Emerging Markets vs. Developed Markets

Emerging markets offer rapid growth potential and investment opportunities, while developed markets provide stability and established infrastructure.

Emerging markets and developed markets offer unique investment opportunities. While developed markets have established economies with strong growth and stable investment potential, emerging markets offer greater opportunities for sudden growth. Read on for the pros and cons of emerging markets versus developed markets to understand the investment opportunities in each. 

What is an Emerging Market?

An emerging market in investing refers to a country whose economy is transitioning into a developed market economy. Emerging markets are in the process of transitioning from a low-income, even preindustrial economy, to a modern economy with a higher standard of living. As the emerging market grows, the nation becomes more engaged with global markets.  

Other characteristics of emerging markets include rapid gross domestic product (GDP) growth, increasing income per capita, increased commodity prices and increased debt and equity market liquidity. To become an emerging market, countries generally need an established financial system infrastructure, regulatory institutions and a unified currency. 

The most famous emerging markets of the last two decades are the BRICS countries: Brazil, Russia, India, China and South Africa. The GDP of these countries has grown significantly in the last two decades, suggesting that they could become major players or even leaders in the global economy and global market share in the decades to come.

As an investor, you might seek out emerging markets for the possibility of high returns. These markets typically experience faster economic growth as measured by GDP. But with higher returns come higher risk as well.

What is a Developed Market?

Investors consider developed markets as economies with the greatest development in financial infrastructure and regulation and the largest capital markets. Generally, a developed country has a high GDP, high income per capita compared to global averages, greater market liquidity and higher debt. Other characteristics of a developed market include openness to foreign ownership and investment, ease of capital movement and efficiency of market institutions. 

Developed markets include the United States and Canada, most of Europe, Israel, the U.K., Australia, New Zealand, Singapore, Japan and Hong Kong. 

Comparing Emerging Markets vs. Developed Markets

Should you invest in emerging markets or developed markets? Here are key comparisons:

Risk

Risk factors vary between markets. Generally, emerging markets are considered higher risk than developed markets. However, any investing activity can come with significant risk. Investors need to know about the risk associated with changes in currency exchange devaluations, government policies or a destabilized economy resulting from changes in tax structures, internal conflict, liquidity issues or a lack of capital that can present additional risk in emerging markets. 

Developed markets aren’t without risk. Investors still need to be alert for bear markets or market adjustments, increasing inflation and the performance of individual stocks or funds to balance risk within their portfolios. 

Signs of Progress

Signs of progress vary for emerging markets versus developed markets. For emerging markets, look for physical financial infrastructure, including banks, a stock exchange and a unified currency. Watch for reforms and the development of institutions like those of modern developed countries aimed at promoting economic growth. Governments of emerging markets may pursue industrial and trade strategies that encourage economic growth and industrialization.

In developed markets and emerging markets, look for signs of stability like low unemployment, steady inflation growth, increasing GDP, increased new home construction and a high score on the consumer confidence index as signs of growth. 

Market Economies Classifications

As definitions of emerging markets vary among investors, there is currently no agreed-upon definition and classification of emerging markets. Generally, factors weighed include income levels, employment levels, GDP growth rates and the quality of the financial system. Other factors may include financial infrastructure, government stability and openness to foreign investment.

The International Monetary Fund (IMF) classifies 20 countries as emerging markets, while Morgan Stanley Capital International (MSCI) classifies 24 countries as emerging markets. 

Countries can move to developed market status or regress to frontier markets. In recent years, several institutions have downgraded Greece to an emerging market, joining the Czech Republic, Hungary, Poland and Turkey as the only non-eveloped EU markets. Around the same time, Argentina and Qatar were upgraded to emerging markets from frontier markets. 

Future Outlook

Emerging markets are just that, a place of potential future development and strong growth. But it’s up to these countries to stabilize their governments and economic systems to build future economic growth. For that reason, the future outlook varies. 

Developed markets are generally considered more stable and expected to make more modest, consistent progress. Even developed economies and stock markets can experience destabilizing influences, changes in government or policies that can have ripple effects on the economy. While emerging markets carry more risk, any investment carries risk and uncertainty. 

How to Invest in Emerging and Developed Markets

Investing in emerging markets offers unique opportunities for growth potential, as these economies often exhibit faster growth rates compared to their developed counterparts. Investors may find appealing returns as these countries continue to develop their infrastructures, bolster their financial markets and expand their consumer bases. However, while the potential for high returns exists, there are also inherent risks involved in investing in these regions. Political instability, currency volatility and less mature regulatory environments can create challenges that investors must navigate carefully.

In contrast, developed markets often associated with stability and lower risk profiles. These economies typically have established financial systems, predictable regulatory environments and mature markets, leading to steadier returns over time. Investors looking for reliable income streams can find opportunities in dividend-paying stocks, bonds and real estate within developed markets. While the growth potential may be slower in these regions, they provide a cushion against the volatility often seen in emerging markets.

Investors can invest in both markets by buying shares in managed funds. This can help mitigate the risk of emerging markets while offering greater growth potential. Learn more about emerging market ETFs and how to invest in emerging markets. 

Invest in Emerging and Developed Markets with Benzinga’s Best Brokers

Here, you can find some of Benzinga’s best brokers for both emerging and developed markets. These professionals can help you create a customized, risk-managed investment strategy. 

Final Tips on Investing in Emerging Markets vs. Developed Markets

Investing in any market requires in-depth research and understanding. Look at historical performance, fund or company management, liquidity and total debt. Remember to diversify across asset classes, investment types and markets. With strong investment knowledge and a risk-balanced strategy, investors can take advantage of growth opportunities in emerging markets and profit from stable, long-term returns offered by developed markets. It’s not a choice of either-or — for many investors, both offer opportunities for growth and diversification. 

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