Investors are always looking for the next big thing, and it makes sense that many of them are flocking to emerging markets. These developing economies have attractive valuations, and the promise of their growth can translate to significant earnings. Today we’ll discuss emerging markets in detail and provide some of the most notable examples.
What are emerging markets?
Emerging markets are countries that are undergoing rapid industrialization and economic growth and, as a result, are getting more and more enmeshed in the global economy. They often present significant growth potential and exciting investment opportunities but come with commensurate risks compared to older, more established markets and economies.
Advantages of emerging markets
Investing in an emerging market can greatly enhance your earning potential. Let’s take a look at their positive aspects.
Attractive regulations and incentives
Emerging markets recognize the importance of attracting foreign investors to stimulate economic growth and development. They implement regulatory reforms that create a favorable investment climate to achieve this. These reforms encompass various areas such as business regulations, tax incentives, intellectual property rights (IPR) protection, foreign ownership restrictions, transparency and anti-corruption measures, infrastructure development, and investor protection.
Emerging markets streamline business regulations, simplify bureaucratic procedures, and establish investor-friendly legal frameworks. They offer tax breaks, exemptions, and reductions to incentivize foreign investment.
Robust IPR protection is prioritized, with the enforcement of copyright, patent, and trademark laws. Foreign ownership restrictions are relaxed to leverage foreign expertise and capital. Transparency, accountability, and anti-corruption measures are strengthened to build trust among investors.
Investments in infrastructure development, including transportation, energy, and telecommunications, enhance competitiveness and attract sector-specific investments. Mechanisms for investor protection and dispute resolution ensure investor rights are prioritized to further boost the market’s attractiveness to foreign cash flow.
Access to untapped markets and natural resources with significant growth potential
The transition from an emerging market into a developed economy can be tumultuous, but with the right resources, economic guidance, and luck, the development can bring about plenty of opportunities to get into new, untapped markets.
In a similar vein, emerging markets may be just starting to discover and utilize their country’s natural resources to their fullest extent. These include but are not limited to, minerals, energy, water, agricultural resources, precious stones, and metal. One example of a current market trend is the demand for lithium, which is used to power environment-friendly electric vehicles. Countries like Chile and Zimbabwe, with their extensive lithium reserves, are now prime candidates for foreign investments.
Favorable demographics
Emerging markets usually have a younger population with almost unlimited potential in terms of growth and experience. The younger workforce is more adaptable to change, especially regarding technology. Aside from that, they offer diverse skills and outlooks that can be useful in problem-solving and decision-making, along with their long-term potential for contributing to the development of their country.
Infrastructure Development
Developing countries present great opportunities for investors in real estate, construction, and other related industries. The drive to improve and urbanize their infrastructure often leads to creating and improving new consumer markets that further bolster their economies. Improved housing projects, commercial developments, and construction and improvement of transportation and other infrastructure are some of the positive signals that investors need to look out for in emerging markets.
Disadvantages of emerging markets
Like any investment, it’s important to weigh the pros and cons before making a decision. Here are some of the pitfalls of investing in emerging markets.
Political and economic instability
It’s not uncommon for emerging markets to face political and economic turmoil during their journey to development. Due to the increased investment and cash flow, their governments are susceptible to fluctuations in policy goals, corruption, and regulatory uncertainties, all of which can cause an unpredictable business environment and negatively affect investor outlook.
Volatile markets
The sudden influx of foreign investments and funds can lead to significant volatility in emerging markets. Since their economies are still in their infancy (or are not yet equipped to withstand foreign trade,) their trade regulations are often found lacking regarding investor protection, liquidity regulations, and risk management guidelines.
Inadequate competencies and education
Emerging markets may face skill gaps and inadequate educational systems that limit the availability of a skilled workforce. This can impact productivity, innovation, and the competitiveness of industries. These issues can often be resolved through government intervention, but it may take time, which is a premium nowadays, considering that several industries, particularly in technology, are experiencing a significant uptick in advancement and development.
