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.

 

  •   17 July 2014
  •      
  •   

 

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

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Australia has saved $4.5 trillion for retirement. Here's what matters more

Most Australians approaching retirement can tell you the exact dollar value of their super account. But success depends on more than a sizeable balance. Here's four key questions to ask yourself at the start of the financial year. 

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Latest Updates

Retirement

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Investing

The investment that sidesteps the new tax traps

Tax rules have changed, but many investors are still using yesterday’s strategies. Insurance bonds may offer advantages for those seeking greater control, tax efficiency and certainty about their wealth.

Shares

The role of shareholder yield in a portfolio

Investors may be overlooking a timeless source of returns in a volatile market. The companies that consistently generate and return cash to shareholders have often proved remarkably resilient through uncertainty.

Shares

Australian inflation still well above the RBA's target

The RBA has spent more than three decades pursuing its 2%-3% inflation target. But the numbers tell a far more complicated story than the headlines. The results may surprise both its strongest critics and most loyal defenders.

Retirement

Retirement in reality - 5 months in

Retirement planning doesn't end when work does. Five months in, Joanne reflects on retiring at a different time to your spouse, coping with setbacks and the importance of rest. Some lessons only become clear after the fact.

Latest from Morningstar

What 6 key market indicators are telling investors right now

Are markets still expensive? There are the seven key indicators every investor needs to know. From gold and equities to bonds, oil, bitcoin and the US dollar. The data reveals where opportunities and risks may lie for investors today.

Investing

Can you ride the AI bubble without overpaying?

AI may prove as transformative as the internet, but markets are behaving as if success is guaranteed. As capital races towards unprecedented levels, investors should ask whether enthusiasm is getting ahead of reality.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 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.