Education • 5 min read
By Camilla Marziani
If you've already been diving into investing for a while, or if you’ve just started dipping your toes into it, chances are you’ve heard about emerging markets. Lately, the emerging markets have caught the eyes of many investors. Read more to find out what you should know about the emerging markets and how to invest in them.
Between news headlines about emerging markets and the five countries that have been known for their fast-growing economies for years, Brasil, Russia, India, China, and South Africa (also known as “BRICS”), you may have an idea as to which countries we’re referring to. However, what you may not know is that the classification of a country as “emerging” is decided by institutional entities, following specific criteria.
For instance, the International Monetary Fund (IMF) classifies 39 countries as “advanced”, while the remaining as “emerging market and developing” economies, with 40 among them defined as “emerging market and middle-income” economies.
Every country that is not considered as “advanced” is then labelled according to a score, which is calculated based on 5 variables: nominal GDP, population, GDP per capita, share of world trade and share of world external debt. In a recent report from the IMF, 20 countries fall into the category of emerging markets, and they are the ones often included in indices featuring emerging markets.
The MSCI, also known as Morgan Stanley Capital International, is a prominent institution when it comes to market classification. The MSCI is a financial company and investment research institution renowned for market classification and for offering indices reflecting their performances - including, since 2001, the Emerging Markets (MSCI-EM) index.
According to the MSCI’s criteria, “emerging markets” are those sharing a number of the characteristics of developed markets, but not all of them. Let’s dive a little further into what criteria the MSCI considers, which markets are considered emerging markets in 2021 and how to invest in them.
Every year, MSCI classifies 84 countries into four categories: developed markets, emerging markets, frontier markets or standalone markets. The criteria behind this assessment involve economic development, market size and liquidity, and market accessibility.
Economic development: Evaluates the sustainability of economic development and is a criterion applied exclusively to developed markets.
Size and liquidity: These factors are employed to see if countries reach the minimum investability, meaning they must have a number of companies with a certain company size in full market cap, security size in float market cap and security liquidity.
Market accessibility: As perhaps the most interesting part of this system, markets are evaluated based on five criteria: openness to foreign ownership, ease of capital inflows and outflows, efficiency of their operational framework, availability of investment instruments and stability of the institutional framework. To get a high score, countries need to prove to be “unproblematic” when it comes to fulfilling these requirements.
As of today, 27 countries are considered emerging markets by the MSCI, including the BRICS: Brazil, Russia, India, China and South Africa, as well as Argentina, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, Indonesia, Korea, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Saudi Arabia, Taiwan, Thailand, Turkey, and United Arab Emirates.
Compared to the IMF’s ranking, the MSCI’s emerging markets exclude Iran, but include Czech Republic, Greece, Korea, Kuwait, Pakistan, Peru, Qatar, and Taiwan.
The MSCI’s Emerging Market index mirrors the performance of the companies of these 27 countries that fulfil the MSCI's requirements.
Let’s look at the latest data on the Emerging Markets index. In 2021, the countries that contributed the highest percentages to the index were China with 34.72%, Taiwan with 14.68%, and South Korea with 12.22%. The number of companies (large and mid-cap) whose performance is reflected by the index added up to a dazzling 1.417, with more than a fifth being in the information technology sector. Some top-performing companies of the Emerging Markets index include Alibaba Group, JD.com and Samsung.
If the stock market or the world of investing sparked your interest, you may have thought about “investing in the emerging markets”. The economies of those 27 countries have been showing mainly upward development during the past years, despite ups and downs.
Looking at the MSCI Emerging Markets index, registered growth of the net returns from the end of 2000 to 2021 amounted to 9.17%, whereas the MSCI ACWI and the MSCI World indices reported an increase of respectively 6.66% and 6.67%. However, this doesn’t mean that these assets can only rise in value: for indices, stocks, and frankly all investing products, it’s important to remember that some may gain value over time, some may lose.
For this reason, many investors opt for a diversified portfolio. This means they diversify their portfolios by investing in different types of assets, but also in different companies growing at different paces, perhaps based in different countries, to distribute and reduce the risks of investing.
Investing directly in an index is not possible, as an index indicates a change in values - for instance, prices - over time. Investors wishing to take part in the Emerging Markets will have to take another road.
There’s a way to invest in them through a product replicating the underlying index: the exchange-traded index fund, also known as ETF ("exchange-traded fund").
On Bitpanda Stocks*, you’ll be able to fractionally invest in the Emerging Markets Stocks*, the ETF* that tracks the performance of the MSCI Emerging Markets index as accurately as possible, and from as little as €1, free of commissions and with limited spreads. The derivative contracts covered by the underlying stocks and ETFs make this possible.
*Bitpanda Stocks enables investing in fractional stocks. Fractional stocks in Europe are always enabled via a contract which replicates the underlying stock or ETF (financial instruments pursuant to section 1 item 7 lit. d WAG 2018). Investing in stocks and ETFs carries risks. For more details see the prospectus at bitpanda.com.
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