Emerging market
Emerging market (emerging economy or emerging market economy) is a country whose economy and financial markets are undergoing rapid industrialization, economic growth, and integration into the global economy but have not yet reached the level of development associated with advanced or developed economies. Emerging markets typically exhibit expanding capital markets, increasing foreign investment, improving regulatory frameworks, rising incomes, and growing participation in international trade. These economies occupy an intermediate stage between frontier markets and developed markets.
Emerging markets have become an increasingly important component of the global economy since the late twentieth century. They account for a significant share of global economic growth, manufacturing output, international trade, and population. Many multinational corporations view emerging economies as important sources of consumer demand, investment opportunities, natural resources, and industrial production. As a result, emerging markets have attracted substantial international capital through foreign direct investment, portfolio investment, and cross-border financing.
The classification of an emerging market is not based solely on gross domestic product (GDP) or income levels. International financial institutions and index providers evaluate multiple economic and financial characteristics, including the accessibility and efficiency of capital markets, liquidity, regulatory quality, corporate governance, market infrastructure, and openness to foreign investors. Organizations such as MSCI Inc., FTSE Russell, and S&P Dow Jones Indices maintain their own classification systems for investment purposes, while institutions including the International Monetary Fund (IMF) and the World Bank use different economic classifications based on broader development criteria.
Although emerging markets generally offer higher long-term growth potential than developed economies, they also tend to exhibit greater volatility and are exposed to higher levels of political, economic, regulatory, and currency risk. Consequently, investors often regard emerging market investments as having both greater potential returns and higher investment risk.
History
The concept of emerging markets gained prominence during the 1980s as many developing countries implemented market-oriented economic reforms, liberalized trade, privatized state-owned enterprises, and opened their financial markets to international investors. These reforms created new opportunities for foreign investment and accelerated economic growth in several regions of the world.
During the 1990s and early twenty-first century, globalization, technological development, and expanding international trade contributed to the rapid growth of many emerging economies. Countries in Asia, Latin America, Eastern Europe, the Middle East, and Africa experienced significant industrialization, urbanization, and capital market development.
The growing importance of these economies led international index providers to establish dedicated investment benchmarks such as the MSCI Emerging Markets Index, enabling institutional investors to measure and allocate investments across emerging equity markets using standardized methodologies.
Today, emerging markets represent a substantial share of global economic output and continue to play an increasingly important role in international finance and investment.
Characteristics
Emerging markets typically exhibit a combination of economic growth and ongoing institutional development.
Common characteristics include:
- rapid economic growth;
- expanding industrialization;
- increasing urbanization;
- developing financial markets;
- growing middle-class populations;
- improving infrastructure;
- rising foreign investment;
- expanding international trade.
The degree to which these characteristics are present varies among individual countries.
Classification
There is no universally accepted definition of an emerging market.
Different organizations apply different methodologies based on economic and financial criteria.
| Organization | Primary classification criteria |
|---|---|
| MSCI Inc. | Market accessibility, liquidity, and investability |
| FTSE Russell | Market quality and accessibility |
| S&P Dow Jones Indices | Investability and market development |
| International Monetary Fund | Economic development and statistical analysis |
| World Bank | National income and economic indicators |
As a result, a country may be classified differently by different organizations.
Financial markets
Emerging markets generally possess increasingly sophisticated financial systems.
These commonly include:
- stock exchanges;
- bond markets;
- banking systems;
- insurance industries;
- asset management companies;
- derivatives markets.
Although financial infrastructure continues to develop, many emerging markets remain less liquid and less mature than developed markets.
Capital markets
The capital markets of emerging economies have expanded considerably over recent decades.
Their development has been supported by:
- privatization programmes;
- corporate listings;
- foreign investment;
- regulatory reforms;
- technological modernization;
- institutional investment.
Growing capital markets have enabled companies to obtain financing through equity and debt securities while increasing investment opportunities for domestic and international investors.
Economic indicators
Emerging markets are often characterized by favourable long-term economic trends.
Common indicators include:
- increasing GDP growth;
- rising household incomes;
- expanding consumer spending;
- growing exports;
- increasing industrial production;
- improving productivity.
These trends may contribute to higher long-term economic growth than that observed in many developed economies.
Investment
Emerging markets represent an important asset class within international investment portfolios.
Investors commonly obtain exposure through:
- individual securities;
- exchange-traded funds;
- index funds;
- actively managed mutual funds;
- sovereign bonds;
- corporate bonds.
Many investment products use the MSCI Emerging Markets Index or similar benchmarks to measure portfolio performance.
Advantages
Emerging market investments offer several potential advantages.
These include:
- higher long-term economic growth potential;
- expanding consumer markets;
- demographic growth;
- industrial development;
- increasing productivity;
- portfolio diversification.
Because economic growth drivers often differ from those of developed markets, emerging market investments may improve international portfolio diversification.
Risks
Emerging markets also present a range of investment risks.
Common risks include:
- political uncertainty;
- regulatory changes;
- currency fluctuations;
- market volatility;
- lower liquidity;
- geopolitical tensions;
- corporate governance concerns.
These risks generally exceed those associated with many developed financial markets and may result in greater price volatility.
Comparison with developed and frontier markets
| Characteristic | Frontier markets | Emerging markets | Developed markets |
|---|---|---|---|
| Economic development | Early stage | Intermediate | Advanced |
| Market liquidity | Low | Moderate | High |
| Foreign investment accessibility | Limited | Improving | Extensive |
| Financial infrastructure | Developing | Well established | Highly developed |
| Investment risk | Highest | Moderate to high | Generally lower |
Although these categories provide a useful framework, the transition between them is gradual rather than absolute.
Importance
Emerging markets have become a major source of global economic growth, international trade, and investment opportunities. Their expanding financial markets, industrial capacity, and consumer demand have significantly influenced the global economy. As international capital markets become increasingly integrated, emerging economies continue to play an important role in portfolio diversification, multinational business expansion, and worldwide economic development.