerships with domestic companies.
Technological development is enabling a transformation of emerging economies. In addition to enabling entrepreneurship and innovation, increasing mobile penetration and app-based payment services have widened financial inclusion, which benefits more sectors than just financial services. For example, there is considerable potential for the growth of e-commerce in emerging economies, particularly as these economies begin to move away from cash and thus reduce their reliance on cash-on-delivery payment methods.
Top emerging markets
The factors that influence growth in emerging markets have changed in the 21st century. Crucially, trade has been a key driver of emerging market growth in recent years, aided by falling manufacturing costs. This is set to continue, against a backdrop of reduced transportation and logistics costs. Trading blocs act as a catalyst for the movement of goods by increasing the ease of inter-country commerce and reducing associated tariffs – and these blocs are therefore a key factor that can drive economic growth.
Economic diversification has also been another key factor in emerging market growth in recent years. This diversification generally refers to increasing revenue from a wider range of sectors, such as tourism, in order to reduce reliance on traditional pillars of the economy, such as agriculture and natural resources. More recently, amid global trade disputes, diversification is important not only in terms of sectors but also trade routes and supply chains. Diversification will thus be key for many emerging economies in 2020 to address their trade imbalances and reduce their susceptibility to economic headwinds – both externally and internally.
Rapid technological innovation is disrupting traditional business models, allowing emerging markets to leapfrog established development stages, and placing increased focus on upskilling the labour force in emerging economies. As part of the so-called Fourth Industrial Revolution, which is based on the application of new digital and automated technologies in production processes and service delivery, the development of human capital has been prioritised. Many emerging markets are characterised by a growing young population, which makes it even more crucial that they advance their education system – which, in many cases, may lag behind global standards – to ensure an adequately skilled workforce and prevent rising unemployment. This can help emerging markets to maintain economic expansion by sustaining productivity, if supported by a pro-growth agenda and innovation to encourage investment inflows and spending.
Among the factors that most notably pose a risk to emerging markets are fluctuating commodity prices, currency stability and current account deficits. Ongoing additional challenges to emerging market growth may include low ease of doing business, insufficient domestic regulation – which may lead to questions surrounding quality and reliability – or the potential for socio-political instability.
Emerging global markets for 2020
Why are emerging markets of interest to investors for 2020?
Emerging markets are of interest to investors for 2020 and beyond because of the high-reward potential offered by their rapid development. The economic agenda is often prioritised by government bodies in these countries. Market opportunities are presented by their growing young demographic, increasing urbanisation and rising household spending power. Rapid technological development leaves the door open for these emerging economies to leapfrog development stages and make up lost ground on more advanced economies in 2020.
Markets in Asia are set to benefit from the signing of what could become the world’s largest trading bloc in 2020, the Regional Comprehensive Economic Partnership. Meanwhile, in Africa, the African Continental Free Trade Area comprises the globe’s largest bloc at present, with 52 of 55 African countries members as of January 2020, and has encouraged regional trade since 2019.
Which emerging markets are growing the fastest?
The emerging markets that are growing the fastest depend to a large extent on demographic advantages, and government priorities and regulation. This means the most promising emerging markets for 2020 will include those where high-potential sectors have been clearly identified by policymakers and an ecosystem has been created to allow them to flourish – which makes emerging economies a particularly exciting investment opportunity for investors seeking to diversify their portfolio. Typical examples of high-growth sectors in emerging economies include e-commerce in Indonesia, which has benefitted from a large domestic market, improvements in infrastructure and increases in discretionary spending power; and the automotive and aerospace industries in Mexico, which have been bolstered by favourable regulations and trade deals. here.
How can you track investment opportunities in emerging markets?
You can explore each of the markets OBG covers by sector here.
Where can you find resources for following emerging markets?
Read our internationally acclaimed intelligence on regions that are shaping the future balance of economic power, and explore a range videos with key players in emerging economies.
Visit the MCSI Emerging Markets Index to explore equity market performance in global emerging markets. This is often used as a performance benchmark for mutual funds and market growth.
See this analysis to learn more about why attractive opportunities exist in economies not yet included in the indices.
Read about risk and reward in emerging markets funds.
We provide emerging market news and views, interviews with key public and private sector players in emerging economies, and an emerging markets blog.
This piece evaluates the role that a pro-growth agenda and productive companies have historically played in propelling the best-performing emerging markets.
As economies compete to increase their share of the global economic pie, special tax incentives aimed at capturing investment have emerged.
Kenya’s story outlines how the assistance of development banks and international funds can boost investor appeal and enable internal economic growth despite internal headwinds.
Learn more about the partnerships we offer to universities and our advisory services.