Emerging Markets

An emerging market is a country that has some characteristics

of a developed market, but does not satisfy standards to be
termed a developed market. This includes countries that may
become developed markets in the future or were in the past

Ayush Malik
2K17/CO/087
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CONTENTS
What are emerging markets?

Types of markets and countries in them

1. Developed Market
2. Emerging Market
3. Frontier Market

Why are emerging markets important?

Characteristics of emerging markets

Opportunities offered by emerging markets

Risk of investing in emerging markets

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TYPE OF MARKETS & COUTRIES IN THEM :

The global marketplace is divided into three types of market: developed,

emerging, and frontier. The investable countries of the world are slotted into one

of these categories. However, only 75 of the 192 countries of the United Nations

are classified as developed or developing. The other 117 nations matter to the

world but not necessarily to investors because they’re really small, really poor, or
just not open to outside investors.
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The rundown of emerging markets isn't fixed. A nation may well move from issues

and neediness to wilderness and emerging-market status. It might take 10 years

or two — it might even take an unrest or the passing of a tyrant — however it

could occur. Don't you need to be there when it does?

Australia Hungary Poland

Austria Iceland Portugal

Belgium Ireland Slovak Republic

Canada Israel Slovenia

Chile Italy South Korea

Czech Republic Japan Spain

Denmark Luxembourg Sweden

Finland Mexico Switzerland

France Netherlands Turkey

Germany New Zealand United Kingdom

DEVELOPED MARKETS
The world's commercial center is isolated in three types of markets: created, developing and
boondocks. The nations of the world in which you can invest are open in one of these classes.
In any case, only 75 of the 192 nations of the United Nations are delegated or created. The
other 117 countries are important for the world but in reality they are not important for
financial specialists, as they are small, extremely poor or simply not open to external
speculators
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EMERGING MARKETS

Emerging markets are not fully developed, but they are making efforts to continue

developing. These countries have certain infrastructure, some stable government

systems, strong human capital and success with economic growth.

To be truly emergent, the economic growth of a country must expand beyond its

borders. It should be producing enough goods to be able to export products to

other countries, becoming an active participant in global trade. There should be

people who can take on the jobs that local businesses are creating.

And it must be open to capital and investments from outside the country,

whether by individuals, financial institutions or multinational corporations an

emerging market needs to have a stock market so that investors can buy and sell

securities.

One of the simplest ways to tell whether a market is emerging is to see if it appears

in a financial index that tracks emerging markets, such as the MSCI Emerging

Markets or the MSCI Frontier Markets index. MSCI Barra, one of the larger financial

index and data firms, posts lists of emerging countries, which include those in the

following list:
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Brazil India Poland

Chile Indonesia Russia

China Malaysia South Africa

Colombia Mexico South Korea

Czech Republic Morocco Taiwan

Egypt Peru Thailand

Hungary Philippines Turkey

FRONTIER MARKETS
Frontier markets area unit a set of rising markets. These countries area unit within the earliest
stage of development however do have a securities market and investable securities.
Growth are often explosive, and therefore the profit potential is gigantic. which means the
chance is high, too? If they need potential and if they need securities that investors will trade,
though, they’re planning to attract attention. These markets have exciting potential
and area unit value considering if you'll be able to handle the chance.
The countries within the following list area unit classified as frontier markets:

Argentina Kenya Saudi Arabia

Bahrain Kuwait Serbia

Botswana Lebanon Slovenia

Bulgaria Lithuania Sri Lanka

Croatia Mauritius Trinidad and Tobago

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Estonia Nigeria Tunisia

Ghana Oman Ukraine

Jamaica Pakistan United Arab Emirates

Jordan Qatar Vietnam

Why are they important?

The secret is within the title – ’emerging’. These area units the economies can
which will that may} grow larger within the future and so will have additional and
additional of an effect on international trade and political economy. as an
example, China was referred to as associate rising market a few years past before
it started employing a capitalist-style economy. currently it’s the third biggest
economy within the world when the U.S. and E.U. (by live of GDP). It’s conjointly
the most important bourgeois within the world. The label of associate ’emerging’
market applies less and fewer by the day as its influence grows.

