“Emerging markets” is a term that refers to an economy that experiences considerable economic growth and possesses some, but not all, characteristics of a developed economy. Emerging markets are countries that are transitioning from the “developing” phase to the “developed” phase.
Emerging markets are well-known for their volatility compared to developed markets like the United States or Europe. While some risks are difficult to predict, four significant factors are affecting emerging markets on an aggregate basis.
In this article, we will look at the four major factors affecting emerging market performance:
- Developed market demand
Many emerging market countries manufacture products and/or sell services to developed market economies. For instance, China makes all kinds of goods for the United States and Europe, while India has become a leading exporter of information technology services. A downturn in developed economies can, therefore, have a negative impact on emerging markets that rely on demand to bolster their economic growth.
- Domestic economy performance
Many emerging market countries are driven by domestic demand rather than export demand. For example, exports account for just US$260 billion of India’s $2.45 trillion (nominal) economy—or about 10% of its total economic output. By comparison, China’s $2.3 trillion in exports account for more than 20% of its $11.8 trillion (nominal) economy. Domestic factors—like consumption and politics—have a big influence on these emerging markets.
Often times, emerging market economies evolve from an export-driven economy to a domestic-focused economy.
- Currency market dynamics
Many emerging market countries have unstable local currencies and must issue debt in dollar-denominated bonds. When the U.S. dollar rises, these debts may become costlier to service for emerging markets that earn revenue in local currency. A higher dollar valuation also implies higher interest rates, which tend to draw capital away from emerging markets and makes it more expensive for emerging markets to raise future capital.
- Commodity performance
Many emerging market countries are net exporters of commodities, which makes them sensitive to changes in commodity prices. For example, Russia is a large exporter of natural gas to Europe and Brazil exports iron-ore, soybeans, coffee, and crude oil to China and the United States. A downturn in these commodities could have a dramatic impact on the revenue generated by state-owned and private enterprises in these countries.
The five major emerging markets
Brazil, Russia, India, China, and South Africa are the biggest emerging markets in the world. In 2009, the leaders of Brazil, Russia, India, and China formed a summit to create “BRIC,” an association created in order to improve political relationships and trade between the largest emerging markets. South Africa joined the “BRIC” group in 2010, which was then re-named “BRICS.”