Emerging Markets: This style invests in equity or debt of emerging (less mature) markets. An emerging market economy is defined as an economy with low to middle per capita income. Such countries constitute approximately 80% of the global population, and represent about 20% of the world’s economies. The term was coined in 1981 by Antoine W. Van Agtmael of the International Finance Corporation of the World Bank. These markets tend to have higher inflation and volatile growth. In recent years, new terms have emerged to describe the largest developing countries such as BRIC that stands for Brazil, Russia, India, and China.
- Pros: Over the last decade emerging markets have outperformed the S&P 500. They may provide growth opportunities superior to more established ones.
- Cons: Short selling is not permitted in many emerging markets, and therefore, effective hedging is often not available. Correlation between all markets both emerging and developed is increasing as the world is becoming increasingly globalized. Emerging markets are not as transparent as developed ones. Political risk is also greater. Volatility is very high.