If you follow the finance world closely, then the term "Emerging Markets (EM)" is one that you regularly hear.
The term was developed a some years ago to refer to countries which were less developed than the Western countries of Europe, United States, and Japan but those that were growing at an accelerated pace. The remaining developing countries were referred to as frontier markets.
Examples of the Emerging Market countries are China, India, Brazil, South Africa, and Russia. These belong to a group known as BRICS. Other EM countries are Malaysia, Indonesia, and Turkey.
The question among many traders is on the reason why the emerging market economies matter and why they should focus on them when trading.
» Related: How to Profitably do Trading in Emerging Markets
Best reasons to evaluate dealing in emerging markets
Before We explain this, We will have a caveat. EM countries currencies are available at multiple trading platforms including the Ppo8. However, because they are not as liquid as those from the developed countries, new traders should avoid them.
Read here if you are wondering why liquidity is important.
The EM size
The first reason is the size of the EM economies. The total world economy is worth more than $100 trillion. The total value of the EM economies is almost 35% of the total world economy.
The picture was different 30 years ago when there were just 10 countries in the EM category. Today, the number of the EM countries has surged to more than 20.
The growth rate
Second, the growth of these economies make them ideal for investors. For example, 20 years ago (more or less), the Chinese economy was worth $1.9 trillion. Today, the country has a GDP of more than $14 trillion. It has achieved this by having double digit economic growth.
On the other hand, the United States has remained largely stagnant. In 2000, it had a GDP of $10 trillion and today, its GDP is more than $18 trillion. This means that the Chinese economy has grown faster than the US, which means that more opportunities have been created in China. During this time, many Chinese have been exited the poverty line.
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This means that the EM countries are where companies from the developed countries are getting their growth. In fact, if you read all financial statements from leading companies in the US and Europe, a common theme will be about their focus on China.
Third, the EM countries are some of the biggest producers in the world. Saudi Arabia is the biggest oil exporter, South Africa is the biggest gold and platinum producer, while Brazil is the biggest agricultural country.
Therefore, when the supplies from these countries is disrupted, the world economy can be halted. For example, some years ago, workers at a Chilean mine known as Escondida went on strike. This led to the significant gains in the price of copper.
» Related: How Supply and Demand Work
In 2019, the US and China was engaged in a trade conflict. This has led to disruption of trade worldwide because of the significant role the two countries have.
Therefore, regardless of what financial securities you trade, you should always pay a close attention to the emerging markets.
You can do this by following local news of those countries. You can also do this by following prominent people from the EM countries on social media. Doing this will help you stay ahead and identify opportunities when they arise.
Emerging market assets to trade
There are several types of emerging market assets that you can trade, including:
- EM currencies - You can trade emerging market currencies like the South Africa rand, Mexican peso, and Turkish lira.
- EM bonds - It is possible to trade EM corporate and government bonds. In most cases, since bonds are not offered by most brokers, a good strategy is to buy EM bond ETFs like the iShares China CNY Bond ETF and L&G ESG China CNY Bond ETF.
- EM stocks - It is possible to trade EM stocks like those from Russia, South Africa, and Mexico. For most Americans, the easiest way to achieve this is to trade ADRs. Some of the most popular EM stocks to buy are Alibaba, Baidu, and JD.com.
- EM ETFs - Another asset to trade is EM ETFs. For example, there are funds that track companies like Alibaba and NetEase.
- EM indices - It is also possible to trade EM indices like Hang Seng and JSE among others. These funds are offered as both ETFs and CFDs.
Pros and cons of trading EM assets
There are several pros and cons of trading EM assets.
- Some EM assets are highly liquid and volatile. For example, companies like Alibaba have higher volume than many American stocks.
- Uncorrelated returns - At times, EM assets tens to have uncorrelated returns than other assets.
- No difference - Another pro is that there is basically no major difference between trading them and American ones.
- Cost - At times, trading some EM assets is usually more expensive than other assets because of wider spreads.
- Geopolitics - There are significant geopolitical issues that could impact their performance. For example, there are risks that Chinese stocks will be delisted from the US.
- Liquidity - At times, EM assets tends to have low liquidity, which can make them hard to trade.
- Inadequate news - Unlike in the US, it is relatively difficult to find some news about several assets.
- Language - There is a likelihood that the asset will have a language barrier when trading these assets.
Emerging markets have become a major part of the global economy. As we said their economy now covers about 35% of the world's economy, so it is easy to understand why their importance is growing more and more.
In this article, we have looked at some of the top assets to trade EM assets. We have also identified some of the benefits and cons of trading these EM assets.
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