Why the divide between Developed and Emerging Markets no longer holds
Investing.com -- The traditional dividing line between developed and emerging markets is losing relevance, with investors reconsidering long-held assumptions that have guided global asset allocation for decades.
Index providers like MSCI and JP Morgan have long defined these categories, influencing trillions of dollars in flows across equities and bonds. But as many emerging economies post stable inflation, build advanced industrial capacity and pursue credible policymaking, those labels appear increasingly outdated.
“I ask my students, what differentiates an emerging market from a developed one?” writes a UBS strategist who also lectures at Columbia University. “My students often cite GDP per capita or poverty rates…yet they quickly realize that countries like the UAE, Korea, Czech Republic, and Chile, among others, are still classified as emerging markets.”
The structural features traditionally associated with emerging markets like fragile institutions, macroeconomic volatility and low industrial sophistication are no longer reliable indicators.
Brazil manufactures aircraft. Taiwan leads the world in semiconductors. Poland is deeply integrated into Europe’s high-tech supply chains.
Last year, inflation across MSCI’s emerging market index averaged just over 3 per cent, only modestly above levels seen in developed economies.
Political risk, once viewed as a defining feature of emerging markets, is increasingly global, with the US and parts of Europe now grappling with electoral uncertainty and populist swings.
Still, some gaps persist. Market depth and liquidity remain clear dividing lines.
Emerging economies account for a small share of global equity market capitalisation. China, the largest, comprises just 3.1% and their assets tend to be more volatile. So, volatility in EMs remain meaningfully higher.
In this shifting landscape, dropping binary classifications and treating countries along a continuum of investment risk and return should be what UBS currently favours.
Chinese technology stocks, which has AI tailwinds and strong earnings, and Indian and Brazilian equities are favoured by UBS.
In fixed income, it sees value in emerging market US dollar bonds, where yields remain attractive despite tighter spreads.
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