• Mark Zanders

Emerging Markets: An Overview

The views in this Global Market Outlook report are subject to change at any time based upon market or other conditions and are current as of October 5, 2019. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed.

Special credit to the CFA Institute's "Capital Market Expectations" and "Managing Investment Portfolios: A Dynamic Process" for broad reference points

Emerging markets are often hard to define; for example, a recent article contrasted the IMF

classifying 152 nations as emerging, while MSCI's definition encompassed only 23!


However, the potential of these markets cannot be overlooked regardless of the difficulty in

classifying them, and we will start with a broad overview, followed by factors associated with

emerging markets, pros and cons of emerging markets investing, and a closer look at the

promising East Africa region.

Looking at GDP, the widely used "BRIC" acronym developed by Jim O'Neill at Goldman Sachs in 2001 in reference to Brazil, Russia, India, and China now comprises the eleventh, ninth, seventh, second largest economies respectively (Data: World Bank), with China alone second only to the U.S. and with a GDP larger than those of Japan, Germany, and the United Kingdom combined, therefore showing that GDP alone may not be sufficient to define emerging markets and that countries can rapidly transition from emerging to developed. 

One useful tool may be to examine growth rates, as emerging markets should offer the

opportunity for larger GDP growth than established markets. Applying this analysis to the

countries above, we get an incomplete picture:  Brazil (0.3), Russia (2.3), India (5.9), China

(6.1), compared to the U.S.(2.2%), Japan (1.0%), German (1.1%), and U.K (0.7%). The most

recent IMF data may provide a more useful perspective, with emerging market growth at 4.5% (2018) and forecasted growth of 4.1% and 4.7%, compared to a world growth rate of 3.8% and forecasted growth of 3.2% and 3.5%, and advanced economies growth rate of 2.2% and forecasted growth of 1.9% and 1.7%. Naturally, emerging countries can have faster growth as they catch up with more developed countries, but with their growth slowing as they develop (as an analogy, a company with $1MM in revenue needs an incremental $1MM to double revenue, but one with $5MM needs an incremental $5MM to accomplish the same) As shown in the GDP example, countries can rapidly transition from the "next big thing" to being firmly established as leading economies, and the IMF data shows that emerging markets have been a major driver of overall world economic growth given that advanced economies have lagged overall growth.  

Some broad items to consider as we analyze emerging markets include:

Consumer demand, which comprises the largest source of economic growth for both

emerging and developed economies, and can be driven both by demographic changes and

increases in consumption.

  • Growth in changes in employment

  • Growth in changes in labor productivity

  • Growth in capital

  • Total factor productivity, often considered as technical process and increased efficiency, or simply as the residual growth not explained by capital or labor

A deep dive into these factors would merit a far longer paper, but a useful equation is the Cobb-Douglas production function, with Total growth = growth due to capital + growth due to labor + growth from TFP, which can help us identify countries poised for outsized growth in potential and what this growth may be attributable to. We will discuss factors associated with emerging markets, as well as the pros and cons of investing in these markets in later article. Further, one region of particular interest to us that we will also discuss in mode is East Africa, as the promising demographic trends from both population growth and a rapidly growing middle class, combined, recent economic growth, and rich natural resources may align in a very favorable manner.


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