An Introduction to Emerging Markets

Last Friday we had the pleasure of hearing Dr. Gaby Berhe Nadari speak on emerging markets.

“The concept of an emerging market is dynamic, not static”

Dr. Nadari emphasised that the concept of an EM is not strictly defined but guidance exists from international organisations such as the International Monetary Fund (IMF) and the World Bank (WB). The IMF broadly describes EMs as nations on track to becoming significant players in the global economy. The WB however, categorises economies based on GNI and economic development.

Moreover, EM criteria varies between MSCI, S&P, and FTSE, reflecting the dynamic economic landscapes of constituent nations. For instance, some countries considered emerging, like the BRICS nations, have become key global players, challenging the position of developed markets (DM) and the traditional definitions of EM. While other countries, Hungary, Czech Republic, and Greece, cycle between developed, emerging and frontier status.

“it is not a question of if but when EMs overtake DMs as the leaders of enterprise, innovation and geopolitical influence”

The most attractive attribute of EMs is their growth potential. Dr. Nadari highlighted key levers, such as a rising middle class, urbanisation, and the liquidity of capital markets. Higher consumption, driven by a larger and younger population with a greater willingness to spend further bolsters growth. It is no surprise that EMs are a popular destination for investment as businesses seek to capitalise on this emerging demand.

“With great growth potential comes great volatility, that is the trade-off”

Political instability in many EMs creates uncertainty, complicating business operations and undermining investor confidence. Similarly, regulatory hurdles, characterised by complex and frequently changing legal frameworks, challenge both local and foreign enterprises.

In addition to political and legal risks, EMs are often vulnerable to economic volatility, including fluctuations in global commodity prices and exchange rates. Infrastructure deficits, particularly in rural or underdeveloped areas further hinder the ability of these markets to realise their full potential. Moreover, persistent income inequality and social unrest are also impediments to progress.

“Today the issue is not deciding whether to invest in EM but how much to invest”

Dr. Nadari explained that EMs are expected to continue playing a crucial role in global economic growth. The rise of the middle class, rapid technological advancements, and expanding urban centers make them attractive destinations for investment. However, the risks remain significant, requiring investors and businesses to carefully navigate the political and economic uncertainties inherent in these regions.