What are Emerging Markets?

You have probably heard of emerging markets. But do you know what they are?

These are economies in nations that are rapidly growing and maturing. They are characterized by stable governments, established mechanisms for trading goods and services, a stable currency, controlled levels of inflation, and liquid securities markets. They are typically in a state of growth. Many will eventually become “developed” countries.

As of May 2010, Dow Jones classified the following 35 countries as emerging markets:

Argentina
Bahrain
Brazil
Bulgaria
Chile
China
Colombia
Czech Republic
Egypt
Estonia
Hungary
India
Indonesia
Jordan
Kuwait
Latvia
Lithuania
Malaysia
Mauritius
Mexico
Morocco
Oman
Pakistan
Peru
Philippines
Poland
Qatar
Romania
Russia
Slovakia
South Africa
Sri Lanka
Thailand
Turkey
United Arab Emirates

Why should investors care about these countries? Because investing in these countries offers the potential for relatively rapid capital appreciation. The companies in these countries are likely to grow at a faster rate than companies in developed markets like the US, Canada, Japan, and Western Europe.

In addition, investments in these countries are likely to have a relatively lower correlation with developed markets. This means that the values of investments in these countries will not move in lock-step with investments in developed markets.

Emerging markets belong in a low-cost, passively managed portfolio.