The term "emerging markets" first appeared in the financial world in the mid-1980s, and it refers broadly to the financial markets and instruments – stocks, bonds, etc. – of developing countries, which offer diversification opportunities for investors.
There is no universal definition of an emerging market. But generally, the term refers to countries whose economic and demographic dynamism tend to drive faster growth than would be expected in the more developed economies of, say, Western Europe or North America. The performance of emerging market investments normally has little, or limited, correlation with traditional instruments such as domestic stocks. As such, they represent opportunities for investors to diversify portfolios that may otherwise be mainly invested in more traditional assets.
Emerging markets generally include most of the countries of South America, Southeast Asia and Eastern Europe. Another category of emerging markets is known by the acronym “BRICS.” These countries – Brazil, Russia, India, China and South Africa – were designated in the early 2000s as the five leading economies of the developing world, representing a significant share of global GDP and wielding greater influence global affairs than other emerging countries.
Because of their dynamism, emerging market economies are generally considered to offer significant prospective returns. At the same time, such investments involve much higher levels of risk than comparable investments in developed countries.
It is therefore essential to understand the specificities of an emerging market country, including its legal and industrial fabric, before investing there.
We usually classify the risks linked to emerging countries under these categories:
- political changes (for example, a coup d'état);
- changes in legislation;
- changes in regulations;
- restrictions on foreign-exchange transactions;
- natural disaster.