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What is Emerging Markets?

Definition of Emerging Markets

Emerging markets is a term used by investors to signify a developing country's market that displays signs of a developed market, but currently falls short of some of the necessary standards to be classified as such. Emerging markets are typically associated with higher risk due to the unpredictable nature of financial sector development. In broad terms, all emerging markets can be regarded as the ultimate convergence trade, in the same way that, for example, the valuations of eastern European countries in line for EU-accession gradually began to align (equities up, bond yields down, currencies strengthening) with those of EU countries the nearer to the accession they drew. How far off an emerging market is from having converged into being a developed market, of course, can be seen most obviously in its credit rating. Also, though, any gaps between an emerging market becoming a developed one can be seen in the former's ability and willingness to meet the basic criteria of a fully-developed investment destination: first, a sustainable fiscal policy; second, a sound balance of payments profile; and, third, a solid financial and political system. In the past few years, there has been an emergence of those emerging markets that can be regarded as further along the development path than all of the others and thus invest-able in a marginally risk-off environment. Prior to the onset of the global financial crisis in 2007/2008, this group was probably best symbolised by the BRIC group, comprised of Brazil, Russia, India and China, which led the way on emerging market valuations by dint principally of their projected growth paths. These were followed by the Next-11 (Mexico, Indonesia, South Korea, Turkey, Bangladesh, Egypt, Nigeria, Pakistan, the Philippines, Vietnam and Iran), of which the first four of the grouping had consistently outperformed the remainder, earning the sobriquet of the 'MIST' countries along the way.
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