The emergence of emerging markets

12 February 2013

Standard Life Investments, the global investment manager, suggests that it is much harder for countries to make the transition from emerging to developed economies than was previously commonly thought.

The latest edition of Global Perspective looks at what defines an emerging economy, measures used to determine the move to a developed economy, and concludes that emerging economies are unlikely to sustain rapid growth unless the developed world is also in growth mode.

Frances Hudson, Global Thematic Strategist, Standard Life Investments said:

"Evidence suggests that it is much harder for countries to make the transition from emerging to developed economies than is commonly thought. According to the World Bank, only 13 countries have moved from upper middle to high income - one of the measures of a developed economy - since 1960. Of those, five are the Asian tigers; others include Greece, Ireland, Spain and Israel.

"In considering the investment potential of emerging-market asset classes, it is clear that they are open for business. However, if growth is the objective, it may be captured better in the early stages by investing in the currency or government bond market, first hard currency then local, rather than equities.

"Much of the rise in emerging countries’ share of global GDP and markets is tied to currency appreciation. Strong economic growth does not necessarily translate into strong equity market performance just as gains in equity markets do not necessarily reflect economic progress.

"Emerging economies cannot grow in isolation. The strongest conclusion must be to consider the lack of persistence in growth differentials and rethink straight-line projections as a prima-facie case for indiscriminate investing in emerging markets."