An emerging market is an economy with a GDP per head below USD 10,000, according to the definition of the International Finance Corporation, which adds the following characteristics:
- Possesses a capital market that is relatively well developed (size and turnover providing sufficient liquidity). However, liquidity still remains an issue for investors in emerging markets.
- Higher growth rate relative to developed economies.
- A relatively stable political and economic condition and a market-oriented economy. The economies of these countries are not entirely developed and are sensitive to external influences, more specifically capital flows. They tend to have high-growth trajectories but have the potential to suffer from violent currency crises.
The benefits of investing in emerging market economies is that they are assumed to grow at a faster rate than developed economies, making them attractive for investment. However, high returns are associated with high risks (liquidity risks, political risks, market imperfections, fraud, corruption, etc.).
The other benefit of emerging markets is their low correlation with developed markets. Thus investing in emerging markets allows for diversification and could lead to portfolio risk reduction. See developed economy.