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What is an emerging market? | CNBC Explains
What is an emerging market? | CNBC Explains
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Phụ đề (73)
0:00
What does Indonesia have in common with countries like India, Brazil and Russia?
0:05
They’re all classified as emerging markets.
0:08
It’s a term that originated in the 1980s and has stuck around since then.
0:12
Two of the most important reasons why?
0:14
Well, these countries are crucial when it comes to driving global economic growth.
0:20
And their financial markets can be goldmines for investors,
0:24
especially those with an appetite for higher risk.
0:28
So what makes an emerging market today?
0:30
And why do investors have such a love-hate relationship with them?
0:37
The term "emerging markets" was coined by a World Bank employee Antoine van Agtmael.
0:42
The finance arm of the World Bank wanted to get more foreign investment into third world countries,
0:48
but didn’t think the term “third world” really inspired investors.
0:53
To make it sound more attractive, van Agtmael coined the term “emerging markets.”
0:59
But if you want a definitive list of emerging markets, good luck.
1:02
The list varies depending on who you ask.
1:05
The IMF classifies 96 countries as emerging.
1:09
It uses criteria such as how much citizens of that country earn, how diverse the country’s exports are,
1:16
and how sophisticated its financial system is.
1:20
That’s one measure.
1:21
But investment research firm MSCI, which creates stock indexes,
1:25
classifies 24 countries as emerging markets.
1:29
Okay, but what’s an index?
1:32
Essentially, it’s a list of stocks that measures certain features.
1:36
For example, if you want to look at how the biggest U.S. companies are doing,
1:40
you could look at the Dow Jones Industrial Average, which covers 30 household names.
1:46
The MSCI is known for its Emerging Markets Index, which shows us
1:50
how emerging countries like Brazil, China and Turkey are doing.
1:55
Unlike the IMF, the MSCI uses how investable a country’s stock market is
2:01
to determine whether it's an emerging market.
2:04
That’s important, because this influences how much foreign investment a country can get.
2:10
You may be wondering how such a diverse group of countries could possibly be grouped together.
2:16
Despite their many differences, there are a few characteristics that they do tend to have in common.
2:21
Let’s take a look at the first one.
2:24
The term “emerging markets” was initially used for developing countries,
2:29
which meant that the average person living there tends to earn less than someone in a developed country.
2:35
Economists call this a lower income per capita.
2:39
But that’s not always true today.
2:41
Some countries, like the United Arab Emirates and South Korea are considered emerging markets,
2:47
but they have higher income per capita than some developed countries, like Spain and Portugal.
2:54
An investor’s goal is to make money. For that, you need growth.
2:57
And emerging markets are known to do just that, rapidly.
3:01
Fast growth is our second characteristic.
3:04
One report found that one out of every four emerging economies
3:08
outperformed its peers and developed countries.
3:12
Of these 18 outperformers, seven exceeded annual per capita GDP growth of 3.5 percent for a 50 year period.
3:22
They include China, South Korea and Indonesia.
3:26
The other 11, which include India, Ethiopia and Cambodia, have enjoyed more recent gains,
3:32
growing at about five percent or higher over the past 20 years. That’s 3.5 percentage points above the U.S.,
3:41
and enough to lift themselves into a new income bracket for countries.
3:47
That growth comes with a lot of risk.
3:49
And that brings us to our next characteristic, high volatility.
3:52
And if you need an example of volatility, just look at this.
3:56
The MSCI index, which shows total returns, shows emerging markets had been doing pretty well,
4:03
until January 2018, when things began to sour.
4:08
We’ve seen their currencies fall to historic lows against the U.S. dollar.
4:12
That’s bad news for countries trying to pay off their debt.
4:16
It’s a problem because a lot of that debt is held in foreign currencies,
4:21
particularly in the strengthening U.S. dollar. That makes paying off debts an uphill battle.
4:28
Not ideal when emerging markets have seen their total debt rise from $21 trillion in 2007 to $63 trillion in 2017.
4:40
Emerging markets crises are worrying, because they affect
4:44
multiple countries and tend to work in a vicious cycle.
4:48
First, the currency falls rapidly.
4:50
Countries then struggle to raise funds due to their less mature capital markets and investors flee.
4:58
This affects the country’s assets and currency, and can sometimes
5:02
damage the country’s banking system and even the economy.
5:05
It’s important to note that an emerging market’s status can come and go.
5:10
That could mean a step up as a developed nation, or a step back as a frontier nation.
5:16
Despite all the uncertainty, one thing is for sure, investors will continue to watch
5:22
emerging markets closely, as the countries continue to expand their role in the global economy.
5:31
Hi everyone, it's Xin En. Thanks for watching.
5:34
If you want to check out more of our videos, click here.
5:36
Feel free to leave any suggestions for future videos in the comments section.
5:40
That's all for now, see you next time.
