Emerging Markets: Beyond the Label
In the ever-evolving landscape of global finance, the term “emerging markets” has become a catch-all phrase that fails to capture the true diversity and complexity of the countries it encompasses. From Kenya to Qatar, Korea to Colombia, and everything in between, the definition of what constitutes an emerging market has become blurred as the world moves towards a more interconnected economy.
- The Conundrum of Emerging Markets
- The term “emerging markets” no longer adequately describes the vast array of countries included in these indices, accounting for 87 percent of all countries, 85 percent of the world’s population, and almost half of global GDP.
- With such a wide range of countries falling under this umbrella term, it becomes increasingly challenging to make meaningful distinctions between them based on economic performance or financial behavior.
- The Flaws of Benchmark Indices
- While investable emerging market indices were designed to attract foreign investment to developing economies, they now fall short of capturing the nuanced differences among these countries.
- Benchmark indices often include countries that exhibit unsustainable economic policies, leading to negative outcomes for investors who rely on them for guidance.
- The China Factor and Currency Volatility
- China’s economic dominance sets it apart from other countries in the index, creating a unique set of challenges for investors.
- The reliance on the US dollar for benchmark indices leads to increased volatility in returns, making it difficult for investors to maintain long-term positions in emerging market assets.
- Rethinking the Approach to Emerging Markets
- Rather than abandoning the concept of emerging markets altogether, investors should seek index products that provide a diversified approach to currency exposure.
- Customizable thematic investment baskets can offer a more tailored approach to investing in emerging market assets, allowing investors to focus on specific themes or trends within these diverse markets.
In conclusion, the traditional definition of emerging markets no longer serves the purpose it was intended for. By embracing the unique characteristics of each country within this group and rethinking how we approach investing in these markets, we can move beyond the limitations of the label and unlock new opportunities for growth and success in the global economy.
