WHAT ARE EMERGING MARKETS?

WHAT ARE EMERGING MARKETS?
WHAT ARE EMERGING MARKETS? VERY GOOD QUESTION SO LET’S HAVE A LOOK.
AN EMERGING MARKET IS A COUNTRY THAT HAS SOME CHARACTERISTICS OF A DEVELOPED MARKET BUT DOESN’T QUIT MEET THE STANDARDS TO BE CALLED A DEVELOPED MARKET.

WHICH COUNTRIES ARE ON THE TOP OF THE EMERGING LIST?
THE 4 LARGEST RIGHT NOW ARE THE BRICS COUNTRIES, BRAZIL, RUSSIA, INDIA AND CHINA. THE FIVE NEXT LARGEST EMERGING MARKETS ARE SOUTH KOREA, MEXICO, INDONESIA, AND SAUDI ARABIA.

WHILE WE ARE ON THIS TOPIC OF EMERGING MARKETS I WANT TO INTRODUCE YOU TO A NEW TERM THIS IS CALLED FRONTIER MARKETS.
WHAT ARE FRONTIER MARKETS?
A FRONTIER MARKET IS A TYPE OF DEVELOPING COUNTRY WHICH IS MORE DEVELOPED THAN THE POOREST AND LEAST DEVELOPING COUNTRIES BUT IS STILL NOT ON THE WATCH LIST FOR INVESTMENT PURPOSES. FRONTIER MARKETS OR BETTER YET PRE-EMERGING MARKETS ARE INVESTABLE BUT POSE A HUGE RISK.

SO LET’S HAVE A LOOK A FEW INDEXES AND SEE WHAT THEY ARE SAYING ABOUT EMERGING MARKETS AND PRE-EMERGING MARKETS AND LET’S HAVE A LOOK AT WHICH COUNTRIES ARE ON THE LIST.

HERE IS FROM THE FTSE INDEX 100. THIS LIST WAS JUST UPDATED IN SEPTEMBER
http://www.ftse.com/products/downloads/FTSE-Country-Classification-Update_latest.pdf

A formal review of country classification within the FTSE global equity indexes is conducted on an annual basis each September using a comprehensive,
transparent and consistent methodology. This annual review incorporates ongoing country classification research and classifies stock markets as
Developed, Advanced Emerging, Secondary Emerging or Frontier within the FTSE global equity indexes.

Following the September 2016 annual review, FTSE Russell confirms that there will be no Country Classification changes in September 2017.

HERE LET’S HAVE A LOOK AT WHAT THE MSCI INDEX SAYS.
https://www.msci.com/market-classification

MSCI ANNUAL MARKET CLASSIFICATION REVIEW

During the Annual Market Classification Review, MSCI analyzes and seeks feedback on those markets it has placed under review for potential market reclassification. Every June, MSCI communicates its conclusions from the discussions with the investment community on the list of countries under review and announces the new list of countries, if any, under review for potential market reclassification in the upcoming cycle.

ALRIGHT SO NOW THAT WE UNDERSTAND WHAT EMERGING MARKETS ARE LET’S HAVE A LOOK AT EMERGING MARKET BONDS. DO WE REMEMBER WHAT EMERGING MARKET BONDS ARE?
EMERGING MARKET BONDS ARE FIXED INCOME DEBT ISSUED BY COUNTRIES WITH DEVELOPING ECONOMIES AND CORPORATIONS WITHIN THOSE NATIONS. SO LET’S HAVE A LOOK NOW AT SOME EMERGING MARKET BONDS.

Saudi Arabia’s debut bond sales poised to set emerging market record
http://www.telegraph.co.uk/business/2016/10/19/saudi-arabias-debut-bond-sales-poised-to-set-emerging-market-rec/

Saudi Arabia attracted massive investor demand of about $67bn on Wednesday for its first international bond offer, as the world’s top crude exporter allayed concern about the impact of low oil prices on its finances.

A source familiar with the offer said order books had come close to the $69bn record for an emerging markets bond issue that was set by Argentina in April this year.

FOR THE WEALTH OF SAUDI IT IS OFTEN FORGOTTEN THEY ARE STILL EMERGING, SOMETIMES THAT FACT GETS OVERLOOKED.

Saudi Arabia is expected to raise up to $17.5bn through its bond offer, which involves five-, 10- and 30-year tranches, the source said. Argentina set the current record for an emerging market sovereign bond sale in April, selling $16.5bn.

The huge size of demand for Saudi debt was partly due to low global interest rates and funds’ frustration with a lack of high-yielding assets around the world.

But Wednesday’s debt sale also marked a success for Saudi Arabia in reassuring investors that it could stabilize state finances and reduce its dependence on oil. In the days before the sale, senior Saudi officials held a series of meetings with top investors in London and the United States.

Riyadh ran a record budget deficit of $98bn last year – 15pc of GDP – and is struggling to cut the gap this year. It turned to the international markets to finance part of its deficit this year, easing pressure on its foreign reserves, which it has been drawing down to pay its bills.

