Emerging market characteristics
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Emerging markets are countries or regions with economies that are in transition from a lower to a higher level of economic development. They typically have lower per capita income and lower levels of capital investment than developed countries, and are characterized by a high degree of market volatility and risk. These markets are attractive to international investors due to their potential for high returns, but they also require a greater level of management due to the increased risk associated with them. Managers must therefore take into account the unique characteristics of these markets and develop strategies that are tailored to the local conditions and culture to ensure success.
Example of emerging market characteristics
- Rapid population growth: Emerging markets often have rapidly growing populations, which can create a larger consumer base for goods and services and create opportunities for business expansion. For example, India's population is projected to overtake China's by 2030, creating a large potential market for businesses.
- Poor infrastructure: Developing countries often have inadequate infrastructure, such as roads, ports, and airports, which can impede the flow of goods and services. For example, Nigeria's infrastructure is estimated to be 60 years behind the developed world. This can be an obstacle to businesses trying to access the market.
- Political instability: Political instability is a common characteristic of emerging markets, which can lead to volatile economic conditions and create risks for businesses seeking to operate in these markets. For example, Venezuela has experienced a period of political unrest, which has led to an economic crisis and a decrease in foreign investment.
- Low levels of technology: Developing countries often have low levels of technology, which can create barriers to entry for businesses wanting to operate in these markets. For example, China has advanced technology, such as 5G networks, while many African countries are yet to deploy the technology.
- High levels of corruption: Corruption is a common feature of many emerging markets, which can create difficulties for businesses wanting to operate in these markets. For example, Transparency International's corruption perception index ranks countries such as Angola, Sudan, and Syria as some of the most corrupt countries in the world.
Emerging market risks
- Political Risk: Emerging markets often have unstable political environments and can be subject to sudden shifts in policy or violent political unrest. This increases the risk of investing in these markets and managers must be aware of the potential for sudden and unexpected changes in government policy.
- Currency Risk: Many emerging markets have currencies that are prone to volatility and can be subject to sudden changes in value or currency devaluation. This can make it difficult to accurately forecast returns and managers must be aware of the risks associated with currency fluctuations.
- Regulatory Risk: Emerging markets often have less developed legal and regulatory frameworks than developed countries, making them more vulnerable to manipulation and fraud. Managers need to be aware of the potential for regulatory uncertainty and be prepared to adjust their strategies and investments accordingly.
- Geopolitical Risk: Some emerging markets are located in regions with ongoing conflict, such as the Middle East or Africa, making them more susceptible to instability and political unrest. Managers must be aware of the potential for sudden and dramatic changes in the political or economic environment, and must adjust their strategies accordingly.
- Market Fragmentation: Many emerging markets are fragmented, with different markets operating in different locations and with different levels of liquidity. This can make it difficult to accurately assess market dynamics and can create additional risk for investors.
- Capital Access Risk: Access to capital can be limited in emerging markets, making it difficult for investors to raise the necessary funds for their investments. Managers must be aware of the potential for limited access to capital and must be prepared to adjust their strategies accordingly.
- High levels of volatility and risk: Emerging markets can be highly unpredictable and therefore difficult to manage. They are characterized by large swings in asset prices, currency exchange rates and economic activity, which can lead to significant losses if not managed properly.
- Low liquidity: Emerging markets often have lower levels of liquidity than developed markets. This means that it can be difficult to quickly buy and sell assets in these markets, as there may not be enough buyers and sellers.
- Lack of transparency: Information on the performance and operations of companies and other institutions in emerging markets can be limited or unreliable. This can make it difficult to accurately assess the risks and rewards of investing in these markets.
- Political and economic instability: Emerging markets are often characterized by political instability and weak economic policies. This can create an uncertain business climate and make it difficult for investors to plan for the long term.
- Cultural differences: Different cultures can present unique challenges for management. For example, business practices, organizational structures, and communication styles can vary from country to country, making it difficult for managers to adapt their strategies accordingly.
Suggested literature
- Bekaert, G., Erb, C. B., Harvey, C. R., & Viskanta, T. E. (1998). Distributional characteristics of emerging market returns and asset allocation. Journal of portfolio management, 24(2), 102-+.
- Patro, D. K., & Wald, J. K. (2005). Firm characteristics and the impact of emerging market liberalizations. Journal of banking & finance, 29(7), 1671-1695.
