An emerging market is a fancy term that many fund managers across the world pitch to their prospective as well as current investors. Emerging markets is the term used in the context of economics, emerging markets in simple words refer to those economies which are not developed economies but are growing rapidly in terms of industrialization, rise in per capita income, stock market outperformance, employment opportunities and so on. Emerging markets provide wonderful opportunities for earning double-digit returns as far as investors are concerned and that is the reason why one should look at some of the important features of emerging markets –
Emerging Market Characteristics
Outperforming Economic Growth
The first and foremost feature of an emerging market is that the economic growth of the emerging market outperforms the economic growth of developed economies by a substantial margin. Hence for example if the GDP of a developed nation is hovering around 2 to 3 percent then the GDP of the emerging market will be somewhere between 8 to 12 percent. In simple words, the outperformance of economic growth is often the major factor that differentiates between emerging economies and developing or developed economies.
Low Cost for Factor of Production
Another important characteristic of emerging markets is that these economies enjoy low costs for the factor of production because in the case of these markets labor is cheap due to high population, and interest rates are also lower thus enabling companies to have capital at low-interest rates. Hence for example if in the case of developed economies the labor is charging $20 to $25 for one hour then in the case of emerging markets labor is available at $3 to $5 per hour thus providing low-cost benefit to emerging markets.
Currency Volatility
Currency volatility is another important feature of emerging markets because in the case of emerging markets there is plenty of foreign direct investment and at any signs of global turmoil these foreign institutional investors take their money out of emerging markets thus putting pressure on the currency of emerging markets. In simple words, if you are thinking of investing in emerging markets then currency risk is an additional risk apart from other market risks associated with the investment.
Growing Middle Class
The growing middle class is another major feature of emerging markets because as the economy booms there is a trickle-down effect that leads to a rise in the income of the people and thus there is a transition where people having low income begin to earn a good income and thus enter the middle class.
Gap Between Rich and Poor
In the case of emerging markets, there is a big gap between the rich and poor as the distribution of income is not uniform and few companies or individuals have a majority of the wealth of the country thus leaving the majority of the population poor. In simple words, although there is economic growth but the benefit of that economic growth is limited to certain sections of the society leaving the poor section of society poorer.
Urbanization
Another important feature of emerging markets is the growing urbanization in the sense that more and more people began to shift from rural areas to urban areas in search of better job opportunities and living standards. In simple words emerging markets see the development of cities or an increase in the population of metro cities due to the influx of rural population into the urban population.
Industries and Services Sector takes Center Stage
In the case of emerging markets, it is the industrial sector and services sector that grows rapidly as compared to the agriculture sector. Hence whether it’s employment opportunities or growth rate or investment opportunities it is the industrial sector and service sector which takes a lead over the agriculture sector.
As one can see from the above that emerging market has some important characteristics and any investor looking to invest in emerging markets should carefully read the above characteristics and then only should invest in emerging markets as not all emerging markets guarantee double-digit returns and any mistake can lead to huge losses for the investor.