22nd February 2012
It may seem as if the developed world's economic future is on a knife edge. So it's not surprising that investors are looking elsewhere to pledge bets for future growth. Brazil, say, and India are frequently tipped as investment opportunities, while what we know as ‘developed markets' including Japan, Germany, France and Italy become increasingly unattractive.
Market commentators are asking whether this trend is set to continue, or if developed markets will reassert their dominance.
But Mindful Money wants to know:
Is the term ‘emerging markets' outdated?
First of all, what is an emerging market? First coined in 1981 by the World Bank, according to Investopedia, the term is now widespread – particularly in the media. Perhaps it was originally meant to describe ‘those countries not developed'. It's easy to find a list of emerging markets – see here – but harder to find a definite description.
Pearson Education points to the World Bank, which uses three variable: Gross domestic product per head, growth rate and state of development to classify whether a country is an emerging market or not. Meanwhile, says Investopedia, an emerging market economy is defined as one with low to middle per capita income. Such countries constitute approximately 80% of the global population, and represent about 20% of the world's economies.
This list includes the likes of China, South Africa and Singapore – the countries that slot into this category vary from very big to very small, and are considered fast-paced emerging economies because of their developments and reforms. Meanwhile, developed markets, as you'd expect, include USA, Western Europe, Australia, and Japan.
But in a changing economic landscape this surely has to shift? After all, isn't China known as an economic powerhouse? According to The Economist many people find the term ‘emerging markets' outdated, but no new, specific term has yet to gain much traction.
BRICs and CIVITs
However, a few new categories have emerged, such as one of the best-known acronym in investment: BRICs.
Written by Jim O'Neill and his team at Goldman Sachs, the report over a decade ago – entitled "Building better global economic BRICs" – predicted that Brazil, Russia, India and China would account for a much larger share of the world economy by 2011. Their predictions have come true in impressive style, with China now the world's second-largest economy.
Now, we've got the CIVITS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and frontier markets such as Africa also on the investment map.
Yet the same Jim O'Neill believes that the traditional distinction between developed and developing countries is outdated. China, Russia, India, Brazil, Turkey, Mexico, South Korea and Indonesia are no longer developing countries. He suggests that these markets be called Growth 8, predicting that the combined GDP of these eight countries will account for about a third of the world economy by 2020. Meanwhile, the G7 countries – Germany, the United States, Japan, Great Britain, Canada, France and Italy – will account for just over 40%.
Perhaps it's more of a divide between southern hemisphere and the northern hemisphere rather than ‘emerging' and ‘developed' these days?
After all, of those countries left unscathed by the global financial crisis it seems all are situated in the southern hemisphere, stresses blog The Conversation. Brazil and Australia are some of them – so the distinctions are blurring. Recently, their economies have started engaging with each other – at times competing for the same markets, at times collaborating and exchanging technology and know-how.
People reckon the performance of an ‘emerging market' can be predicted, says Mindful Money's psychologist blogger Kim Stephenson. But it can't – although investing in these may offer more security.
He says: "What is "emerging"? If it means "emergent" as in complexity theory it's more interesting. Is social media, for example, an "emerging market" – or would people say it's emerged and they think they know where it's going?
"As with any "emergent system" where numbers of simple actions lead to unexpected and complex results that can look as if they are centrally planned, the results of simple actions of people in a market are impossible to predict. But they look so much like a pattern that people (who evolved to spot patterns, whether they are really there or not) think they can see a pattern and predict it.
"With mature markets, people think they can predict them – despite the mountains of evidence to the contrary, and investors are totally convinced that they know that "there is now cause for optimism" or "the market hasn't yet bottomed out" or whatever. In a new area, they might not have quite the same level of unjustified confidence in their own presci
ence – so they might ironically be safer."
Of course, even though investors are willing to take a punt on whatever they might deem ‘emerging markets', they are still considered volatile with important questions to be asked on corporate governance and the risk involved. Perhaps it's time for a new classification so that various asset management teams can be sure they are applying their tools to the right markets?
What do you think?
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