What are Emerging Markets?
The economies of developing countries rely majorly on agriculture and natural resources. However, they are trying to break away from these traditional economies and moving towards a more advanced and modern economy. With increased production and adopting policies or free market, or mixed economies, they are focusing towards becoming a fully industrialized and developed nation. The markets of these countries and societies are known as emerging markets.
These are the countries that do not completely meet the standards of a developed nation, but might become one in the future. They make up almost 80% of world’s economy. Some of the examples of emerging markets are China, Egypt, Pakistan, Russia, Indonesia, and India.
Emerging Markets also include nations that once were categorized as developed.
Some of the defining characteristics of emerging markets are;
- Lower Per Capita Income
One of the key features of emerging markets is that they have lower per capita income compared to those of developed countries like US and UK. The per capita income is calculated by dividing the national income with total population. It tells us the average yearly income of an individual in the country. Through the per capita income we analyze how wealthy and successful the people of a specific country are. Their standard of living and the extent to which they can fulfill their needs and wants. According to World Bank, any country whose per capita income is either $3,995 or less than that is considered as the developing country.
By trying to become a developed nation, leaders of emerging markets are trying to provide better standard of living for their people.
- Highly Volatile
Emerging markets are known to be highly volatile. As mentioned above, they rely heavily on agriculture, so any natural disaster or change in environment can have significant impact on their economy.
These countries also go through phases of political instability and social upheaval. Military also has a strong hold in such countries and have indirect interference in government as well.
Since the economies of these countries are not completely industrialized, they are extremely sensitive towards any external price shocks.
Because of these reasons the emerging markets are highly volatile and can be a great challenge for businesses.
- Vulnerable to changes in Currency and Commodities
As the per capita income of emerging markets is lower, so any increase in prices of commodities, like oil and food, can incur huge losses to business. The quality of life in such places is already not the best, and when commodities are also going to be expensive for people, then they will not have much money left to spend on their desires or luxuries. And hence, selling your product and service can be extremely difficult in such times.
The same happens when there is any swing in currency as well, especially compared to the US dollar. As these are agrarian societies, so they have to import majority of the manufactured goods. So, increase in dollar rates, makes running a business more costly in emerging markets compared to those of developed countries.
Emerging markets are also extremely vulnerable to any swing in currency rates and commodities because these industries are dominated by developed nations and hence the latter does not have much influence over the decisions or trends surrounding these industries.
Initially, when countries are shifting their economies, in case of emerging markets from agriculture to industrial, they go through periods of unemployment and inflation. As most of the people are farmers by profession, they end up losing their land and jobs. This leads to social unrest and hence investors can lose a lot of their money.
- Higher Growth Rate
With all the above-mentioned characteristics, one might question foreign businesses entering these markets. But the one thing that proves to be a huge incentive for these businesses is that these markets show incredible potential for growth. Since they are shifting trends and economies, they have huge potential for growth.
The only thing is that the capital markets of these countries are immature. They do not have information about their companies easily available. So, you might need to a lot of research if you are thinking about investing in these companies. But once you are done with the hard part, gathering data, everything else becomes easy and profitable. Emerging markets are known to be lucrative and risky at the same time.