Crucially, rising markets can facilitate the worldwide economy to grow.

Robust growth and development will eventually cause developing economies

passing those that area unit thought-about to be additional advanced. a major
example is that Asian nation overtook the U.K. in terms of value at the top of 2016,
power-assisted by uncertainty over Brexit that negatively affected business
investment.

Why invest in emerging markets?

Emerging markets area unit engaging as a result of they have an inclination to

grow quicker than their developed counterparts. you'll be able to see this
clearly once viewing what number of those markets have modified over the last
decade. economic process since the 2007/8 monetary crisis has
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been terribly stagnant in Europe and America, whereas investors have had
to manage terribly low interest rates and different factors that
have created growth a really slow method. the main focus was on keeping a lid
on the fallout from the crisis and sheltering Western economies from the storm.
Since then, investors have looked elsewhere to reap the gains that Western
markets accustomed supply and still do thus.
In distinction, developing economies {can supply|offers|can give} excitement
and promise as a result of they'll offer growth.
Investment will facilitate company profits, which suggests stocks go up too. this
will then cause any investment that results in a lot of opportunities in an
exceedingly feedback loop. once a rustic is turning into a lot
of industrialized it'll be payment large sums on infrastructure
and different aspects which will encourage giant amounts of foreign
investment, resulting in ascent and growth in liquidity and capital. industry also
can have a myriad of advantages in terms of accelerating the proletariat for
industries
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Characteristics of Emerging Markets and the

Opportunities They Create
Each of the specific differences in developing markets presents challenges for
companies entering these markets but also creates opportunities for companies
with the right solutions.

CHARACTERISTIC #1: MARKETS AND CULTURE ARE

DEMANDING

Dust and heat, lack of electricity, narrow highways, and low budgets all place
strains on products in the developing world. While companies might be tempted
to produce second-rate products for the developing world, consumers are very
demanding, expecting high value for their scarce cash. Products and services
also have to be adapted to local cultures and traditions, which can be very
different from those in the developed world. How do you sell jewelry and clothing
in Islamic countries, which do not allow you to show women’s faces? How do you
sell food and beauty products to a market that is concerned about their
being halal? Customers in these markets also have not yet developed a culture
of consumerism. They don’t know how to be customers, so strategies used in
developed markets, such as money-back guarantees, can have unexpected
effects. The memsahib (Indian housewife) and other social networks can have a
major impact on the growth of products, brands, and markets.

Opportunity: By adapting to different cultures, rugged environments, and

demanding price-performance targets, companies can develop breakthrough
designs for product and service offerings. Sometimes these solutions may look
more like a motorized "bullock cart" than a traditional automobile. From meeting
the demand for halal foods to offering Islamic banking services and cell phones
that point the way to Mecca, companies can reach a Muslim market that
accounts for one in five customers in developing markets. How do you need to
modify or create products and services designed for the local conditions of
developing markets? How can you build consumerism and use social networks to
build markets for your products?
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CHARACTERISTIC #2: THERE ARE HIGH RATES OF

EMIGRATION TO THE DEVELOPED WORLD

The developing world is exporting not only products and services to the
developed world, but also people. The foreign-born population in the U.S. rose to
31 million people in the last census in 2000, up 57 percent from 1990. These
immigrants are in touch with family and friends back home. Globally, immigrants
sent home an estimated $93 billion in 2003, second only to foreign direct
investment as the largest financial flow from the developed to the developing
world. While immigrants are formally a part of developed markets, they are part
of something much bigger. These global diasporas are redefining the borders of
markets and creating social networks that stretch across the developed and
developing world.

