What Is an Emerging Market Economy?

Emerging markets are often full of terrific investing ideas. These countries are in a Goldilocks zone between risky low-income economies and the mature, plateaued growth of advanced financial systems. An emerging market economy is characterized by a developing infrastructure, modernized financial systems, and increasing integration into the global market.

Lettered die spelling economic growth sitting atop a faded world map.

Image source: Getty Images.

Making sense of it

Making sense of the emerging market economy

An emerging market economy (EME) sits between developing and highly developed economies. Their rapid growth and rising industrialization are often counterbalanced by economic inequality and a certain degree of instability. They are not quite on par with advanced economies, like the U.S., France, or Japan, but have taken a few solid steps ahead of less developed nations, like Chad, Laos, or Haiti.

Emerging economies often come with enticing growth prospects, and they have made substantial strides in infrastructure, manufacturing, and service sector capabilities. The improvements are usually decades in the making, although the tipping point that leads to a higher level of functioning may look abrupt from the outside.

Some of the heavy hitters in this league include massive economies like Brazil, Russia, India, China -- often collectively referred to as the BRIC bloc -- and Mexico. Further, in 2023, the International Monetary Fund counts Saudi Arabia, Nigeria, and South Africa among these fast-growing emerging market economies.

What's the big idea?

Put simply, you can think of emerging market economies as garage bands that have just inked their first major record deal. Overflowing with talent and potential, they might be on the cusp of global stardom. There's still plenty of work to do, but things are getting better -- fast.

As an investor, these markets offer a unique blend of risk and reward. While they tend to be more volatile than developed markets, the potential for significant returns can be enticing. For context, advanced economies saw an average increase of 2.7% in their gross domestic product (GDP) in 2022, while India's GDP rose by 7.2%, and Saudi Arabia saw an 8.7% increase.

You don't want to miss out on that high-octane growth. At the same time, these countries often face internal strife and political instability as local leaders and entrepreneurs attempt to capture large slices of the growing opportunity. So you must balance the risks and rewards of putting your money to work in emerging market economies.

Moreover, investing in emerging markets can be a great tool for diversifying your investment portfolio. Often, these economies respond differently to global economic events than developed markets, which can provide a buffer during times of financial turbulence in more established economies.

Lots of flagpoles flying flags of different countries.

Image source: Getty Images.

Your move, investor

Now you know what an emerging market economy is and how it differs from fully mature world economies. But how can that knowledge help you, a U.S. investor?

Well, if you're feeling adventurous and willing to tolerate some risk in exchange for potentially higher returns, you can actually make direct investments in many of these markets -- right from your all-American brokerage account.

In some cases, the largest and most successful businesses in your target market also have shares available on U.S. stock exchanges. Many of these tickers will be found on the pink sheets or over-the-counter (OTC) markets, with a handful moving up to the full-featured Nasdaq market and New York Stock Exchange (NYSE).

With or without these superstars, markets advanced enough to classify as emerging economies can be reached through country-specific exchange-traded funds (ETFs). Here, the fund manager manages a portfolio of local stocks reflecting the overall performance of a certain market. In your portfolio, this country-targeting investment behaves like a single stock.

And, of course, you could always look for true-blue American companies with exposure to high-growth emerging market economies. For instance, some of Netflix's (NFLX -0.63%) fastest-growing subscriber markets are found in Latin America and Africa -- home to the emerging market economies of Brazil, Mexico, South Africa, and Nigeria -- allowing you to dip a careful toe in the emerging market waters.

Example

Example: Tapping into India's emerging economy

For those looking to spice up their portfolios with a dash of Indian flair and capitalize on the vigorous economic stride of the world's most populous nation, there's good news.

First, there's no need to wade into the murky waters of risky OTC stocks. A quintet of Indian juggernauts, each boasting market caps north of $10 billion as of summer 2023, have made their home on the NYSE. Enter titans like:

Global banking behemoth HDFC Bank (HDB 0.02%)
Pharmaceutical maestro Dr. Reddy's Laboratories (RDY 0.72%)
Tech luminary Infosys (INFY -0.41%), with its deep roots in consulting and outsourcing

Given their NYSE listings, these firms adhere to the stringent financial reporting standards of the exchange. If you're versed in their specific market sectors and understand their business mechanics, dipping your toes into India's burgeoning market becomes as seamless as investing in a homegrown American stock.