An emerging market economy refers to an economy — usually the economy of a country in the developing world — experiencing steady progression. These economies are increasingly prominent worldwide due to international exchange, foreign and domestic investments, and higher liquidity rates.
Some examples of emerging markets in Asia include China, Thailand and South Korea. Examples in Latin America include Mexico, Brazil, Peru, and Argentina.
Read on to learn more about what constitutes an emerging market and to see a list of real-world examples.
What are emerging markets?
An emerging market, or an emerging economy, is an economy undergoing a shift from a pre-industrial state toward modernization.
These economies have much potential and can reward foreign investors with good profits due to constant growth. A country’s Gross Domestic Product (GDP) measures this progression.
Achieving industrialization is another significant aspect associated with budding markets. Extraction and agrarian-based endeavors take a back seat in favor of physical manufacturing and trade and domestic pursuits like encouraging property ownership and sales.
However, these changes can also be risky since these markets aren’t fully stable yet. Political strife, currency value fluctuations, and illiquid assets are a few factors affecting these economies.
Developed market economies often have strict regulations regarding infrastructure, trading stocks, and product development. The United States and Japan are two countries that lead the global economy in these types of reforms. Continual adjustments to economic sectors are a staple of a fully established market that many emerging economies work to achieve.
Just as economies can be “upgraded” to a developed economy, such as in the case of Argentina, “downgrading” is also possible if a country experiences severe problems. Greece is the most prevalent example of a downgraded economy.
Main characteristics and how they work
The term “emerging economy” is interpreted in a variety of ways. The following are the most widely recognized attributes of most emerging economies.
Low-income levels are a significant incentive to drive market progression in order to create more jobs, thereby also enabling consumers to spend more.
Volatility refers to the rate at which prices change. This phenomenon often applies to the stock market and any potential returns. Natural disasters, price shocks, and domestic policy instability can cause high volatility.
Currency and commodities are also susceptible to this phenomenon. Emerging markets aren’t inherently powerful enough to have any true influence on these events. This could lead to the presence of a bear market or a drop in stock prices.
Bear markets are associated with economic recessions. There can be shortages in oil, gas, and food, which leads to inflation. In extreme cases, riots or regime changes can take place.
High potential returns
Emerging markets require a lot of capital. This can be a wonderful opportunity for foreign investors.
When a collective decides to invest the majority of its assets in securities, commodities, stocks, and bones in the economy of developing countries, they create an emerging market fund. Emerging market funds can be mutual funds or ETFs, and help diversify one’s financial portfolio.
High growth increases competition and can yield higher returns for those who participate in international investing, especially if these parties invest in exports since goods produced at home are worth more in emerging markets. For such an economy to appeal to investors, they must have low debt, an expanding labor force, and a stable government. Otherwise, taking such a monetary risk may lead to a greater loss in profits.
The major emerging markets
Over the years, each of the following countries has worked to move away from traditional markets. Following in the footsteps of most Westernized nations, these counties are striving for industrialization and prominence in the global arena.
Since 2010, Brazil’s GDP has grown a total of 8 percent. Fluctuations have occurred due to political uncertainty and trade sanctions. However, Brazilians have since managed to initiate further progress in the country, in the form of increasing income levels and addressing widespread poverty. The exchange of commodities like soybeans and coffee has boosted Brazil’s foreign investments.
Government spending is the main factor sparking economic growth in China. The economy has grown a total of 10 percent since major economic reforms were approved in 1978. China’s GDP is still climbing thanks to technological exports, expanding manufacturing, and using resources which, in turn, encourage more spending and drive businesses.
The slow but continual shift from a communist to a capitalist Russia has been occurring since 1991. These efforts have helped Russia grow economically. The nation saw a spike in oil prices thanks to increased demand, and the boost has been positive for the country’s overall economy.
As the political antagonism between Russia and other advanced economic nation states like the United States, Canada, and Japan decreases, the Russian economy should continue to grow.
Once again, political vulnerability and economic policy changes have led to economic instability in India. Nevertheless, India is emphasizing long-term growth by stepping up its manufacturing, offering more national services, and focusing on technological advancements. India is one of the biggest emerging economies today.
South Africa’s emerging economy has seen multiple booms and busts over the past few decades. Mining for natural resources is the economy’s primary commodity, but this industry can be pretty volatile. Fortunately, the nation’s GDP has been rising. Unfortunately, however, climbing crime and unemployment rates have also hindered the country's growth.
The bottom line
An emerging market refers to a country taking steps to boost its productive abilities and achieve a higher quality of life for its citizens. Rapid growth and high potential are two of the main characteristics of such an economy. Consequently, vulnerability and risky investments are also notable traits of an emerging market.
Investing in emerging economies is an activity that occurs on a national level. But economies are built from the ground up, and a country’s citizens’ daily participation is just as important as these grander ventures, from buying and selling stocks of their own to making purchases with a credit card, to setting up a will or a trust.
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