Opportunity: By understanding the global social networks of immigrants and their

friends and family back home, companies can draw on the resources of the
developed world to meet the needs of end users in the developing world.
Companies can develop "bank shots" to sell products that are paid for in the U.S.
but delivered to relatives in Mexico or India. Companies also can serve immigrants
abroad and create services to weave together the far-flung networks of this
"ricochet economy." How can you build businesses across these global social
networks?
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CHARACTERISTIC #3: MARKETS ARE FRAGMENTED

Developing markets are highly fragmented, with few national brands that have a
commanding presence. For example, beer companies initially saw China as a
huge monolithic market waiting to be tapped with their global megabrands. After
the first push failed, however, it became clear that this market would be won one
local market at a time. Local beers were thriving, and large companies began to
acquire them. In the words of Wai Kee Tan, vice president for corporate affairs in
Asia for Belgian-based Interview SA, "China is a nation, but not a national
market."6 MTV and HSBC have succeeded by making their global brands local,
market by market around the world. Branding strategies and portfolios need to
be tailored to the reality of fragmented, market-stall economies.

Opportunity: By developing or acquiring strong local brands and tailoring global

brands to local markets, companies can tap into the power of regional
communities. They can leverage their global brands and capture the imagination
of the local market. What is the right balance of global and local brands needed
to connect with the market?

CHARACTERISTIC #4: POPULATIONS ARE YOUTHFUL AND

GROWING

While Japan, Europe, and the U.S. are worried about pensions and the rapid
aging of their populations, emerging economies are young. Peter Drucker has
declared that the "youth market is over,"7 but in the developing world, the youth
market is just beginning. While only 21 percent of the U.S. population is under the
age of 14, this figure is 33 percent in India, 29 percent in Brazil, and 33 percent in
Iran (and remember, these percentages are on a much larger population base).
Most of the world’s population growth will take place in developing countries.

Opportunity: A young population creates markets for education, games,

entertainment, apparel, fast foods, cafes, fashion, magazines and books, beauty
products, music, and other products and services. While young people are
globally attuned, the youth in developing markets can be different from those in
the developed world, and companies need to be aware of the pushback from
tradition.
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CHARACTERISTIC #5: THERE IS LIMITED INCOME AND

SPACE

Incomes and cash flows in the developing world are much lower. In rural and poor
segments, low income limits purchases. But even in more affluent sectors, there is
a tendency to limit purchase size. In environments of past or present scarcity, cash
is kept liquid rather than being tied up in household inventory. Saving rates in
China and nine other rapidly developing countries climbed from 20 percent to 34
percent between the early 1970s and early 1990s, at the same time that savings
in industrialized countries fell. While consumers are buying "super size" or "economy
size" in the developed world, sachets of shampoo and other products are
accounting for billions of dollars of revenue in the developing world. In the
developed world, customers pay a premium for convenience. In the developing
world, customers buy small for different reasons. Homes are much smaller, so
furnishings and other products need to be scaled accordingly. India, with 342
people per square kilometer, is more than 11 times as densely populated as the
U.S. (31), and China is more than four and a half times as densely populated (135).

Opportunity: By reducing package size, offering small payments, using demand

pooling, and tailoring products to small spaces, companies can build billion-dollar
markets a few pennies at a time. Like the just-in-time inventory systems of Toyota
or Dell, companies need to design systems to help consumers fill their "just-in-time
pantries." How can you grow a large business by thinking small payments,
packages, and products?

CHARACTERISTIC #6: INFRASTRUCTURE IS WEAK

Most of the rural population of the 86 percent markets is inaccessible by motor

vehicles, and they lack good sanitation and electricity. At the same time, the
cities are growing very rapidly, and this fast urbanization has placed tremendous
strains on the urban infrastructure. Infrastructure everywhere in the developing
world is fragile or underdeveloped. Transportation networks are nonexistent.
Power failures are frequent. Clean water and sanitation are often lacking.
Underdeveloped economic systems and restrictive regulations have created
thriving informal or parallel economies in developing nations. It is estimated that
the informal economy accounts for at least 40 percent of the GNP of low-income
nations.
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Opportunity: The weak infrastructure creates opportunities for companies that

can fill the gaps with water purification systems, generators, inverters, and other
products. It also creates opportunities for companies that can find ways to work
around holes in the infrastructure, such as through ready-to-eat meals that don’t
require refrigeration. The informal economy may present opportunities for
legitimate businesses. How can you find opportunities in the holes in the
infrastructure?

