Emerging markets are countries that do not yet have fully developed financial markets and economies. This is in comparison with developed countries or advanced economies that offer a more stable place for investment and commerce.
Emerging markets tend to have more systemic risk than developed markets, yet they can also have rapid growth rates that result in a high return on investments based in those countries. This article explores the definition of an emerging market, along with some examples of emerging economies and their offerings within the financial markets, and how you can trade on emerging markets on our Next Generation trading platform.
There is no single definition for emerging markets, and the term itself could be misleading because “emerging” indicates that a country is growing and will potentially become a developed nation. This may not be the case.
Emerging market economies are seen as different to developed countries based on the size and stability of their financial markets and economies. Economic indicators are used to predict how much corruption there is in the country; how stable the political situation is; global trade and economic variables (such as long-term inflation rates); employment rates and standard of living, as well as the country’s financial and physical infrastructure.
An emerging market may rank low on any one of these criteria, but not necessarily all. As opposed to considering it in absolute turns, it could be viewed as a ranking system, where the countries that rank highest are considered developed, while the ones that rank low are considered emerging. Some emerging markets have better economies and infrastructure than others.
From a trading perspective, emerging markets are simply another place to seek out opportunities. Emerging economies tend to be more volatile because of instabilities in the financial or political climate, but these can also offer high rates of returns on associated investments.
Traders can seek out various opportunities, such as investing in individual companies within an emerging market, buying basket stocks (such as an exchange-traded fund (ETF) or a stock index) from a specific country or group of countries, trading in the currencies of an emerging market, or trading the corporate or government bonds available in these markets.
For example, when browsing the Product Library on our online trading platform, you can filter your selection by market type, sub-type (where you can select emerging economies), region or country (where you can select emerging countries, such as China and India, for example).
Thinking of a scale, advanced economies are at the top, emerging market economies are below, then frontier markets sit below emerging markets.
Frontier markets are in the early stages of developing a financial system and economy, eliminating corruption and finding a stable political situation. There is often little in the way of an economy and the standard of living may be low for much of the population. These markets are typically harder to invest in because of the lack of assessable financial markets, such as stocks, bonds and currencies. Emerging economies — while the sophistication and robustness of the infrastructure within them varies — typically have one or multiple financial markets that are of interest to traders.
Different organisations have different criteria for what defines an emerging economy, therefore, there is not a definitive list. Compiling a cross-section of several lists puts the total between 30 and 50 countries. Below are some examples of emerging markets, along with assets that drive each economy, most notably within the commodities market.
Many scholars seem to think China is not yet fully developed as of 2021, but that it is beyond other emerging market economies in terms of rankings. Investing in the Chinese economy is easily accessible through technology stocks and ETFs, the Chinese Yuan (CNH) is a popularly-traded offshore currency, and China is a widely followed global market due to its size.
That said, average per-capita income in the country and ecological protection remains low. The laws are arguably lax or not followed when it comes to product safety and copyrighting, to name a few issues, strengthening the debate of whether it is a developed or emerging economy.
There is a wide range of financial products that you can trade related to emerging markets countries. As shown in the above image, our platform offers more than 130 currencies, indices, bonds, equities and ETFs to trade within emerging economies. Open an account to explore trading on the below instruments.
To trade emerging market bonds, traders and investors typically use an ETF that purchases (or sells) multiple bonds to create a portfolio. Below are some of the largest and most popular emerging economy bonds on our platform from iShares, Vanguard and SPDR.
Directly trading individual bonds in an emerging market can be trickier, as this requires converting money to the country’s currency and having a trading account within that country, or with a broker that allows you to make trades in the specific country. This is why ETF trading is often an easier option in terms of accessibility.
Foreign exchange is one of the largest and most liquid financial market worldwide. We offer more than 330 currency pairs on our platform, 120 of which are classified as emerging market currencies. The below image shows a sample of currencies available, including the Mexican Peso (MXN), Polish Zloty (PLN) and Turkish Lira (TRY).
To trade emerging market equities or shares, traders often consider an ETF that purchases or sells multiple stocks in one, or several, emerging economies. Some of our emerging market equity indexes are displayed below.
In the same way as emerging market bonds, directly buying individual equities in an emerging economy can be more challenging. This is often carried out through a broker in the specific country in the corresponding currency.
Indices are a way to trade multiple stocks within an emerging market in one transaction. For example, a trader could open a position on whether they think that the China A50 index will rise or fall in value. The index tracks its constituent stocks, meaning that depending on how the individual stocks perform, this will provide a profit or loss to the trader. Over time, the indices tend to track the overall economic growth of the country as well.
ETFs track the performance of emerging economy shares by tracking individual countries or country groups. They do this by buying individual stocks that meet the ETF’s criteria. The ETF is basically a portfolio, the performance of which is based on the shares it holds. ETF trading charges a fee for managing the portfolio, called the expense ratio. This fee varies by fund.
Some of the emerging market ETFs that are available on our CFD trading platform are described below:
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There are two main benefits of trading within emerging markets: diversification and return potential. Individual emerging markets and developed markets may not always move in the same direction, as some emerging economies may be unaffected by what is occurring in developed economies.
In terms of asset allocation, investors could dedicate some funds to emerging markets to reap the diversification benefit. For further portfolio diversification, investors may also want to consider adding a world index or global ETF that contain both developed and emerging market shares.
Just as in developed countries, there are profit opportunities in emerging economies, mainly due to the economic growth rates of the country. However, the downside is that emerging market countries are typically considered riskier. Their economies are smaller and often more fragile. In addition, while emerging market currencies are directly accessible, many shares and bonds are not directly accessible to retail traders unless you are trading on indices or exchange-traded funds.
Undervalued and overvalued may mean different things to investors with different time horizons. For example, short-term traders may not worry if a market is overvalued; if something is going up, they may want to be involved and potentially capture some profit. A longer-term investor may get scared away when things are overvalued, preferring to buy when it is undervalued.
One way to assess if a country’s stock market(s) is overvalued is to take the market cap of all stocks in that country then divide it by gross domestic product (GDP) for that country. This is commonly called the “Buffett Indicator”, which is based on Warren Buffett’s theory that if market capitalisation is too high relative to GDP, the stock market may be overheated. The ratio will vary by country. The more overvalued, the smaller future returns are likely to be. Learn more about fundamental analysis ratios.
The number of opportunities available to traders and investors are unlimited when emerging market countries are included. There are more than 130 emerging market instruments available to trade on using spread bets and CFDs within our Next Generation trading platform, as well as more than 50 emerging market ETFs listed on the US Stock Market that are also accessible via the Product Library.
In summary, trading on emerging markets provides diversification and the potential for profit, as with all trades, but it can be accompanied by high risk and volatility. Clients of CMC Markets can access bonds, currencies, shares, indices and ETFs through spread betting and CFD trading, so there is an emerging economy product for any style of trader or investor.
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