Abstract
Emerging markets have become increasingly important in international portfolio management and world financial system. They now represent a dynamic set of investment opportunities for both individual and institutional investors. Although much has been learned about emerging market finance, these markets still pose challenges for finance studies as standard models are often ill suited to deal with their specific characteristics.
The purpose of this chapter is to provide a comprehensive review of emerging markets through presenting their qualitative and quantitative characteristics. The focus is also put on the ways for foreign investors to gain access to these markets as well as on country and specific risks because their assessment affects, to a large extent, international investment decisions.
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Notes
- 1.
By the end of 2008, national economies are divided into three groups: low income countries (also referred to as less developed countries) with GNI per capital of $975 or less, low and middle income countries with GNI per capita ranging from $976 to $11,905, and high income countries with GNI per capita of $11,906 or more. Within the low and middle income class, all countries with GNI per capital higher than $3,855 are typically included in an upper middle income category.
- 2.
The IFC is a member of the World Bank group in charge of promoting sustainable economic growth in developing countries through financing private sector investments, mobilizing capital in the international financial markets, and providing advisory services to businesses and governments.
- 3.
Interested readers can refer to the S&P’s Emerging Markets Index Methodology (November, 2007) for more detailed information about country inclusion criteria.
- 4.
A foreign bond is a bond issued by a non-resident entity in a domestic market, denominated in the currency of the country where it is issued and only negotiated in a predetermined exchange. Eurobonds refer to bonds denominated in a currency different from the currency of the country or market where they are issued. A Eurodollar bond (i.e., US dollar-denominated) issued by a Thai company in Japan is an example of Eurobonds. In practice, Eurobonds are often denominated in the currency of one of the most advanced countries such as US dollar, Japanese Yen, Euros and UK Pound Sterling, and their issue is led by an international underwriting syndicate of international banks, brokers and dealers. Note that they are more attractive than foreign bonds because the issuers have the flexibility to choose the country in which the bonds are issued as well as to denominate the bonds in their preferred currency. In addition, there is no fix physical market place for Eurobonds, but they can be traded globally and listed in one of the Eurocenters developed throughout the world (New York, London, Paris, Tokyo, etc.).
- 5.
Data on market indicators are obtained from S&P’s Global Stock Market Factbook (2004) and Emerging Market Database. The years of 1990 and 2003 are intentionally chosen for comparative purpose because they cover the period of intensive market openings in almost all emerging countries.
- 6.
Throughout this book we use interchangeably the following expressions: financial liberalization, stock market liberalization and market liberalization.
- 7.
Note that the estimation of Adler and Dumas’s (1983) model is only possible for a very small number of countries.
- 8.
Traditional methods for political risk assessment include, among others, the comparative techniques of risk rating and mapping systems, and the analytical techniques of special reports, expert systems and country default probability determination (Clark and Tunaru 2001).
- 9.
MSCI EAFE is a market-capitalization-weighted index constructed from the perspective of North American investors. Its constituents include listed stocks from 21 developed countries in Europe, Australasia, and Far East (e.g., Australia, Austria, Finland, Singapore, Sweden, UK, etc.) excluding the US and Canada. The regional weights as of December 31, 2006 are approximately as follows: 45.27% for Europe (excluding the UK), 23.71% for the UK, 25.55% for Japan, and 8.47% for Asia Pacific.
- 10.
The increase in cross-market correlations reflects the fact that emerging markets commove largely with developed in recent years. Three main factors explain this phenomenon: the financial interdependences due to high degree of cross-border capital mobility, the economic integration resulting from tighter trade links and increased number of companies with international operations, and the rapid convergence of emerging markets toward the economic and financial structure of mature markets.
- 11.
Eurobonds are simply international bonds that are denominated in a currency other than the currency of the country or the market in which they are issued. They are sold throughout the world. Country fund refers to an investment company that issues a number of shares in its home market and uses the proceeds to invest in a portfolio of assets in a foreign country. American Depository Receipt is a negotiable certificate issued by a US bank that represents a certain amount of shares of a foreign company in a foreign stock market. The financial characteristics of these instruments are discussed in Chap. 2.
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Arouri, M.E.H., Jawadi, F., Nguyen, D.K. (2010). Emerging Markets: Overview and Performance Analysis. In: The Dynamics of Emerging Stock Markets. Contributions to Management Science. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2389-9_1
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