Developed and emerging markets: the practical difference
intermediate
Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.
Содержание · 4
The split into developed and emerging markets is a formal classification by index providers that moves real money.
The criteria
Market size and liquidity, accessibility to foreign investors, the quality of infrastructure and regulation, freedom of capital movement.
Household income levels barely feature in the criteria.
Why the classification affects prices
Large funds follow indices. A country's inclusion in an emerging markets index means automatic inflows from every fund tracking it; exclusion means outflows.
That movement has nothing to do with the quality of individual companies.
The risk premium
Emerging markets have historically traded at a discount to developed ones on multiples. The discount reflects higher political, currency and infrastructure risk.
The currency component
An emerging market's return to a foreign investor combines the performance of the securities and the performance of the currency. The second frequently consumes the first.
A local investor does not face that problem — their income and spending are in the same currency: Currency exposure: you have it even if you never opened it.
Related: Restrictions and infrastructure risk: how it differs from market risk and World indices: what each of them measures.
Prepared by a language model from our stored data and checked by an editor.
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