What are emerging markets?
Emerging markets are countries that are playing catch-up with developed economies, usually in terms of gross domestic product (GDP) per capita. But GDP per capita isn’t the only criterion taken into consideration. While there’s no single definition for an emerging market, characteristics such as export diversification and the degree of participation in the global financial system are usually important factors.1 Emerging markets are also more established and advanced than frontier markets.
As of December 2021, MSCI, the provider of the most popular emerging market equity index, listed 25 emerging markets, with China, India, and Taiwan representing the largest weights. Based on MSCI’s country classification, emerging markets account for 37% of the world’s GDP, versus 54% for developed markets and 9% for the rest of the world.2
Today’s emerging markets are also quite different from what they were 20 years ago, at least from an economic standpoint. In the past, they were commodities-oriented economies, relying heavily on the energy and materials sectors to fuel growth. Although those sectors are still playing a key role in their economies, emerging markets have become increasingly tech- and consumer-focused, thanks to an environment that’s more favourable to innovation and a fast-growing middle class propelling consumer demand.
Risks of investing in emerging markets
Emerging markets are vital for the world’s economic health and growth, from playing a key role in supply chains to being at the centre stage of the clean energy transition. In an investing context, emerging markets can also be a key asset class for many investors to meet their financial objectives. On an absolute return basis, for example, emerging markets have provided higher equity returns than developed markets over the past two decades, generating an annualized return of 10%.3
Investing in emerging markets, however, is not without risks.
Governments in emerging markets tend to have greater decision power and intervene more in the market than policymakers in developed countries. For example, in some emerging countries, there’s a lack of central bank independence, something which is considered critical for long-term economic stability. Political risk also refers to the probability of war, regulatory changes, and runaway inflation.
In emerging markets, there’s also a greater risk of nationalization of corporations or expropriation of their assets, which can significantly impact both the company that’s taken over and its investors. For example, in 2007, Venezuela seized control of multiple oil fields managed by foreign companies like Total, Exxon, and ConocoPhillips.
Currencies in emerging markets tend to be more volatile than those of developed countries, which can hurt performance. Although currency risk is mitigated by the fact that there’s some diversification across the different currency movements of the 25 emerging markets, it can still be a headwind for foreign investors. To eliminate that risk, investors can opt for a currency-hedged strategy.
The equity markets of emerging economies are, in general, less liquid than those of developed economies, which could lead to more volatile price movements, especially when there‘s panic in the markets and transaction volumes decline.
The COVID-19 pandemic—and the way each country is dealing with it—created a new risk for economies around the world, not just for emerging markets. However, populations in developed countries are largely vaccinated, which helps reduce the probability of future lockdowns, contrary to emerging markets for which vaccination rates are still problematic.
Considering the risks and rewards is key before committing to an allocation in emerging markets. As with any investments, it’s critical to talk to your financial advisor to assess whether they can be a good long-term investment for you.
1 https://www.imf.org/external/pubs/ft/weo/faq.htm#q4b. 2 Manulife Investment Management, World Bank, as of December 2021. 3 Manulife Investment Management, Macrobond, as of December 2021
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person.
All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment, or legal advice. Clients and prospects should seek professional advice for their particular situation. Neither Manulife Investment Management nor any of our affiliates or representatives (collectively Manulife Investment Management) is providing tax, investment or legal advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Manulife Investment Management shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social ,and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Manulife Investment Management
Manulife Investment Management is the global brand for the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship and the full resources of our parent company to serve individuals, institutions, and retirement plan members worldwide. Headquartered in Toronto, our leading capabilities in public and private markets are strengthened by an investment footprint that spans 18 geographies. We complement these capabilities by providing access to a network of unaffiliated asset managers from around the world. We’re committed to investing responsibly across our businesses. We develop innovative global frameworks for sustainable investing, collaboratively engage with companies in our securities portfolios, and maintain a high standard of stewardship where we own and operate assets, and we believe in supporting financial well-being through our workplace retirement plans. Today, plan sponsors around the world rely on our retirement plan administration and investment expertise to help their employees plan for, save for, and live a better retirement.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.