Emerging markets are crucial for UK-listed companies due to their rapid economic growth, expanding consumer base, increasing demand for goods and services and new investment opportunities. These regions offer diversification opportunities, mitigate reliance on mature markets and drive revenue growth through access to dynamic industries and untapped potential. With rising global connectivity, successful engagement with emerging markets can enhance competitiveness and long-term shareholder value.
An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards – ie, high income, openness to foreign ownership and ease of capital movement, amongst others. This includes markets that may become developed markets in the future or were in the past, which means an emerging market status can come and go. Emerging economies are in the process of transitioning from low-income, less developed status to a more advanced state.
The characteristics of these markets (amongst others) are low per capital income, undeveloped financial markets, improving living standards, and some still face challenges relating to political instability.
There is no definitive list of countries classified as ‘emerging markets’. The International Monetary Fund (IMF) classifies 96 countries as emerging, using criteria such us how much citizens of that country earn, how diverse the country’s exports are and how sophisticated its financial system is. In comparison, investment research firm, MSCI classifies 24 countries as emerging markets, with their classification based on how investible a country’s stock market is, which ultimately influences foreign investment.
Countries commonly classified as emerging markets include China, India, Brazil, South Africa and Mexico. Many emerging markets are part of the BRICS group (Brazil, Russia, India, China and South Africa), which signifies their importance in the global economy.
Key features of emerging markets include:
- Economic growth
Emerging economies tend to have higher growth rates compared to developed economies. They are often industrialising rapidly and expanding sectors like technology, manufacturing and services. In the two decades before the pandemic, emerging markets largely outperformed developed markets. Rapid growth resulted in an increase in emerging markets’ share of global GDP, largely at the expense of western Europe. According to a statistics.com report, 1 out of every 4 emerging economies outperformed their peers and developed countries, growing at an average of >3.5% compared to 2.7% in the US.
- High volatility
Market volatility is the frequency and degree of price fluctuations, whether up or down. Market volatility is the frequency and degree of price fluctuations, whether up or down. These markets can be more volatile than developed economies due to political risks, regulatory changes and fluctuations currency values. In the past, we’ve seen emerging markets’ currencies fall to historic lows against the US dollar.
- Investment opportunities
Many fast-growing emerging markets have investment climates that are difficult to navigate, but investors often appear willing to put up with the inconvenience of difficult operating conditions in exchange for natural resources, efficiency gains, or the potential rewards that come with a large domestic market. Due to their growth potential, emerging markets attach foreign direct investment and capital inflows, offering opportunities for investors seeking higher return and though often at a great risk, hence the love-hate relationship investors tend to have with them.
- Expanding middle class
The middle class is experiencing significant growth in emerging countries and the speed of growth has typically increased considerably. A growing middle class leads to higher consumption, which boosts domestic demand and can support long-term economic growth.
Why should listed companies pay attention to emerging markets?
Emerging markets play a crucial role due to their increasing economic influence, investment potential and unique challenges. Here are some of the key areas where the importance of these markets can be seen:
- Growth opportunities
The rapid economic growth and expansion in emerging economies represents new multinational opportunities. As these countries industrialise, they experience rising consumer demand, creating opportunities for companies to enter untapped or less saturated markets.
Many emerging economies, such as India, China, and Brazil, have large and growing populations (increasingly part of the middle class) and therefore providing a large consumer base. These populations offer significant potential for demand in areas like consumer goods, technology, healthcare and financial services.
- Diversification of risk
By expanding into emerging economies, companies reduce their reliance on mature, slower-growing markets. This diversification helps mitigate risks associated with economic downturns or regulatory changes in developed markets.
- Resource access
Many emerging economies are rich in natural resources, such as energy, minerals and agricultural products. Companies can benefit from gaining direct access to these resources, ensuring a stable supply chain for critical materials.
- Government incentives
Governments in emerging markets seek to attract foreign investment while maintaining economic stability. As such, they often provide incentives for foreign investment, including tax breaks, favourable trade policies and subsidies. These initiatives make entering and operating in these countries more attractive and financially viable.
- Cost saving
Typically, emerging markets offer lower labour and production costs, allowing companies to reduce operational expenses. This can enhance competitiveness, especially in manufacturing and labour-intensive industries. We’ve seen the positive impact of large corporations moving their manufacturing plants to emerging economies.
- Global influence
As emerging economies grow, companies that engage with these regions can position themselves to benefit from policy changes, trade agreements and evolving global standards.
Companies operating in emerging markets often face higher levels of business risk due to volatile economic conditions, regulatory uncertainty, political instability, differences in accounting and legal framework and exchange rate fluctuations.
How can we help?
With this multinational growth, investors need to ensure transparency, compliance and reliability of financial reporting in these regions. The PKF team has years of experience and a presence in emerging economies either through the PKF network or directly working with clients whose main offices are based in, amongst others, Central and South America, Africa and Asia.
Our Capital Markets team has extensive experience of working with clients breaking into untapped markets by providing due diligence on identified opportunities across the globe. We are here to help with the following:
- Assessing and mitigating the unique risks that come with investing in these economies, providing greater assurance to stakeholders
- Providing a deep understanding of the economic and business environments, including navigating different in local and international accounting standards, legal frameworks and compliance requirements
- As businesses in emerging markets grow, there is increasing demand for environmental, social, and governance (ESG) reporting. Assessing non-financial information, such as sustainability reports and ESG disclosures, ensures companies in these regions meet international standards of social responsibility and transparency.
- Many emerging markets are rapidly adopting new technologies, including advancements in accounting and financial management tools. We can navigate the technological transformation challenges together.
Effective accounting can provide better insights into a company’s risk exposure, aiding decision-making and strategic planning.
For more information, please contact Pamela Ntandane or Joseph Archer.
