Emerging markets Essay Example for Free

Emerging markets EssayEmerging markets be nations with social or business activity in the subprogram of rapid growth and industrialization. The economies of China and India argon considered to be the largest.1 According to The Economist many people find the landmark outdated, but no stark naked term has yet to gain much traction.2 Emerging market hedge fund capital reached a record new level in the first quarter of 2011 of $121 billion.3 The seven largest emerging and developing economies by either nominal GDP or GDP (PPP) are China, Brazil, Russia, India, Mexico, Indonesia, and Turkey. picAn emerging market economy (EME) is delimitate as an economy with low to middle per capita income. Such countries constitute approximately 80% of the valet(a) population, and name about 20% of the worlds economies. The term was coined in 1981 by Antoine W. Van Agtmael of the International Finance Corporationpic of the World Bank.Although the term emerging market is loosely defined, co untries that fall into this category, varying from very big to very small, are normally considered emerging because of their developments and put rights. Hence, even though China is deemed one of the worlds stinting powerhouses, it is lumped into the category alongside much small economies with a great deal less resourcespic, like Tunisia. Both China and Tunisia belong to this category because two have embarked on economic development and reform programs, and have begun to open up their markets and emerge onto the global scene. EMEs are considered to be fast-growing economies.What an EME Looks LikeEMEs are characterized as transitional, meaning they are in the process of moving from a closed economy to an open market economy while building responsibility within the system. Examples include the former Soviet Union and Eastern bloc countries. As an emerging market, a country is embarking on an economic reform program that will lead it to stronger and more responsible economic perf ormance levels, as well as transparency and efficiencypic in the capital market. An EME will also reform its exchange rate system because a stable local currency builds confidence in an economy, specially when unusualers are considering investing. Exchange rate reforms also reduce the desire for local investors to send their capital oversea (capital flight). Besides implementing reforms, an EME is also most likely receiving aid and guidance from large donor countries and/or world organizations such as the World Bank and International Monetary Fund.One key characteristic of the EME is an subjoin in both local and foreign investment (portfolio and direct). A growth in investment in a country often indicates that the country has been able to build confidence in the local economy. Moreover, foreign investment is a signal that the world has begun to take notice of the emerging market, and when international capital flows are directed toward an EME, the injection of foreign currency in to the local economy adds volume to the countrys stock market and long-run investment to the infrastructure.For foreign investors or developed-economy businessespic, an EME provides an outlet for expansion by serving, for employment, as a new step forward for a new factory or for new sources of revenue. For the recipient country, employment levels rise, labor and managerial skills acquire more refined, and a sharing and transfer of technology occurs. In the long-run, the EMEs overall production levels should rise, increasing its rude domestic product and eventually lessening the gap between the emerged and emerging worlds.Portfolio Investment and RisksBecause their markets are in transition and hence not stable, emerging markets offer an opportunity to investors who are looking to add virtually risk to their portfolios. The possibility for some economies to fall back into a not-completely-resolved civil war or a revolution sparking a change in government could result in a retu rn to nationalization, expropriation and the sever of the capital market. Because the risk of an EME investment is higher than an investment in a developed market, panic, speculation and knee-jerk reactions are also more common the 1997 Asian crisis, during which international portfolio flows into these countries actually began to reverse themselves, is a good example of how EMEs can be high-risk investment opportunities. (For more insight on getting into emerging economies, make Forging Frontier Markets.)However, the bigger the risk, the bigger the reward, so emerging market investments have become a standard practice among investors aiming to diversify while adding risk. (For more details on the advantages and disadvantages of making foreign investments, make Is Offshore Investing For You? and Going International.)