Emerging markets are not only important today because they drive the global economy growth but because they are now rapidly industrializing and adopting a free market or mixed economy shifting drastically from relying mostly on agriculture and the export of raw materials to investing in more productive capacities.
Although their financial systems have become more sophisticated the World Bank has defined developing countries as those with either low or lower middle per capita income of less than $4,035 which has resulted in rapid growth as compared to developed countries which usually tag at a less than 3 percent growth rate.
Increased industrialization, natural disasters, external price shocks and domestic policy instabilities has resulted in rapid social change thereby making this economies highly volatile.
Emerging markets are also more susceptible to volatile currency swings, such as those involving the dollar. They are also vulnerable to commodities swings, such as those of oil or food.
The downside of the growth rate in these markets is the fragility of their capital markets, they simply lack a solid track record of foreign direct investment.
The good thing is the rapid growth can also lead to a higher-than-average return for investors. That's because many of these countries focus on an export-driven strategy. They don't have the demand at home, so they produce lower-cost consumer goods and commodities for developed markets. The companies that fuel this growth will profit more. This translates into higher stock prices for investors. It also means a higher return on bonds which costs more to cover the additional risk of emerging market companies.
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