CHARACTERISTIC #7: TECHNOLOGY IS

UNDERDEVELOPED

The developed world has had a head start of many decades in land-line
telephones, computing, and other technologies. The developed world has had a
much longer time to build technology-intensive industries such as
pharmaceuticals and biotechnology, with the support of academic institutions
and supplier networks. How could developing countries ever hope to compete?
Won’t the market for technology be slow to develop in the 86 percent world?

Opportunity: Powerful new technologies can leap across the boundaries of the
developing world. Without the constraints of legacy systems, companies have
opportunities to create new systems from scratch, often leapfrogging old
technology. Technology can spread very rapidly as consumers quickly adopt it
without the switching costs of developed-market customers. How you create the
technologies, or ride the technologies, to allow your business to leapfrog with the
market?

CHARACTERISTIC #8: DISTRIBUTION CHANNELS ARE

WEAK

Developing nations have poor distribution systems. In large cities, distribution is

often through small, hole-in-the-wall shops such as the paanwalla shops in India,
the tiendas de la esquinas in Mexico, and sari-sari stores in the Philippines. A
market of 600 million is locked in India’s villages, 42 percent of which have
populations of less than 500, with weak connections to the outside world. The lack
of media, roadways, and electricity creates seemingly impenetrable barriers.
Some villages don’t have retail outlets at all, and some distribution opportunities,
such as market days or carnivals, are temporary in nature.
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Opportunity: By building distribution or utilizing the existing idiosyncratic systems in

the developing world, such as small shops and market days, companies can find
ways to "take the market to the people," meeting the diffused and fragmented
markets of the developing world where they live. How can you create the
distribution networks to reach the dispersed markets of developing countries?

CHARACTERISTIC #9: MARKETS ARE CHANGING

RAPIDLY

By definition, the global 86 percent markets are developing. Although it will take
decades for these markets to become developed, the certainty is that they will
continue to change rapidly. In a year, or even a matter of months, these markets
can shift. Look at the rapid emergence of South Korea over the past decade or
the growth of India and China. Consumers become upscale. The precise
trajectory this development will take will depend on factors such as government
regulations, traditional business practices and culture, and companies’ actions.
Rising incomes and improved economic conditions will change consumer habits
and society itself, creating predictable shifts, such as the increasing
empowerment of women, as these markets mature. These markets will present
new challenges and opportunities at each stage of their development.
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Opportunity
As rising markets progress, they usually expertise the fast financial gain growth they
started out to make. As a lot of folks inside a rustic rise out of economic condition,
a client category develops that results in a marketplace jam-packed with
shoppers UN agency are hungry for brand spanking new merchandise and
services. With the correct giving combined with a strategically chosen market, a
corporation will expect to grow their revenue at a gradual rate within the right
market.

In addition, rising markets have begun to drive world innovation. a lot of and a lot
of, firms ar discovering that rising markets enable them to initiate at a lower value,
however with the potential to disrupt the established order. it's vital for firms to stay
in mind that if they hope to fuel innovation in rising markets they have to bear in
mind of the potential pitfalls alternative businesses have round-faced, like rating
product or service giving’s competitively and positioning their offering properly so
as to draw in their audience.

The potential for growth in rising markets comes with its own set of risks. whereas
most rising markets have begun reforming their political, legal, and monetary
systems, challenges still stay. several countries still don't clearly shield property
rights, have a culture of corruption, pass laws designed to impede trade, and
have a weak monetary infrastructure. If firms aren't responsive to these potential
challenges, they will not see the success they hope to in rising markets.

The Risks of Investing In Emerging Markets

Emerging markets often seem to offer provide new investment opportunities, their
elevated economic growth rates offering higher expected returns – not to
mention the benefits of diversification. But there are a number of risks that
potential investors should be aware of before planting seeds of their capital in
one of these up-and-comers.

Foreign Exchange Rate Risk

Foreign investments in stocks and bonds will typically produce returns in the local
currency. As a result, investors will have to convert this local currency back into
their domestic currency. An American who purchases a Brazilian stock in Brazil will
have to buy and sell the security using the Brazilian real.
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Therefore, currency fluctuations can impact the total return of the investment. If,
for example, the local value of a held stock increased by 5%, but the real
depreciated by 10%, the investor will experience a net loss in terms of total returns
when selling and converting back to U.S. dollars. (See our tutorial on Forex
Currencies for background.)

