Top 10 emerging market economies

Emerging markets (EMs) are countries with economies thought to be transitioning from ‘developing’ to ‘developed’ status. A country’s status is measured using many socio-economic factors, including the liquidity of local debt and equity markets, and the level of market efficiency.

List of the biggest emerging market economies

By nominal gross domestic product (GDP), the 10 biggest emerging market economies are:¹

1. China (GDP: $14,092.514 billion)
2. India (GDP: $2,848.231 billion)
3. Brazil (GDP: $2,138.918 billion)
4. Russia (GDP: $1,719.900 billion)
5. Mexico (GDP: $1,212.831 billion)
6. Indonesia (GDP: $1,074.966 billion)
7. Turkey (GDP: $909.885 billion)
8. Thailand (GDP: $483.739 billion)
9. South Africa (GDP: $370.887 billion)
10. Malaysia (GDP: $364.919 billion)

To produce this ranking, we compiled a list of the countries defined as ‘emerging markets’ by all five of the following bodies: the International Monetary Fund (IMF), Dow Jones, Russell, Standard & Poor’s and Morgan Stanley Capital International (MSCI). This list included Brazil, Chile, China, Colombia, Hungary, Indonesia, India, Malaysia, Mexico, Peru, Philippines, Russia, South Africa, Thailand and Turkey. We took these countries and ranked them using gross domestic product (GDP) data from the IMF to produce our top 10.

Before we look at each of the top 10 emerging economies, let’s get some background on how EMs performed collectively in 2018.

Emerging markets: what you need to know

At the start of 2018, investing in EM economies was set to be the next big thing, following impressive rates of development in 2017. During this time the MSCI Emerging Market Index – which represents large and mid-cap stocks across 24 EM countries – rose 37.28%, up from 11.19% in 2016.²

But following a sustained period of economic and political uncertainty, emerging economies had a tough year in 2018. The main factors driving EM’s economic health were:

• Concerns over the US-China trade war: the escalating tension, caused by US President Donald Trump imposing tariffs on China, led to emerging markets falling from grace. The uncertainty spread from China to other emerging markets, impacting financial markets across the board – including forex, shares and commodities
• A strong US economy: the dollar rallied significantly during 2018, which contributed to emerging markets underperforming. In fact, the US economy experienced a positive year all round, which caused the MSCI Emerging Market Index to fall by 20% between January and September. Many EM economies have significant loans and bonds in USD so, as the US dollar rises, these debts become increasingly difficult to pay off
• A lack of foreign investment: due the financial stresses coming from the trade war, there is a reluctance to invest in any EM economies that might be caught in the crossfire
• Low commodity prices: a strong US dollar, rising interest rates and concerns over the trade war’s impact on international markets caused the prices of many commodities – including oil and copper – to fall throughout the year

How to trade emerging market economies

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Now, let’s look at each of the top ten EM economies, their growth forecasts for 2019 – measured using the rate of change in GDP from one year to another – and the key financial markets to watch.

China (GDP: $14,092.514 billion)

Despite being the second largest economy in the world,² China has been considered an EM economy for over 25 years. While China enjoyed massive growth throughout the 1990s and 2000s, it has experienced an economic slowdown over the last decade due to a rise in the state sector and mounting financial risks.

In 2017, China’s growth rate increased for the first time since 2010, up to 6.9%, as the demand for Chinese products increased domestically and abroad. But 2018 saw China’s growth slow again amid Beijing’s financial deleveraging policies – which aimed to reduce debt – and the escalating trade war with the US.

Although fears over the trade tensions have negatively impacted market sentiment surrounding Chinese stocks and the yuan, the country still has a predicted growth rate of 6.2% for 2019.³

Learn more about China's emerging economy

Key markets: USD/CNH, ETFs such as the iShares China Large-Cap ETF (FXI) and commodities including iron, aluminium and corn.

India (GDP: $2,848.231 billion)

India is the third-largest emerging economy and the seventh-largest economy in the world.² The country’s economic development kick­-started in the 1990s, when the government introduced policies to boost market competition, the standard of living and per capita income.

By 2015, India’s economy had grown by 7.2%, which was faster than any other emerging market. And it is expected to continue growing at an average rate of 7.4% throughout 2019.³

Learn more about India's emerging economy

Key markets: USD/RUB and SP_EURRUB, ETFs such as the iShares MSCI India Small-Cap ETF and commodities including sugar, wheat and cotton.

Brazil (GDP: $2,138.918 billion)

Brazil’s economy had showed impressive growth but from 2010 onwards, problems arose that caused investors to question the country’s economic future. Most of the market concern stemmed from the instability of Brazil’s previous government, which was wounded by scandal in 2016 following the arrest of former President Dilma Rousseff.

But on 1 January 2019, Jair Bolsonaro assumed office. While controversial, his economic policies of cutting spending and reducing taxes were well-received by financial markets – in fact, the Brazilian real gained 10% against the dollar ahead of his inauguration.

Despite this optimism, the 2018 emerging economies rout hit growth expectations for Brazil hard, with the IMF predicting an increase of just 2.4% in 2019.³

Learn more about Brazil’s emerging economy

Key markets: USD/BRL, the IBOVESPA stock index, and commodities including coffee, sugar and wheat.

Russia (GDP: $1,719.900 billion)

Russia is the 12^th largest economy in the world by GDP,² though its growth rate was negative for most of the 1990s due to post-Soviet era sanctions. But when the government defaulted on Soviet-era debt in 1998, the economy began to see signs of growth.

