Defining Emerging Markets - dummies

By Ann C. Logue

The term emerging market was coined at the World Bank’s International Finance Corporation (IFC), which works to develop the private sector in poor countries. The IFC’s strategy is to bring in private investors rather than government or nonprofit aid organizations. The emerging market category describes the investment opportunity for investors willing to look to the long term.

Within these developing markets are different classes:

  • Emerging markets are those countries that have growing economies and a growing middle class. Some of these countries were once poor, and some still have high rates of poverty. Many are undergoing profound social and political change for the better.

  • Frontier markets include very small nations at an early stage of economic development and nations that have tiny stock markets. These markets present opportunities for patient investors with an appetite for risk.

  • Pre-emerging markets include the poorest of the world’s nations. These markets have few opportunities for investors now, but they could become really interesting in the years to come, so they’re worth watching.

Who decides which countries fall into which categories? The arbiter for most investors is MSCI Barra, a firm that puts together investment indexes used by portfolio managers to evaluate their performance.

The potential is real in these developing markets. A full 43 percent of the world’s wealth is in nations emerging out of poverty and onto the world’s financial and trade markets. Most of the world’s people are in such countries as well — some 5.5 billion live developing markets.

Developing markets are where the growth opportunities are now. The world’s developing nations are growing faster than the developed ones. That faster growth can lead to higher profits than you may get from similar investments in the established markets found in North America, Western Europe, Australia, and Japan.