Limited infrastructure
Developing countries often do not enjoy the kind of infrastructure that first-world countries have. And while this presents another opportunity for investments, the deficiencies also often lead to delays in development and business expansions, not to mention the increased costs.
Four emerging markets to look out for
There are agencies and foreign market analysts that identify emerging markets around the world. One of the most notable is the Morgan Stanley Capital Internation (MSCI), which has a dedicated Emerging Markets Index. The composition of the MSCI Emerging Markets Index has evolved over time, with countries being included or excluded based on a market classification framework that evaluates economic development, market size, liquidity, and accessibility. Here are some of the most viable selections from their list:
Philippines
Touted as one of the fastest-growing emerging economies in the world, with expert forecasts predicting a trillion-dollar economy by 2033, the Philippines is one of the best bets in Southeast Asia for emerging markets. The country is notable for its strong, consistent economic growth, strategic location, varied natural resources, growing consumer market, skilled workforce, attractive investment programs, and stable political environment.
The country saw a 7.6% increase in GDP back in 2022, and most experts agree that it will continue to increase in the neighborhood of 6% in 2023 despite a challenging economic climate in the area. The previous growth was, as some claim, a mere result of a rebound from the COVID-19 pandemic economy, but experts are confident that the momentum will push the Philippines into a brighter development path.
South Korea
Like Japan, South Korea’s transformation from a nation devastated by war to a thriving economy is a model that most emerging markets emulate. Strategic government policies have massively contributed to the country’s average annual GDP growth of 10% from 1926 to 1994. However, the Asian financial crisis identified several underlying economic weaknesses, like high levels of short-term foreign borrowing, resulting in a sharp decline in GDP. Still, South Korea is now a global center for innovation and technology, with well-known companies and brands like Samsung Electronics Co. Ltd., Hyundai Motors Company Limited, Kia Motors Corporation, Hyundai Heavy Industries Company Limited, and POSCO spearheading its economy.
With a projected GDP of $1.72 trillion in 2023, South Korea ranks as the 12th largest economy globally. Furthermore, it is expected that its GDP will reach $2.12 trillion by 2028. South Korea remains highly reliant on exports, solidifying its position as one of the world’s most export-dependent industrialized nations. The country’s continued economic success underscores its resilience and ability to adapt to an ever-evolving global market.
India
India remains a strong contender for emerging markets despite economic uncertainties. The country has consistently shown solid macroeconomic fundamentals, fiscal discipline, attractive saving rates, increasing domestic demand, and political stability. The government remains steadfast in its commitment to augment capital spending, particularly in infrastructure, to stimulate growth and enhance competitiveness. With the expanding middle class and their evolving spending patterns, India’s economy is increasingly driven by domestic consumption.
The nation’s nominal GDP, projected at $3.76 trillion for 2023, is anticipated to reach $5.57 trillion by 2028, positioning India as the world’s third-largest economy, as the International Monetary Fund (IMF) estimates. India currently falls into the lower middle-income category, according to the World Bank. Looking ahead, an EY report predicts that by 2047, the country’s 100th year of independence, India’s economy will soar to a staggering GDP size of $26 trillion, with per capita GDP surpassing $15,000.
Mexico
Mexico is considered an emerging market due to several key factors. First, the country has achieved consistent economic growth, driven by sectors like manufacturing, services, and tourism. Its strategic location has also led to significant trade integration and investment opportunities. Mexico’s extensive network of trade agreements, including the USMCA and other free trade agreements, facilitates access to diverse markets.
The country’s competitive labor force, characterized by a growing young population, attracts foreign investment, particularly in manufacturing-related industries. Furthermore, Mexico’s large domestic market, with a growing middle class and increased consumer purchasing power, creates business opportunities. The implementation of structural reforms and infrastructure development initiatives further supports economic growth. Despite existing challenges, Mexico’s efforts to address them and favorable economic conditions make it an appealing destination for investors seeking emerging market prospects.
Closing thoughts
Emerging markets present an opportunity for investors to get in on the ground floor of an impressive developing economy. However, risks and opportunities go hand in hand, and smart investors should conduct due diligence to weigh the pros and cons of these potential investments.