Non-Normal Distribution

North American market returns arguably follow a pattern of normal distributions.

As a result, financial models can be used to price derivatives and make
somewhat accurate economic forecasts about the future of equity prices.
Emerging market securities, on the other hand, cannot be valuated using the
same type of mean-variance analysis. Also, because emerging markets are
undergoing constant changes, it is almost impossible to utilize historical
information in order to draw proper correlations between events and returns.

Lax Insider Trading Restrictions

Although most countries claim to enforce strict laws against insider trading, none
has proved to be as rigorous as the U.S. in terms of prosecuting these practices.
Insider trading and various forms of market manipulation introduce market
inefficiencies, whereby equity prices will significantly deviate from their intrinsic
value. Such a system can be subject to extreme speculation, and can also be
heavily controlled by those holding privileged information.

Lack of Liquidity

Emerging markets are generally less liquid than those found in developed
economies. This market imperfection results in higher broker fees and an
increased level of price uncertainty. Investors who try to sell stocks in an illiquid
market face substantial risks that their orders will not be filled at the current price,
and the transactions will only go through at an unfavorable level.

Additionally, brokers will charge higher commissions, as they have to make more
diligent efforts to find counterparties for trades. Illiquid markets prevent investors
realizing the benefits of fast transactions.
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Difficulty Raising Capital

A poorly developed banking system will prevent firms from having the access to
financing that is required to grow their businesses. Attained capital will usually be
issued at a high required rate of return, increasing the company's weighted
average cost of capital (WACC). The major concern with having a high WACC is
that fewer projects will produce a high enough return to yield a positive net
present value. Therefore, financial systems found in developed nations do not
allow companies to undertake a higher variety of profit-generating projects.

Poor Corporate Governance

A solid corporate governance structure within any organization is correlated with

positive stock returns. Emerging markets sometimes have weaker corporate
governance systems, whereby management, or even the government, has a
greater voice in the firm than shareholders.

Furthermore, when countries have restrictions on corporate takeovers,

management does not have the same level of incentive to perform in order to
maintain job security. While corporate governance in the emerging markets has
a long road to go before being considered fully effective by North American
standards, many countries are showing improvements in this area in order to gain
access to cheaper international financing.

Increased Chance of Bankruptcy

A poor system of checks and balances and weaker accounting audit procedures
increase the chance of corporate bankruptcy. Of course, bankruptcy is common
in every economy, but such risks are most common outside of the developed
world. Within emerging markets, firms can more freely cook the books to give an
extended picture of profitability. Once the corporation is exposed, it experiences
a sudden drop in value. Because emerging markets are viewed as being riskier,
they have to issue bonds that pay higher interest rates. The increased debt
burden further increases borrowing costs and strengthens the potential for
bankruptcy. Still, this asset class has left much of its unstable past behind.
(Investing in Emerging Market Debt has rewards to offer.)
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Political Risk

Political risk refers to uncertainty concerning adverse government actions and

selections. Developed nations tend to follow a free market discipline of low
government intervention, whereas rising market businesses square measure
usually privatized upon demand. Some extra factors that contribute to political
risk are: chance of war, tax will increase, loss of grant, amendment of market
policy, inability to manage inflation and laws concerning resource extraction.
Major political instability may also lead to war and a closure of business, as staff
either refuse or aren't any longer ready to do their jobs.

The Bottom Line

Investing in rising markets will turn out substantial returns to one's portfolio.
However, investors should bear in mind that everyone high returns should be
judged among the risk-and-reward framework. The challenge for investors is to
search out ways in which to take advantage on AN rising market's growth
whereas avoiding exposure to its volatility and different drawbacks. to find out
additional regarding the professionals and cons, see "Should You Invest in rising
Markets?"

The said risks square measure a number of the foremost rife that has to be
assessed before investment. sadly, however, the premiums related to these risks
will usually solely be calculable, instead of determined on a concrete basis.