In general, the term refers to the economies of countries that are undergoing industrialization as they develop, whose share of world GDP is growing rapidly. In 2020, the 37 markets covered by the Oxford Business Group (OBG) represented around 21.6% of the world’s population and approximately 9.6% of global GDP. Some emerging markets, such as South Korea, have a large number of consumers and a rich economy, while others, such as parts of Southeast Asia, the Middle East and Africa, are still in the early stages of developing a strong economy and a stable environment.
Is it worth investing in emerging markets?
Emerging markets and developing economies account for about 80% of global economic growth, according to the International Monetary Fund (IMF). They also account for about 85% of global consumption growth, more than double that of the 1990s.
For every success of an emerging market like South Korea, there is a struggling Venezuela or Russia, and like anything experiencing rapid development, emerging market economies can struggle to grow, so investors should Be aware of the volatility that this asset class often entails.
There have long been relative winners and losers, so it is important to be discerning in this asset class. Currently, several Latin American countries are benefiting from favorable trends in monetary policy, inflation, and global trade, which could provide strong momentum for stocks in 2023.
In the case of Brazil, the general consumer price index has fallen sharply from 12.1% in April 2022 to 5.8% in December, with the expectation that the anti-poverty program will support labor market improvements that could help to strengthen economic growth. In addition, China’s economic reopening is likely to fuel a strong expansion of trade for Brazil.
Regarding Mexico, where tourism represents 15% of GDP and 13% of all jobs, and where 70% of international travel comes from the United States, a probable slowdown in tourism from that country is an obstacle in the short term. Likewise, the sluggishness of sales in the automotive sector, which represents 20% of Mexico’s manufacturing output, may also hinder growth. However, a trend of nearshoringwhich encourages global companies to move supply chains closer to home, could substantially boost US investment in Mexico, which could see an increase of $155 billion in its exports to the United States – or more than 10% of the Mexican GDP- in a period of five years.
Emerging markets can stretch and offer investors growth and upward momentum in boom times, but they can pull back when market cycles change. While a high percentage of the portfolio in emerging markets may not be desired, a modest 5-10% allocation could add an additional layer of diversification.