An emerging market is a country that is recognized as having a significant GDP growth (as well as a large global contribution to production), an increase in the size of the middle class, and a potential for rapid growth and investment.
Emerging markets used to be a somewhat obscure niche of the international investing world. These rapidly developing countries play an increasingly important role in the global economic system. In fact, more than half of global economic growth is now driven by emerging markets.
The BRIC (Brazil, Russia, India, China) nations alone account for roughly 30% of production globally. These countries have offered some spectacular returns over time. Other emerging markets are Mexico, South Korea, Colombia, Indonesia, Egypt, Turkey, and South Africa.
Brazil has been a significant driver of growth in Latin America as the largest economy. The country is involved in recovering from the worst recession in its history. This recovery has resulted in a 1.1% increase in GDP growth. The inflation rate has been reduced to 2.13%.
Investors interested in betting on a rebound in Brazil have a wide range of options, ranging from exchange-traded funds to several large companies like oil producer Petrobras, which has a New York Stock Exchange-listed ADR.
The largest Brazil ETFs include:
- iShares MSCI Brazil Capped ETF (EWZ)
- Direxion Daily Brazil Bull 2X Shares (BRZU)
- iShares MSCI Brazil Small-Cap ETF (EWZS)
Some ADFs for Brazil are:
- Banco Bradesco S.A. (BBD)
- Itaú Unibanco Holding (ITUB)
- Gerdau S.A. (GGB)
Russia's transformation from communism to an embrace of capitalism has had a staggering impact on its economy. A global boom in commodities had helped Russia's stock market become one of the world's top performers until a downturn in 2015.
The Russian economy began a recovery in 2017, experiencing a 1.5% growth in GDP. However, Russia's invasion of Ukraine in February 2022 sent the Russian economy into a tailspin. The country was dealt heavy sanctions by the international community.
In compliance with the economic sanctions over Russia's invasion of Ukraine, BlackRock has stopped issuing new shares of the iShares MSCI Russia ETF (ERUS).
The largest Russian ETFs include:
- Van Eck Vectors Russia ETF (RSX)
- iShares MSCI Russia ETF (ERUS)
- Franklin FTSE Russia ETF (FLRU)
India's economic growth rate is close to that of China—6.7% to 6.9% (2017), respectively. Investors in India have also seen some upside (positive returns) over the past several years.
The BSE Sensex index (a measure of continuously performing stocks) has come close to doubling since 2016, indicating good growth and confidence by investors.
India's large English-speaking population and technology-savvy firms such as Infosys Technologies have been molding India into an emerging market.
The largest India ETFs include:
- iShares MSCI India ETF (INDA)
- WisdomTree India Earnings Fund (EPI)
- iShares India 50 ETF (INDY)
The iShares China Large-Cap ETF is one exchange-traded fund that invests in Chinese stocks. Investors can participate in China through mutual funds, ETFs, and Chinese companies with listings on Nasdaq and the New York Stock Exchange.
The largest China ETFs include:
- Global X MSCI China Financials ETF (CHIX)
- Global X MSCI China Utilities ETF (CHIU)
- Xtrackers Harvest CSI 500 China-A Shares Small Cap Fund (ASHS)
The Next 11 Economies
Jim O'Neill—the man responsible for coining the BRIC acronym to represent emerging markets—also coined the Next 11 to represent the world economies with the potential to become among the world's largest during this century.
The Next 11 list includes Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam.
These are frontier markets that are risky by nature. Since these countries are developing, they are unstable and experience marketwide volatility.
There are many developing countries that fall outside of the emerging market category. Those that are developing, but are not yet at the level for emerging are called frontier markets. Some of these countries are Croatia, Kenya, Nigeria, Bangladesh, and Vietnam.
Frontier markets are a risk-heavy investment and should be considered only if you don't mind the amount of risk that comes with them. These countries usually are commodity heavy, not transparent and are hard to find information on.
Many of these countries are also politically unstable, as powers within the countries struggle to control commodities and resources. The returns could be significant, but investing in a frontier economy should only be an option for those with large, diverse portfolios that can handle the risk.
Emerging markets have been volatile over the past couple of years, after experiencing some tremendous success in the earlier part of the decade. The BRIC economies—Brazil, Russia, India, and China—are among the most popular emerging markets. In general, investors may want to consider allocating a portion of their portfolio to these markets, although there are some risks involved.
Frequently Asked Questions (FAQs)
How has outsourcing helped developing and emerging economies?
Outsourcing jobs increases investment in countries where the jobs go. These are often developing or emerging economies, because relatively underdeveloped economies allow U.S. companies to save on wages and other supply costs. As companies move jobs abroad, workers in developing and emerging countries get new opportunities to earn an income, they buy more things than they were buying before, and their local economy grows.
Where are the majority emerging economies found?
As of 2022, Asian nations made up the majority of the MSCI Emerging Markets Index. The largest component is China (30.78%), followed by Taiwan (15.99%), India (12.81%), and South Korea (12.73%).