According to World Economic Outlook (WEO) of International Monetary Fund (IMF) link
the main criteria used to classify the world into advanced economies and emerging market and developing economies are (1) per capita income level, (2) export diversification – so oil exporters that have high per capita GDP would not make the advanced classification because around 70% of its exports are oil, and (3) degree of integration into the global financial system. Note, however, that these are not the only factors considered in deciding the classification.
Emerging markets continue to attract investors from all over the world. Several reasons exist:
Geographic diversification helps to reduce portfolio volatility and stabilize cash flow. Global markets don’t necessarily rise and fall together. Examples can be:
a) Asian currency crisis that started in Thailand with the financial collapse of the Thai baht
after the Thai government was forced to float
the baht due to lack of foreign currency to support its fixed exchange rate, cutting its peg
to the US$.
b) Financial crises of 2008 that most impacted North American and European markets.
- High growth
Emerging and developing economies are those from where the most of the growth in the world is coming from. That’s where the majority of the stock markets appreciation is likely to be. They are expected to increase two to three times faster than developed nations like the US, according to International Monetary Fund estimates.
The chart above provides IMF information as at August 2014 on percent change of Gross Domestic Product at constant prices. Year 2019 forecast for emerging markets and developing economies is 5.345% vs 1.905% for European Union that is 2.8 times higher measure.
Strong potential future performance can be attributable to:
a) Young population that gives good employment opportunities
b) Relatively low debt burden for government and corporations and thus healthy balance sheets
c) High potential for productivity growth. It has greatly lagged to that of mature economies but better infrastructure and technological advances in developing world can significantly boost productivity