With the high growth at an incredible pace, the different features of EM have been wildly discussed. First of all, the most important distinguishing feature of EM is their high level of growth and high return. According to The World Bank estimates, developing countries are projected to grow by 6.1% in 2010, 5.9% in 2011, and 6.1% in 2012, while the corresponding figures for the developed countries are just 2.3%, 2.4% and 2.6% in the world output growth (Hunkar 2010). Jonathan Anderson (2008), UBS’s chief Asia-Pacific economist, argues that the stocks in EM have overtaken that in developed countries in the last 25 years. At the same time, several developing countries economy performance is as well as developed countries. For instance,‘ the year-to-date returns of Brazil, India and Mexico are 4.3%, 17.1 % and 5.3%, respectively. ’(…….?)Although EM has experienced exceptional economic growth in recent years, it also expected to perform a continual increase growth and high return in their further.
Secondly, volatility is another contributing factor of EM. Mah claimed that the main factor contribute to higher volatility in EM is their political instability and lack of liquidity. If organizations combat with each other for power, there could be protests, riots and coups along the way. We called this political instability, which always make passing through fiscal and currency policies become hard. Let’s take Thai for example, even through the price about Thai equities are very low, they also have to leave prices suppressed for a long time because of it’s political instability. The other factor lack of liquidity means some investor holding shares may be difficult to find a buyer. The reason is that small to medium size market stocks may not be actively traded.
Last but not least, emerging markets are also characterized by lacking of transparency and corruption. Lack of transparency implies that legal and political systems are not open and accountable. It is often associated with corruption. There is a huge distinction between developed markets and emerging markets that are EM are generally perceived to have relatively high corruption than developed markets. Russia is a case in point, In the 2007 Global Integrity Report, Russia received an overall integrity score of “weak”. Sectors most affected by corruption were “Civil Society, Public Information and Media”, “Government Accountability” and “Administration and Civil Service”, all of which received scores of “very weak”, and “Elections” and “Anti-Corruption and Rule of Law” sectors received scores of “weak”.7
The INDEM foundation, a Moscow-based NGO reports a 900% growth in the volume of bribery between 2001 and 2005, while the EBRD reported a total increase of 50% in the volume of bribery between 2002 and 2005. The 2005 Business Environment and Enterprise Performance Survey (BEEPS), conducted by the World Bank, indicates that the bribe tax had fallen from 1.4% of a firm’s annual sales in 2002 to 1.0% in 2005; however, because of Russia’s general economic growth, the actual amount of money paid as bribes by businesses has grown. The BEEPS also indicates that 40% of firms surveyed in 2005 reported corruption as a major problem to doing business, increasing from 30% in 2002. High-profile corruption cases (2G scandal) in India have effect on its policy and business. If the government does not take appropriate measures to solve it, the country’s image and economic growth might be destroyed (INDIA: Notes on a scandal 2011).
To my way of thinking, even though these markets are perceived to be more risky than mature markets, we cannot ignore the benefits they can provide to us. Emerging markets have broadened the range of products for investors to choose, which makes the portfolio diversified in global world become possible. Wide diversifications of emerging markets significantly limit the portfolio volatility because it can avoid investor to put too many of our budget eggs in one basket. What is more, the rapid development of emerging market counties and their strong relationships between other counties is a major factor to improve the world economy, both developed counties and developing counties could benefit from it.
Reference
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