WHAT COUNTS AS an emerging market? Broadly speaking, an economy that is not too rich, not too poor and not too closed to foreign capital. The term was coined by Antoine van Agtmael in 1981 when he was working for the International Finance Corporation (IFC), a division of the World Bank. He hoped to create what he had named: a set of promising stockmarkets, lifted from obscurity, thereby attracting the investment they needed to thrive.
At the time, it was hard work even to compare the performance of stockmarkets in places like Brazil, India and South Korea. The IFC, having collected data on ten such markets, felt that foreign investors might take to these boondock bourses, but would be put off by the risk of investing in a single company or the trouble of diversifying across many firms and places. The answer, the IFC concluded, was to provide them with a one-stop, broadly representative “Third-World Equity Fund”. When Mr Agtmael pitched the idea to a group of fund managers at an event hosted by Salomon Brothers, some were sceptical, other intrigued. One liked the idea but hated the name. So Mr Agtmael spent the weekend dreaming up the term “emerging markets”, with which he hoped to evoke “progress, uplift and dynamism”. That label proved wildly successful.
The first such fund, pioneered by Capital Group in 1986, included only four countries. The most popular equity benchmark, the MSCI EM index, started in 1988 with ten and now spans 24. Many people complain that the category has become an indiscriminate grab-bag, throwing together economies at utterly different stages of development, such as Taiwan and Pakistan. But the group was never all that homogeneous. The ten markets in the original MSCI index included the Philippines but also Portugal, a country seven times as rich (at market exchange rates). Indeed, the markets are now more tightly correlated than they were in the early years, according to MSCI (though less so than in the crisis years from 2008 to 2013).
The emerging-markets group has also become more prosperous and more Asian. The World Bank now classifies nine of MSCI’s 24 benchmark economies as high-income. (These economies, which include Taiwan, South Korea, Qatar, the United Arab Emirates and several members of the European Union, will not feature prominently in this special report.) Asia accounts for almost 70% of the group’s combined GDP and commands a similar weight in the equity index. From Hong Kong “I can cover 60% of the market cap within four hours’ flight,” says Sean Taylor of Deutsche Bank Asset Management.
Some countries are much more important to investors than their economic weight would suggest, thanks to their unusually deep and open stock- or debt markets. The best example is South Africa: the combined value of shares on its stockmarket is more than three times its GDP. The biggest company listed on its stockmarket is Naspers, mainly because it has a 33% stake in Tencent, a Chinese
As well as progress, uplift and dynamism, emerging markets have traditionally featured crises, defaults and slumps. Many have been laid low by profligate governments, overstretched companies, mismatched balance-sheets, fickle foreign capital or volatile commodity prices. Such setbacks can take a toll on their long-term prospects, preventing them from graduating to the ranks of mature markets. Poor economies typically become “emerging markets” because they have grown quickly. They remain “emerging” because they have not managed to grow steadily.
