Investing in emerging markets
“Emerging markets” refers to the economies of nations that are undergoing industrialisation as they become more developed. The share of global GDP of these countries is growing rapidly. As of 2018 the 35 markets covered by OBG accounted for around 21% of the world’s population and roughly 10% of global GDP, as represented by the “yellow slice” of the pie in Figure 1.
These are typically the most dynamic growth markets and they therefore present an exciting – high-risk, high-return – opportunity for investors. GDP within the yellow slice was initially predicted to grow by approximately 4.4% per year between 2021 and 2023; the outbreak of Covid-19, however, has stunted growth across all economies. The IMF’s World Economic Outlook Update from June 2020 predicted GDP would contract by 5% across emerging economies in 2020, excluding China, before rebounding to 4.7% growth in 2021.
There is not one absolute definition or categorisation of an emerging market – some economists employ a formula using a country’s GDP and per capita income, while other indices consider a combination of factors, including size, liquidity and market accessibility to determine whether a market is emerging, or to predict whether it will become emerging.
Emerging markets typically have a set of common characteristics. For example, they often introduce regulatory reforms to progress towards becoming a developed nation. Generally speaking, these economies are characterised by an increasing reliance on industrialisation and manufacturing – a shift that is often designed to reduce their dependence on agriculture, energy and other natural resources or raw materials. 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 for investment 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.
Recently published OBG Emerging Market reports
How emerging global markets are changing
Emerging markets have changed considerably over the last decade: financial inclusion has widened and technology penetration has increased, most notably as governments have introduced regulatory reforms to promote growth and mitigate risk.
Emerging markets lag behind more developed economies in terms of their financial sectors, in particular. Many emerging economies have also historically had low levels of financial inclusion. In recent years many 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 for greater foreign participation and often presents an opportunity for partnerships with domestic companies.
Technological development is also enabling a transformation of emerging economies. In addition to facilitating 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 reduce their reliance on cash-on-delivery payment methods.
Top emerging markets
The factors influencing 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 transport and logistics costs.
Trade blocs act as a catalyst for the movement of goods by increasing the ease of cross-border commerce and reducing associated tariffs – agreements that create these blocs are therefore an attractive path to unlock economic growth.
Economic diversification has also been an important driver of emerging market growth in recent years. Diversification generally refers to generating economic output from a wider range of sectors, such as tourism, in order to reduce reliance on traditional – and often lower-value-added – pillars of the economy like agriculture and natural resources.
More recently, amid global trade disputes and Covid-19-related disruption to logistics, diversification has proven important not only in terms of sectors, but also trade routes and supply chains. Diversification will therefore be crucial for many emerging economies in 2020 to address trade imbalances and reduce their susceptibility to economic headwinds – both externally and internally.
At the same time, 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 large and growing young population, which makes it even more crucial that they advance their education systems – which, in many cases, may lag behind global standards – in order to develop an adequately skilled workforce and prevent growth in unemployment. This can help emerging markets 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 pose the most notable risk to emerging markets are fluctuating commodity prices, currency instability and current account deficits. Ongoing additional challenges 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?
Despite the economic impacts of the Covid-19 pandemic, emerging markets will remain of interest to investors in 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 relative to more advanced economies.
Markets in Asia are set to benefit from the signing of what could become the world’s largest trade 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 54 of 55 African countries members as of June 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.
In addition to navigating the most severe economic effects of the Covid-19 pandemic, 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.
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.
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.
Curious how emerging markets are coping with Covid-19? Check out our special series of Covid-19 Economic Impact Assessments and Interviews.