The term “Emerging Market” refers to countries with emerging economies that have significant growth potential. Typically, emerging markets are characterized by rapid economic growth, high urbanization, large populations, and ongoing social and political changes.
Emerging market countries often have thriving industrial and small business sectors, abundant natural resources, and relatively young populations. Some examples of emerging market countries that are commonly mentioned include Brazil, Russia, India, China (known as the BRIC), as well as countries in the Southeast Asian region such as Indonesia, Malaysia, Thailand and Vietnam.
Emerging markets are also often identified with higher risks than mature markets, including political risks, currency fluctuations, volatile regulations, and economic uncertainties. However, developing markets also offer attractive investment opportunities due to their high growth potential.
Factors That Make Countries Emerging Markets
There are several factors that can cause a country to become an emerging market. Some of the main factors that can influence a country’s developing market status are as follows:
1. Economic Growth: A high rate of economic growth is one of the important factors in placing a country in the developing market category. Strong economic growth indicates a structural change and a sustainable increase in economic activity.
2. Income per Capita: While not the sole determining factor, low or moderate income per capita is often a feature of developing market countries. Low per capita income reflects the potential for significant economic growth if this income can be increased.
3. Human Development Index (HDI): The Human Development Index is a composite measure that includes aspects such as life expectancy, education, and income. Countries with HDI that are still at the middle or low level tend to be classified as developing markets.
4. Infrastructure and Resources: The availability of adequate infrastructure, including transportation, energy and telecommunications, as well as natural resource wealth such as oil, gas or minerals, can be factors that support economic growth and developing market status.
5. Political Stability: Stable political conditions and consistent policies play an important role in attracting investment and driving economic growth. Countries with good political stability tend to be more attractive to investors and can become emerging markets.
In general, there are no standard or firm criteria for determining developing market status. However, organizations such as the World Bank and rating agencies such as MSCI (Morgan Stanley Capital International) often use several of the factors listed above to classify countries as developing markets.
Investment Risks in Emerging Markets
Investing in emerging markets involves risks that investors need to be aware of. Some of the main risks associated with investing in emerging markets include:
1. Political Risk: Emerging markets often have less political stability and higher risk of policy changes. Changes in government, corruption, legal instability, and political conflict can affect the investment environment. Investors can reduce this risk by understanding and following the political developments in the country, adopting a portfolio diversification approach, and conducting a comprehensive risk analysis before making an investment decision.
2. Currency Risk: Fluctuations in currency exchange rates can affect investment returns. Sudden and significant changes in local currency values ​​can negatively impact an investor’s portfolio. The use of hedging instruments or the allocation of diversified assets in different currencies can help reduce currency risk.
3. Liquidity Risk: Emerging markets may have less liquidity than mature markets. This can make it difficult for investors to sell or buy assets at the desired price. Investors should consider the liquidity of the assets they choose and ensure they have a sound exit strategy.
4. Regulatory Risk: Changes in government regulation or policy could affect investment in emerging markets. Unstable or inconsistent regulations can create uncertainty for investors. Conducting policy analysis and understanding the legal framework in the country can help investors manage regulatory risk.
5. Market and Financial Risks: Emerging markets can be more susceptible to sudden economic and financial fluctuations. Risks related to changes in interest rates, stock market volatility, global economic conditions, and macroeconomic uncertainties can affect investment performance in developing markets. Portfolio diversification, active monitoring and careful risk analysis can help reduce the impact of market and financial risks.
To mitigate these risks, investors can adopt a cautious approach, conduct thorough research on a particular country, understand the risk factors involved, and consider a diversified portfolio with a balanced allocation of assets across different markets. Consultation with a financial professional or financial planner can also assist in managing risk and making better investment decisions in emerging markets.
The Influence of Technological Developments on Emerging Markets
Technological developments have a significant impact on emerging markets. Following are some of the specific trends and opportunities seen in the relationship between technology and emerging markets:
1. Internet Access and Mobile Penetration: Technology has played an important role in expanding internet access and mobile penetration in developing markets. This creates new opportunities in the digital sector such as e-commerce, fintech, edutech, and application-based services that can support economic growth, financial inclusion, and access to information.
2. Fintech and Inclusive Finance: In emerging markets, technology has facilitated the development of fintech, including digital banking services, mobile-based money transfers, and peer-to-peer lending. Inclusive finance initiatives supported by technology help overcome limitations in access to traditional financial services and provide wider access to people in remote or underserved areas.
3. Technology Driven Agriculture: Agriculture is an important sector in many developing markets. Technologies such as sensors, data analytics and digital agriculture are playing a role in increasing efficiency, better production, resource management and monitoring of soil and weather conditions. Innovations such as smart farming and drone-based farming are helping farmers increase crop yields and reduce the risk of losses.
4. Renewable Energy and Infrastructure: Several developing markets are already leveraging renewable energy technologies, such as solar and wind power, to address energy security and environmental impact challenges. Investments in technology-enabled infrastructure, such as smart grids and digital-driven transportation, can also increase efficiency and connectivity in emerging markets.
5. Digitizing the Service Sector: Technology has also transformed the service sector in emerging markets. For example, telemedicine-based healthcare allows access to remote medical care, and edutech supports online-based education and training. The digitalization of the service sector opens up opportunities for innovation, equal access and an increase in the quality of life.
However, it is important to remember that technological developments can also strengthen the digital divide between urban and rural areas and between different groups of people. Therefore, it is important for developing market countries to ensure that technology is used in an inclusive manner and provides benefits for all levels of society.
