Investing globally provides valuable opportunities to diversify your portfolio. When doing so, Fisher Investments Canada says it’s important to know how the investment world breaks down different countries.
There are three main categories: developed, emerging and frontier markets. What do the terms mean for investors?
Supranational economic bodies, like the OECD or the International Monetary Fund, use these terms too. Most investment management firms apply developed, emerging and frontier differently, as defined by index providers like MSCI, FTSE or Standard and Poor’s. These providers group countries at similar stages of development and accessibility to global investors. Countries are promoted as they advance, and demoted if they regress.
Exhibit 1: Map of the World’s Developed, Emerging and Frontier Markets
Many nations aren’t categorized. This doesn’t mean they have no equity markets; some do and some don’t. In these cases, the index provider has either found insufficient global investor interest in creating an index, or the markets are inaccessible to global investors. As countries liberalize, they often attract more interest. Major index providers take note accordingly.
While the categorizations are somewhat fluid, there are some defining features.
Developed countries typically have strong democracies and well-established court systems, which entrench the rule of law. They are generally higher-income (per capita), and have protections of private property common to capitalist countries. While political developments can pose some risk to financial markets in developed nations, the typical checks and balances help mitigate them.
MSCI defines the U.S., Canada, Japan, many western European nations, Australia and New Zealand as developed. These countries have open markets where investors can easily move funds in and out. There are few “capital controls”, or rules, preventing investment and withdrawal of funds. These attributes are key to the investing definition of developed, as they largely determine whether an investor can freely buy or sell securities in the country.
Most index providers that Fisher Investments Canada follows classify emerging markets as generally sharing weaker property rights and less-established political systems than developed nations. They are typically lower on the scale of per-capita income. They’re also less open to foreign investment, employing some capital controls and barriers to trade and investment.
Take China. The country is reforming and has significantly opened its markets to investment in recent years. Yet China still maintains capital controls, and private property rights are limited. Foreigners can’t easily trade all of its equities, as investors generally must qualify under government-defined terms and are subject to legal limits.
These factors may make emerging markets seem less attractive to investors. However, when these markets do reform, they can reap significant benefits in terms of rapid economic growth and development. That gives companies active there exposure to potentially fast-growing sales and profits.
Frontier markets are generally very impoverished nations, with little-to-no property rights and few established political institutions. Many struggle with poor infrastructure, unstable currencies and a lack of independent central banks and judicial systems. These nations usually need major political and economic reforms.
Nigeria is an example of a frontier nation. It’s an oil powerhouse, sporting Africa’s largest output.[i] But the energy industry often relies on western companies’ expertise in extracting oil. Nigeria also struggles with political instability, including an ongoing battle against the terror group Boko Haram. Democracy is new in Nigeria and elections, like those in February 2019, often see accusations of corruption, rigging and violence.[ii] Still, many analysts see vast opportunities for growth—a reward for heavy political risk—in investing in these nations.
MSCI and other index providers continually review their categorizations, to reflect either improved or worsened economic openness to investment.
For example, in 2013 MSCI downgraded Greece from developed to emerging market. MSCI cited a lack of securities lending, rules restricting short selling (an investment tactic designed to benefit from declining share prices) and diminished size, all due to the country’s deep economic crisis.[iii]
Emerging and frontier markets can offer investors outsized gains at times, but that’s not assured. Even in good times for the world economy and stocks overall—like 2011-2016, when global economic expansion persisted—developed markets can lead emerging and frontier ones.[iv]
Consider too that not all countries grouped together are alike in material ways. Commodity-rich Brazil bears little resemblance to technology-heavy Taiwan, yet both are emerging markets. It’s unwise to assume that all nations in a given category respond to the same influences simultaneously.
To Fisher Investments Canada, investing globally doesn’t mean you need to own stocks in emerging and frontier markets. Opportunities can arise there, but investors can obtain adequate diversity within developed markets.
Still, knowing the broad categories of development can help investors assess various nations and understand some particular types of risks, mostly on the political and economic openness fronts. Educating yourself on the range of categories available to invest in globally can help you make wiser choices.
Fisher Asset Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: US Energy Information Administration, as of 27/2/2019. https://www.eia.gov/beta/international/?fips=NI
[ii] “Nigerian President Prepares for Daunting Second Term After Volatile Vote,” Joe Parkinson, The Wall Street Journal, 27/2/2019.
[iii] “MSCI Announces the Results of the 2013 Annual Market Classification Review,” MSCI, 11 June 2013, https://www.msci.com/eqb/pressreleases/archive/2013_Mkt_Class_PR.pdf.
[iv] Statement based on the performance of the MSCI World, MSCI Emerging Markets and MSCI Frontier Markets Indexes cumulatively, including net dividends, from 31/12/2010 – 31/12/2016.
This content was produced by an advertiser. The Globe and Mail was not involved in its creation.