Emerging Markets

Emerging markets are developing country economies that are progressively becoming more integrated into global markets. They constitute nations that are likely to develop in the near future as well as those that have developed in the past.

Emerging markets are developing country economies that are progressively becoming more integrated into global markets. They constitute nations that are likely to develop in the near future as well as those that have developed in the past.

Emerging markets generally exhibit most (not all) of the characteristics of developed nations. They are essentially “nations on the move”, transitioning from traditional low-income and less developed economies to modern industrialized economies capable of sustaining higher standards of living as well as mixed/free markets.

Emerging markets generally experience high growth rates, but this rapid economic growth also carries inherent risks.

Risks range from general volatility to socio-political instability. However, emerging markets have played an important role in stimulating the global economy since the term was coined in the early 80s.

In fact, it is estimated that emerging markets represent around 80% of the global economy. This is because large countries like China and India are also called emerging markets because of their over-reliance on exports and the availability of cheap labor.

The 1997 currency crisis saw important steps taken by major financial institutions such as the IMF (International Monetary Fund) to help emerging markets have more sophisticated economies and financial systems.

During the turn of the millennium, the term BRICS has been used to refer to the major emerging markets that are expected to have a significant influence on the global economy by 2050. BRICS means the nations of Brazil, Russia, India, China and South Africa.

Another term is the “N-11” or “Next Eleven”, which constitutes nations such as Egypt, Iran, Bangladesh, Indonesia, Mexico, Turkey, Nigeria, Philippines, Pakistan, Vietnam and South Korea.

There is also MINT, which refers to the nations of Indonesia, Mexico, Turkey, and Nigeria. These terms are generally coined to distinguish countries that share unique investment opportunities available to foreign investors.

The constitution of emerging markets is very controversial. There is no general agreement on the absolute metric that can be used to rank emerging markets.

However, there are at least 20 emerging markets in the world; with the IMF ranking 23 countries, the MSCI (Morgan Stanley Capital International) ranking 24 countries, and Dow Jones ranking 22 countries. Metrics used to rank emerging markets include GDP per capita, political and macroeconomic stability, investment regulations, business opportunities and growth rate.

Characteristics of Emerging Markets

Emerging Markets

Here are some of the characteristics of emerging market economies:

High economic growth rates

Emerging markets generally see their economies grow at around 6% to 7% per year.

It is not uncommon for economies to experience double-digit growth rates. In contrast, developed countries typically experience economic growth rates below 3%.

This means that emerging market GDP growth rates will consistently outperform developed countries.

Immature capital markets

Emerging markets generally have liquid local equity and debt markets.

However, unlike developed countries, their capital markets are still immature, so it can be daunting to obtain reliable and relevant information about the companies that trade on their exchanges.

It can also be difficult to sell debt products such as bonds.

High investment potential

Emerging markets have high investment potential, with particularly attractive opportunities as they transition from closed economies predominantly based on mining and agriculture to more open economies that facilitate international trade.

Compared to developed nations, emerging markets offer the potential for higher returns despite the inherent risks.

Instability and volatility

Emerging markets are characterized by instability and volatility. These nations are vulnerable to fluctuations in the values ​​of commodities such as oil and food, as well as major currencies such as the US Dollar (USD) and Euro (EUR).

Locally, they are also heavily affected by changes in inflation levels and interest rates.

Major Emerging Market Currencies

Here are some examples of some of the most popular currencies in emerging markets:

  • Brazilian Real (BRL)

The BRL is the official currency of Brazil and is the 20th most traded currency on global forex markets as of September 2021.

The BRL was introduced in July 1994 as Brazil sought to address the country's rampant hyperinflation as well as stabilize and grow its economy.

The country has a very diversified economy.: is a major commodity exporter and also has a booming service sector.

For the past few years, the USDBRL pair has been fluctuating between 3,00 and 6,00, with factors driving commodity prices and political anxieties.

  • ruble (RUB)

The RUB is the official currency of the Russian Federation and is the 17th most traded currency on global forex markets as of September 2021.

Modern RUB was introduced in 1991 after the collapse of the Soviet Union.

The Russian economy is massively dependent on the export of oil and natural gas products, mainly to members of the European Union.

RUB is very volatile and has even earned the title of “the most volatile currency in the world”. The USDRUB pair has been fluctuating between 55,00 and 80,00 for the past few years, with oil price fluctuations and US sanctions responsible for its high volatility.

  • Chinese Renminbi (CNH or CNY)

Often referred to as the “yuan”, the CNH is the official currency of the People's Republic of China and is the 8th most traded currency on global forex markets as of September 2021.

In terms of nominal GDP, China is the 2nd largest economy in the world, after the United States.

This makes the economy the most impactful emerging market by far! The USDCNY* pair has been trading between 6.0000 and 7.2000 in recent years, with Chinese monetary policy as the source of volatility as well as the international debt market.

  • Indian Rupee (INR)(INR)

The INR is the official currency of the Republic of India and is the 16th most traded currency on the global foreign exchange markets as of September 2021.

INR has its roots in the XNUMXth century, while the Indian economy has seen the fastest growth in the XNUMXst century.

India is predominantly a service-based economy, but it also has robust agricultural and export sectors.

The USDINR pair has been trading between 60,00 and 80,00 in recent years, with the triggers for volatility being central bank interventions as well as changes in commodity prices.

How to trade emerging market currencies

Emerging market currencies have unique characteristics that also present unique opportunities and risks.

Compared to developed market currencies, they are relatively illiquid, highly volatile and traded in low volumes.

They also feature wider spreads.

Here are some of the best strategies for taking advantage of opportunities in emerging market currency price action:

trend trading

Emerging market currencies are sometimes influenced by commodity prices and monetary policies.

Extended trends in commodity markets, combined with a monetary stance (fundamental analysis), can inspire extended trends in emerging market currencies.

When the trend is trading, traders identify the prevailing trend and then make long or short trades depending on whether the market is bullish or bearish.

breakout trades

The instability and volatility inherent in emerging market economies means that prevailing market patterns can be distorted and open up opportunities for reversing money production.

Disruption can be a source of profitable trading opportunities. With this strategy, the challenge is always to filter out valid and false breaks in the market.

Range Trading

Range trading can provide many opportunities when trading emerging market currencies.

For example, China allows its currency to trade in a moving range of 2% relative to a set midpoint daily. This fundamental information exposes great opportunities for Range trading in the market. The strategy would simply be to buy at or near defined support levels and sell at or near defined resistance levels.

Carry Trade

Emerging markets typically have higher interest rates compared to developed markets.

This opens up carry trade opportunities where investors can borrow low interest currencies to buy high interest currencies.

With this strategy, you earn the interest rate differential. In the leveraged foreign exchange market, the high interest rate differential between emerging market currencies and developed market currencies can be very attractive.

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