Trading on emerging markets

There is no single definition for emerging markets, and the term itself could be misleading because “emerging” indicates that a country is growing and will potentially become a developed nation. This may not be the case.

Emerging market economies are seen as different to developed countries based on the size and stability of their financial markets and economies. Economic indicators​​ are used to predict how much corruption there is in the country; how stable the political situation is; global trade and economic variables (such as long-term inflation rates); employment rates and standard of living, as well as the country’s financial and physical infrastructure.

An emerging market may rank low on any one of these criteria, but not necessarily all. As opposed to considering it in absolute turns, it could be viewed as a ranking system, where the countries that rank highest are considered developed, while the ones that rank low are considered emerging. Some emerging markets have better economies and infrastructure than others.

From a trading perspective, emerging markets are simply another place to seek out opportunities. Emerging economies tend to be more volatile because of instabilities in the financial or political climate, but these can also offer high rates of returns on associated investments.

Traders can seek out various opportunities, such as investing in individual companies within an emerging market, buying basket stocks (such as an exchange-traded fund​ (ETF) or a stock index​) from a specific country or group of countries, trading in the currencies of an emerging market, or trading the corporate or government bonds available in these markets.

For example, when browsing the Product Library on our online trading platform, you can filter your selection by market type, sub-type (where you can select emerging economies), region or country (where you can select emerging countries, such as China and India, for example).

Different organisations have different criteria for what defines an emerging economy, therefore, there is not a definitive list. Compiling a cross-section of several lists puts the total between 30 and 50 countries. Below are some examples of emerging markets, along with assets that drive each economy, most notably within the commodities market​​.

There is a wide range of financial products that you can trade related to emerging markets countries. As shown in the above image, our platform offers more than 130 currencies, indices, bonds, equities and ETFs to trade within emerging economies. Open an account to explore trading the below instruments.

ETFs track the performance of emerging economy shares by tracking individual countries or country groups. They do this by buying individual stocks that meet the ETF’s criteria. The ETF is basically a portfolio, the performance of which is based on the shares it holds. ETFs​​ charges a fee for managing the portfolio, called the expense ratio. This fee varies by fund.

Some of the emerging market ETFs that are available on our CFD trading platform are described below:

There are two main benefits of trading within emerging markets: diversification and return potential. Individual emerging markets and developed markets may not always move in the same direction, as some emerging economies may be unaffected by what is occurring in developed economies.

In terms of asset allocation​, investors could dedicate some funds to emerging markets to reap the diversification benefit. For further portfolio diversification​, investors may also want to consider adding a world index or global ETF that contain both developed and emerging market shares.

Just as in developed countries, there are profit opportunities in emerging economies, mainly due to the economic growth rates of the country. However, the downside is that emerging market countries are typically considered riskier. Their economies are smaller and often more fragile. In addition, while emerging market currencies are directly accessible, many shares and bonds are not directly accessible to retail traders unless you are trading on indices or exchange-traded funds.

Undervalued and overvalued may mean different things to investors with different time horizons. For example, short-term traders may not worry if a market is overvalued; if something is going up, they may want to be involved and potentially capture some profit. A longer-term investor may get scared away when things are overvalued, preferring to buy when it is undervalued.

One way to assess if a country’s stock market(s) is overvalued is to take the market cap of all stocks in that country then divide it by gross domestic product (GDP) for that country. This is commonly called the “Buffett Indicator”, which is based on Warren Buffett’s theory that if market capitalisation is too high relative to GDP, the stock market may be overheated. The ratio will vary by country. The more overvalued, the smaller future returns are likely to be. Learn more about fundamental analysis ratios​​.

The number of opportunities available to traders and investors are unlimited when emerging market countries are included. There are more than 130 emerging market instruments available to trade on using spread bets and CFDs within our Next Generation trading platform, as well as more than 50 emerging market ETFs listed on the US Stock Market that are also accessible via the Product Library.

In summary, trading on emerging markets provides diversification and the potential for profit, as with all trades, but it can be accompanied by high risk and volatility. Clients of CMC Markets can access bonds, currencies, shares, indices and ETFs through spread betting and CFD trading, so there is an emerging economy product for any style of trader or investor.