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

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Property

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Investment strategies

Dumb money triumphant

One sign of today's speculative market froth is that retail investors are winning, and winning big. It bears remarkable similarities to 1929 and 1999, and this story may not have a happy ending either.

Retirement

Can the sequence of investment returns ruin retirement?

Retirement outcomes aren’t just about average returns. The sequence of returns, good or bad, can dramatically shape how long super lasts. Understanding sequencing risk is key to managing longevity risk.

Strategy

How AI is changing search and what it means for Google

The use of generative AI in search is on the rise and has profound implications for search engines like Google, as well as for companies that rely on clicks to make sales.

Survey: Getting to know you, and your thoughts on Firstlinks

We’d love to get to know more about our readers, hear your thoughts on Firstlinks and see how we can make it better for you. Please complete this short survey, and have your say.

Investment strategies

A framework for understanding the AI investment boom

Technological leaps - from air travel to computing - has enriched society but squeezed margins. As AI accelerates, investors must separate progress from profitability to avoid repeating past mistakes.

Economy

The mystery behind modern spending choices

Today’s consumers are walking contradictions - craving simplicity in an age of abundance, privacy in a public world. These tensions tell a bigger story about what people truly value and why.

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.