Analysis Of Emerging Markets Risks And Opportunities

What Is The Outlook For Emerging Markets?

A great many trade finance handicappers have been projecting stagnation in Emerging Market Economies for the last five years, since the global financial crisis. However, in a recent article, the Financial Times pushed back against the structural negativity around Emerging Market assets. Financial Times is more constructive, stating that “despite their vulnerability to a long-run stagnation in global trade growth, we think such risks are overemphasized and that Emerging Markets assets –characterized by much improved external balances, high yields, and unchallenging valuations – are well-positioned to benefit when more favorable trade winds return.”

Based on the reasons cited by Financial Times and others, we believe there is a real possibility that Emerging Markets are beginning to attract fresh investment. In order to support clients that are considering Emerging Market investments, we are positioned to offer Political Risk Insurance to limit losses that result from political risks and are continuing to publish an expanded content series on Political Risk Insurance with support material.

Characteristics of Emerging Markets

• Low per capita income
• Instituting reforms
• Commitment to development
• Moving from closed economies to open markets
• Improvements in transparency
• Substantial increases in foreign investment
• Stabilizing exchange rates

Defining Emerging Markets

Although there is no official governing body of defining Emerging Market Economies, most of those who do define them use virtually the same criteria to do so. They are economies with low to middle per capita income, constituting approximately 80% of the global population, and approximately 20% of the world’s economies. Although Emerging Markets are loosely defined, Emerging Market countries are usually characterized as emerging because they have recently implemented developments and reforms.

In other words, they are countries that have made a commitment to economic development and reform programs and have begun to open their markets. Emerging Markets are universally considered fast-growing economies. Most Emerging Markets are smaller economies, but that is not a hard and fast rule. Large countries are not precluded from the classification. China, for example, is a huge country with a huge economy. It is, nonetheless characterized as an Emerging Market Economy because it has begun economic development and reform programs.

Because they are moving from closed economies to open market economies, and are embarking on economic reform programs that promise stronger future economic performance, they are considered transitional. They have all also tacitly if not specifically guaranteed improvements in transparency in capital markets as well as the political arena. Emerging markets make a concerted effort to stabilize and strengthen local currency through exchange rate reforms.

In addition to implementing reforms, Emerging Market Economies likely receive aid and guidance from large donor countries organizations like the World Bank and IMF. A defining characteristic of all Emerging Markets is that they experience significant increases in both portfolio and direct foreign investment. The growth of foreign investment in a country is a key indicator that world financial markets are taking them seriously and that capital flow towards the country will likely continue.

Political Risk Insurance Expanded Content Series

This article, which defines and characterizes emerging markets is part of our expanded content series on Political Risk Insurance, as are the pages listed below. We published this content series to ensure that our clients have the information they need to more fully understand emerging markets, political risks and both the long-term costs and benefits of Political Risk Insurance. Start at the beginning with the Political Risk Insurance service page and then read the expanded support content in this series. The details are cited towards the bottom of that page.