Emerging markets
Countries whose economies and financial markets are developing but are not yet classed as fully developed by the major index providers.
Also called: emerging economies · EM
The label is used by index providers such as MSCI, FTSE Russell and S&P Dow Jones Indices, each of which classifies countries as developed, emerging or frontier. Their criteria include not only income levels and economic size but also how open and well functioning the stock market is for foreign investors: the ease of moving money in and out, market liquidity, and the reliability of regulation and settlement. China, India and Brazil are standard examples. Classifications are reviewed regularly, so a country can be promoted or demoted, and the providers do not always agree.
Investors buy emerging markets for faster expected economic growth, a different mix of industries and diversification away from developed markets. The risks are higher: greater volatility, currency swings, weaker corporate governance and investor protection, political intervention, capital controls, and higher trading and fund costs. Faster economic growth has not reliably translated into higher stock returns, since growth is often already priced in or captured by new share issues rather than by existing shareholders. In global index funds weighted by market capitalisation, emerging markets make up a much smaller share than their share of world economic output.
General education, not personal financial, tax or legal advice.
Guides that go deeper
Where emerging markets comes up in practice.
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Personal Finance & RetirementHow Inflation Quietly Rewrites a Retirement Plan
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Legendary InvestorsSir John Templeton: Buying at the Point of Maximum Pessimism
Templeton made his name buying stocks nobody else wanted — starting with a bet on the entire European stock market as the continent headed into World War II.