Emerging markets

Emerging markets are capital markets in non-developed economies. The characteristics of an emerging market vary from country to country but the following are common:

  • high economic growth
  • high exchange rate risk
  • high political risk
  • lack of effective regulation and weak legal systems
  • weak protection for minority shareholders
  • large numbers of companies that are controlled by a single majority shareholder, or a group of connected shareholders (e.g. a family)
  • the existence of large conglomerates.

Exchange rate risks are often over-estimated by investors as they are usually offset by the inflation (and therefore profit growth) that tends to follow on depreciation. The other risks that are attached to investing in emerging markets are largely diversifiable.

The weak protection of minorities is often reflected in prices, but some of the other risks that result from weak regulatory environments are not so easy to dismiss. In particular, investors can rely less on brokers and other advisers in emerging markets than they generally can in developed economies.

The existence of (often, the dominance of markets by) conglomerates is the result of several other aspects of emerging markets and developing economies - the lack of liquid capital markets, and poor regulation, in particular.