An emerging market refers to an economy experiencing significant economic growth and possessing some but not all characteristics of a developed economy. These markets represent countries transitioning from the developing phase to the developed phase.
Emerging markets often exhibit market volatility due to political instability, external price movements, or supply-demand shocks from natural disasters. This volatility can lead to fluctuations in exchange rates and market performance, posing risks for investors. Despite these risks, emerging markets offer growth and investment potential. They attract foreign investors with the promise of high returns, as these countries, moving from agriculture-based economies to more developed ones, often require substantial foreign capital due to a lack of domestic resources. By leveraging their competitive advantage, emerging markets focus on exporting low-cost goods to wealthier nations, which in turn boosts GDP growth, stock prices, and investor returns.
The economic growth rates in emerging markets are typically high as their governments implement policies favouring industrialisation and rapid development. Such policies result in lower unemployment rates, higher disposable incomes, increased investments, and improved infrastructure. In contrast, developed countries like the USA, Germany, and Japan experience slower economic growth due to early industrialisation.
Emerging markets generally have low to middle income per capita compared to other countries, largely due to their reliance on agriculture. As these economies shift towards industrialisation and manufacturing, income per capita rises along with GDP. Additionally, lower average incomes can serve as incentives for higher economic growth.
The five major emerging markets globally are Brazil, Russia, India, China, and South Africa. In 2009, the leaders of Brazil, Russia, India, and China formed an association known as “BRIC” to enhance political relationships and trade among the largest emerging markets. South Africa joined this group in 2010, leading to the rebranding of the association as “BRICS.”
Emerging markets are characterised by their transitional status from developing to developed economies, marked by volatility, growth potential, and rising income levels. These markets offer significant opportunities for investors despite the inherent risks associated with their economic and political environments.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