In late 2014, concerns were raised over Russia’s reliance on oil exports in the face of the international sanctions that followed the country’s military intervention in Ukraine. But after considerable efforts were made to ensure financial stability, the IMF raised its expectations of Russia’s GDP growth forecast for 2019 – up from 1.7% to 1.8% - despite cutting its global forecasts.³

Learn more about Russia's emerging economy

Key markets: USD/RUB and SP_EURRUB, ETFs such as the MSCI Russia Capped Index UCITS ETF and commodities including oil and gas.

Mexico (GDP: $1,212.831 billion)

Mexico has quickly become one of the most popular emerging markets among investors. It is the second largest economy in Latin America, and the 13^th largest in the world.² Although Mexico’s growth did slow during the global recession, its year-over-year GDP picked up in 2016 and continued to increase in 2018 – rising from $1.07 trillion in 2016 to almost $1.2 trillion in 2018.

Mexico’s economy is heavily reliant on exports to the US, which means that the price of the domestic stock market and currency – the peso – are closely linked to the US dollar. But despite falls in the price of raw materials and volatility across global markets, the predictions for the country are positive. In fact, the country’s GDP is expected to continue growing at an average of 2.5% in 2019.³

Key markets: USD/MXN and EUR/MXN, the MX35 stock index and commodities including corn, wheat and iron.

Indonesia (GDP: $1,074.966 billion)

Indonesia is Southeast Asia’s largest economy, which has helped it attract market attention.

However, the emerging market rout of 2018 had a severe impact on Indonesia due to its reliance on foreign money to fund deficits. The foreign ownership of Indonesian government bonds was up to 40% in 2017, from 33% in 2014. Normally, foreign capital boosts the economy, but when the foreign market is unhealthy, the impact can reverse.

In December 2018, Indonesian markets rebounded slightly, recovering from tumbling exchange rates after the Indonesian central bank hiked interest rates. Market sentiment is generally positive going into 2019, with Indonesia’s predicted growth at 5.1% for the year.³

Key markets: USD/INR and GBP/INR, ETFs such as the iShares MSCI Indonesia ETF and commodities including palm oil and natural gas.

Turkey (GDP: $909.885 billion)

Since 2000, Turkey has attracted the attention of investors around the world, due to the significant improvements made in economic and social development.

In 2018, however, the economic landscape looked markedly different as the country’s financial markets were in a downward spiral for a large portion the year. The market fears were rooted in the country’s reliance on foreign currencies – as Turkey has one of the largest account deficits in the world – and a collapse of the Turkish lira.

The knock-on effects of Turkey’s slump were felt in other emerging markets such as Argentina and South Africa. While other EMs have seemingly recovered, Turkey’s expected growth rate remains low at just 0.4% for 2019.³

Key markets: USD/TRY and EUR/TRY, ETFs such as the iShares MSCI Turkey ETF and commodities including, cotton and cattle.

Thailand (GDP: $483.739 billion)

Thailand’s economic growth has been pretty incredible, progressing from a low-income country to an upper-income country in just one generation. But the government isn’t done: they’ve outlined plans to address economic stability, human capital, equality and market competitiveness.

The Thai economy grew at an average annual rate of 7.5% between 1960 and 1996. But this rate slowed to 5% during the Asian financial crisis of the following decade – and even reached lows of 3.5% between 2005 and 2015.⁴

The economy was thought to be on the road to recovery, as growth reached 4.8% in the first financial quarter of 2018. But the economy expanded at a slower pace throughout the remainder of the year as public spending and tourism decreased. This led to a subdued 2019 forecast of 3.9%.³

Key markets: ETFs such as the MSCI Thailand UCITS ETF and commodities including palm oil, cattle and corn.

South Africa (GDP: $370.887 billion)

South Africa is a middle-income emerging market, and although its economy experienced sustained growth acceleration from 1994 to 2007, it has been decelerating since.

This is because the economy is heavily reliant on natural resources, which means that when commodity prices are low, the South African economy often does worse than its peers.

In the first half of 2018, South Africa fell into its first recession since 2009 amid investors’ concerns over the emerging market rout. The South African rand fell against the dollar – from $0.085 in February 2018 to a low of $0.065 in September. This put further downward pressure on emerging market currencies and caused the MSCI EM index to fall 0.7% in September.

The South African economy is still predicted to experience GDP growth in 2019, but forecasts were subdued at 0.9%.³

Key markets: USD/ZAR and EUR/ZAR, shares traded on the Johannesburg Stock Exchange (JSE) and commodities including corn, wheat and sugar.

Malaysia (GDP: $364.919 billion)

Although Malaysia only ranks tenth by GDP, Bloomberg’s analysis of emerging markets ranks Malaysia right at the top in terms of current-account surplus, economic stability and growth outlook.⁵

Malaysia’s economy has experienced an average yearly growth of 5.4% since 2010. And compared to a lot of other emerging markets, Malaysia got through 2018 relatively unscathed, growing at a rate of 4.4%. Its predicted growth for 2019 is slightly higher, at 4.6%.

Key markets: ETFs such as the iShares MSCI Malaysia ETF, the KLCI and commodities including palm oil, cocoa, and natural gas.

What does the future hold for emerging market economies?

There is increased optimism that the worst is over for emerging markets. But investors remain cautious as Federal Reserve (Fed) interest rate hikes in the US have caused EM central banks to tighten their policies, which could put a ceiling on growth. If the Fed continues to raise interest rates throughout 2019, this could spell more trouble for emerging markets.

Perhaps the greater point of focus will be the trade war, as any escalation between the US and China could damage the global economy and commodity supply chains. Negotiations are expected to continue throughout the year, but it will be important to look at how each financial asset will be impacted by the trade disputes before taking a position on it.

¹IMF, 2018
²MSCI, 2018
³IMF, 2018
⁴World Bank, 2018
⁵Bloomberg, 2018