Difference between developed, emerging and frontier economies?
Investors looking for an international exposure need to understand various categories of economies and the risks involved. Find out the country categories and the things to note before investing there
Nikita Vashisht New Delhi
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Illustration
A diverse portfolio helps investors hedge concentration risks. And while portfolio or investment diversification is important, locations or economies where you put your money is equally crucial.
And when you turn towards international markets, you have the options of investing in developed markets, emerging markets, and frontier markets.
Let us understand what each of these markets are, and how can one invest in them?
While there’s no one standard definition of each of these markets, experts point out that there are a number of characteristics that are hallmarks of each.
For instance, developed nations usually have more advanced economies, better-developed infrastructure, and higher per capita income.
Western economists consider $15,000 to $20,000 per capita GDP to be a sufficient range for developed status.
That apart, developed economies are also characterised with highly developed capital markets, regulatory bodies and high household incomes.
However, a high per capita GDP alone does not confer developed economy status without other non-economic factors such as the infant mortality rate and life expectancy.
For example, the United Nations still considers Qatar, which had one of the world's highest per-capita GDP in 2021 at around $62,000, a developing economy.
This is because the nation has extreme income inequality, lack of infrastructure, and limited educational opportunities for non-affluent citizens.
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Overall, various organisations including World Bank, the United Nations, MSCI, FTSE, and Standard & Poor’s consider about 25 nations as developed economies.
Australia, Austria, Belgium, Denmark, Canada, France, Germany, Hong Kong, Italy, Japan, New Zealand, Norway, Portugal, Singapore, Spain, Switzerland, the US, and the UK
These include Australia, Austria, Belgium, Denmark, Canada, France, Germany, Hong Kong, Italy, Japan, New Zealand, Norway, Portugal, Singapore, Spain, Switzerland, the US and the UK.
According to the World Bank, countries with low, middle, and upper-middle incomes per capita, relative to incomes in other countries around the globe, are labeled as developing, or emerging.
Developing countries or economies are those which do not enjoy the same level of economic security, industrialization, and growth like the developed countries.
It includes the nations that do not have the economic strength of developed nations, but are in the process of becoming developed economies.
It pegs per capital income for emerging markets between at $4,095 or less.
But for investors, the emerging markets offer a greater amount of liquidity as well as stability. Emerging market countries include BRICS countries -- Brazil, Russia, India, China, and South Africa.
Besides, Mexico, Pakistan, and Saudi Arabia are other developing economies.
The third one is frontier market. They are somewhat less advanced capital markets in the developing world.
These markets are in a country that is more established than the least developed nations. It is still less established than the emerging markets because it is too small, carries too much inherent risk, or is too illiquid to be considered an emerging market.
That’s why they are sometimes called as pre-emerging markets. So, based on these criteria, frontier markets include the likes of Colombia, Indonesia, Vietnam, Egypt, Turkey and Nigeria.
One of the easiest ways to incorporate stocks from various markets is to purchase shares in managed funds. Secondly, bear in mind the risks, liquidity, and growth potential of a given country before investing.
That apart, investors must balance the strengths, weaknesses, opportunities, and threats before investing in a particular country.
They should also make tradeoffs and place bets among debt, equity, domestic, international, growth and safer options.
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First Published: Jun 15 2022 | 7:00 AM IST
