Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 71

Which countries should be classified as emerging market?

Many retail investors are drawn to invest in emerging market funds, but think little about which countries they are investing in? Emerging market indices are poor representations of the investment opportunities available in that asset class. This arises in part because the index includes countries which are no longer emerging and omits some which manifestly are.

Readers would have no problem naming countries considered ‘core’ emerging markets: China, India, Brazil, Mexico. Others would utilise the ‘BRICs’ misnomer. But how about Vietnam? Or Israel? Or Taiwan?

It’s difficult to compile a definitive list of which countries qualify as ‘emerging markets’ and which do not. The methodology for including countries in the index is far from academic. Investors in emerging markets, and particularly retail investors purchasing exchange traded funds which mirror the index, have a particular conception of what they’re buying: access to markets where, in theory, there is scope for higher returns if investors are willing to tolerate the potential for higher risk.

Investors in the asset class typically seek to benefit from the tailwinds around hundreds of millions of people being lifted out of poverty via globalisation, through the allocation of capital to companies which are contributing to and benefiting from sustainable development.

Yet this is hardly a truthful representation of the constituents of the index. Most prominently, South Korea and Taiwan are not countries characterised by youthful populations, rapid urbanisation, a shift from agriculture to industry and an emerging consumption-driven middle class. They went through those transitions years or even decades ago.

Rather, these are societies where the median age is higher than the US, GDP per capita is higher than Italy and life expectancies match those of Denmark. On the UN’s Human Development Index (HDI) from March 2013, both are very firmly ‘very high human development’ societies. Indeed, both have levels of human development higher than that of the UK.

Yet emerging market indices typically allocate a quarter of their assets to Taiwan and South Korea, countries not yet reclassified as developed markets based purely on the basis of technicalities around market access.

Meanwhile emerging markets investors struggle to access large developing country markets like Vietnam, Nigeria and Bangladesh, which are quickly integrating themselves into the global economy and ‘emerging’ as viable, long-term investment destinations. These ‘frontier’ countries are firmly emerging markets in socioeconomic terms.

This situation results in investors missing out on long-term investment opportunities. Equally, those countries excluded by emerging market indices are overlooked for portfolio flows which can help contribute to long-term socioeconomic development.

This is only one, albeit pertinent, example of the absurdity of investing according to an index, for the simple reason that they are necessarily backwards looking. Both in terms of companies and countries, they are composed of yesterday’s winners, not tomorrow’s. Investing through indices is akin to driving along a road by looking in the rear view mirror.

The concept of exchanges falling into categories such as developed or emerging is a diminishing cogent notion. It is becoming increasingly easy for companies to choose the location in which to list, such as Chinese entities in New York or Russian companies in Hong Kong. More and more businesses are now truly global, and are either listed in developed markets but derive a significant to large portion of earnings from emerging markets, or vice versa.

The index thus bears little resemblance to the opportunities available to investors in emerging markets. This is especially so when the indices include countries which no longer benefit from the strong sustainable development tailwinds that are expected to be the driver of potentially higher returns in emerging markets whilst excluding some which do.

Bottom-up stock-pickers should not be hamstrung in searching for returns for their clients by arbitrary indexes. The fact is businesses do not run themselves in line with indexes so therefore asset managers should not feel the need to allocate capital or define risk on such a basis.

 

Jack McGinn is an Analyst with First State Stewart, part of Colonial First State Global Asset Management, specialising in Asia Pacific, Global Emerging Markets and Global Equities funds.

 


 

Leave a Comment:

RELATED ARTICLES

Burma diary: how millions of people make a living

From building BRICs to building blocs

banner

Most viewed in recent weeks

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Latest Updates

Investment strategies

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Shares

Why the ASX needs dual-class shares

The ASX is exploring the introduction of dual class share structures for listed companies. Opposition is building to the plan but the ASX should ignore the naysayers and bring Australia into line with its global peers.

The state of women's wealth in Australia

New research shows the average Australian woman has $428,000 in net wealth, 40% less than the average man. This takes a deep dive into what the gender wealth gap looks like across different life stages.

Investing

The two most dangerous words in investing

Market extremes are where the biggest investment risks and opportunities lie. While events like this are usually only obvious in hindsight, learning to watch out for these two words can alert you to them in real time.

Shares

Investing in the backbone of the digital age

Semiconductors are used to make microchips and are essential to a vast range of technology and devices. This looks at what’s driving demand for chips, how the industry is evolving, and favoured stocks to play the theme.

Gold

Why gold’s record highs in 2025 differ from prior peaks

Gold prices hit new recent highs, driven by a stronger euro, tariff concerns, and steady ETF buying – all while the precious metal’s fundamental backdrop remains solid amid a shifting global economic landscape.

Now might be the best time to switch out of bank hybrids

In this interview, Schroders' Helen Mason discusses investing in corporate and financial credit securities, market impacts of tariffs, opportunities for cash investments, and views on tier two and hybrid bonds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.