The Saudi issue is expected to set a benchmark for the kingdom and pave the way for further international issues by the government in coming years, as well as bond sales by a string of big Saudi companies.

THIS IS WHAT IS NEEDED TO SET A BENCHMARK FOR FURTHER BOND SALES.

“Not only could the bond help develop the Kingdom’s debt markets by introducing a more sophisticated type of investor, but there are also positive ripple effects for Gulf Cooperation Council fixed income as well as more global investors to take a closer, and longer-term, look at the region.”

The five-year tranche was expected to be priced later on Wednesday at 140 basis points over US Treasuries plus or minus 5 bps, the source said. That is cheaper than initial price thoughts of US Treasuries plus 160 bps.

For the 10-year tranche, guidance tightened to 170 bps plus or minus 5 bps from a starting point of the plus 185 bp area. For the 30-year, Saudi Arabia set guidance at 215 bps plus or minus 5 bps; initial price thoughts were around 235 bps.

AND NOW LET’S JUST TAKE A QUICK LOOK AT HOW CURRENCIES ARE PRICED

How are currency prices determined?
https://www.quora.com/How-are-currency-prices-determined
Most of the currencies out there are floating currencies, which means the markets dictate their value. Even if there are fixed rate currencies, they are pegged to some major, like the USD, so anyway, the market will dictate their fate. So, what do I mean by this “market dictatorship”?

The exchange rates of the currency pairs always fluctuate because of more reasons.

The first one is because of the supply/demand as to the goods from the market. Imagine that a company has produced 1 million mobile phones and there are 4 million people ready to buy them. The demand for such mobile phones is too high, so it is clear that the price will increase to a point when only 1 million will be able to pay for it. In another situation, imagine that the company produces the same million of mobile phones, but there are only 200 000 people wanting to buy such a product. In the last case the offer is too high, so the price will be reduced so that more people will change their mind and will want to buy it, so that the company doesn’t waste its resources and energy.

Keeping these examples in mind, you can also apply them in the Forex. Some of the currencies are more attractive because of the economic situation at a given moment in a given country. For example, if the US economy today shows some positive statistics, the US dollar will become more valuable, and the pairs where it is the base currency(USD/YYY) will go up, while the pairs where it is the quote currency(YYY/USD) will go down.

The second reason why the currency pairs do fluctuate is because of the Purchasing Power Parity. In simple words, if the goods’ price is fluctuating, it will also influence the currency pair value. The meaning of this factor is as follows: under equal circumstances, the change in the ratio of currency exchange rates between two countries is proportional to the ratio between the prices of domestic and overseas prices. For example, consider the fact that 1 EUR = 1 USD: if the X product in the USA is 1 dollar, in Europe it should be 1 euro. If tomorrow our X product in the USA gets more expensive, to 1.50 dollars, while in Europe it remains the same, then it means the value of the dollar decreases and the exchange rate will be 1.50 dollars for 1 euro.

Finally, we should make it clear why the supply/demand changes. Here are the reasons:

1. Economic state – this is the most significant economic factor, which depends on the following sub-factors: the growth rate of the economy, changes in the tax system, unemployment and employment, economic condition and the level of stability of the country as a whole.

2. The relative interest rates – The change in relative interest rates is a prerequisite for a change in investors’ confidence in the currency. If the rate goes up, the currency becomes more attractive for deposits, so its price increases in relation to other currencies. If the rate drops, there is no point to deposit money, so people get rid of money by investing them in some business, so the currency value decreases.

3. The demand and supply of capital influences the exchange rates.

4. Political changes – any instability in the country could significantly shake the price level, not only within the country but also around the world.

5. The market sentiment.

6. Natural factors – this includes any natural disasters and other natural phenomenon which has a significant impact on the global economy.

FOR THOSE THAT PREFER TO WATCH A SHORT VIDEO OF HOW CURRENCY PRICE IS DETERMINED HERE IT IS.
http://www.investopedia.com/ask/answers/forex/how-forex-exchange-rates-set.asp

ALRIGHT ALL MAYBE YOU CAN GO SEE IF YOU CAN FIND EXAMPLES OF EMERGING MARKET BONDS AND BRING THEM IN HERE FOR DISCUSSION. RENI THANK YOU FOR POSTING ABOUT SAUDI IT WAS RIGHT ON TIME.

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LOVE TO ALL …..ML

One thought on “WHAT ARE EMERGING MARKETS?

  • Reni

    Ok great! So now I look for an example here to ‘set’ the concrete so -to-speak of what this looks like.

    I am keeping my eye on Vietnam (a possible frontier market?). My sense is that it is set to explode economically as there is so much POTENTIAL and the social/economic order is quietly negotiating development yet laying low (under the radar) politically. It is ‘hot’ over there in Asia with the Philippines, south China Sea, etc.
    http://www.worldbank.org/en/country/vietnam/overview

    or do I have this backwards- help me out here; this is heady stuff ML, tough to wrap one’s mind around. I have to go slow to digest it all. Your analogy of the mobile phone is a fine example of how it works. Simple, in a very complex system
    thanks a million..

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