Seminar Report

Emerging Markets 1
 Contents

1. Emerging Markets 01

2. Introduction 01

3. Characteristics 02

4. Formation Of Emerging Markets 03

5. Rise Of Emerging Markets 04

6. Challenges 04

7. Prospects 05

8. BRIC Emerging Economies 06

9. BRIC: The Path To 2050 07

10. BRIC Summit 10

11. BRIC: The World's Biggest Emerging Economies 13

12. Emerging Market India 16

13. Capital Flows To Emerging Economies 17

14. Emerging Economies To Drive Global Recovery In 2010 19

15. Bibliography 20

Emerging Markets 2
 Emerging Markets

INTRODUCTION

Emerging markets are countries that are restructuring their economies along market-

oriented lines and offer a wealth of opportunities in trade, technology transfers, and

foreign direct investment. Emerging markets are nations with social or business

activity in the process of rapid growth and industrialization. Currently, there are

approximately 28 emerging markets in the world, with the economies of China and

India considered to be by far the two largest. According to According to the World

Bank, the five biggest emerging markets are China, India, Indonesia, Brazil and

Russia. Other countries that are also considered as emerging markets include Mexico,

Argentina, South Africa, Poland, Turkey, and South Korea. These countries made a

critical transition from a developing country to an emerging market. Each of them is

important as an individual market and the combined effect of the group as a whole

will change the face of global economics and politics. Developing countries that are

neither part of the least developed countries, nor of the newly industrialized countries

Term Originally brought into fashion in the 1980s by then World Bank economist

Antoine van Agtmael, the term is sometimes loosely used as a replacement for

emerging economies, but really signifies a business phenomenon that is not fully

described by or constrained to geography or economic strength; such countries are

considered to be in a transitional phase between developing and developed status.

Examples of emerging markets include China, India, some countries of Latin America

(particularly Argentina, Brazil, Chile, Mexico and Peru), some countries in Southeast

Emerging Markets 3
Asia, most countries in Eastern Europe, Russia, some countries in the Middle East

(particularly in the Persian Gulf Arab States), and parts of Africa (particularly South

Africa). Emphasizing the fluid nature of the category, political scientist Ian Bremmer

defines an emerging market as "a country where politics matters at least as much as

economics to the markets.

Characteristics.

First, they are regional economic powerhouses with large populations, large resource

bases, and large markets. Their economic success will spur development in the

countries around them; but if they experience an economic crisis, they can bring their

neighbors down with them.

Second, they are transitional societies that are undertaking domestic economic and

political reforms. They adopt open door policies to replace their traditional state

interventionist policies that failed to produce sustainable economic growth.

Third, they are the world's fastest growing economies, contributing to a great deal of

the world's explosive growth of trade. By 2020, the five biggest emerging markets'

share of world output will double to 16.1 percent from 7.8 percent in 1992. They will

also become more significant buyers of goods and services than industrialized

countries.

Fourth, they are critical participants in the world's major political, economic, and

social affairs. They are seeking a larger voice in international politics and a bigger

slice of the global economic pie.

Emerging Markets 4
Formation of Emerging Markets

There are two potential causes for the creation of emerging markets: the failure of

state-led economic development and the need for capital investment. First, state-led

economic development failed to produce sustainable growth in the traditional

developing countries. This failure and its tremendous negative impact pushed those

countries to adopt open door policies, and to change from the state's being in charge

of the economy to facilitating economic growth along market-oriented lines. Second,

the developing counties desperately needed capital to finance their development, but

the traditional government borrowing failed to fuel the development process. In the

past, the governments of the developing countries borrowed either from commercial

banks or from foreign governments and multilateral lenders like the IMF and the

Word Bank. This often resulted in heavy debt overload and led to a severe economic

imbalance. The past track record of many developing countries also demonstrates

their inability to well manage and efficiently operate the borrowed funds to support

economic growth. In light of the unsatisfactory results of government borrowing,

developing countries began to rely on equity investment as a means of financing

economic growth. They seek to attract equity investment from private investors who

will become their partners in development. To attract equity financing, a developing

country has to establish the preconditions of a market economy and create a business

climate that meets the expectations of foreign investors. This change in financing

sources thus became another factor leading to the rise of emerging markets.

Emerging Markets 5
Rise of Emerging Markets

The rise of emerging markets is changing the traditional view of development as

follows.

First, foreign "investment" is replacing foreign "assistance." Investing in the

emerging markets is no longer associated with the traditional notion of providing

development assistance to poorer nations.

Second, emerging markets are rationalizing their trade relations and capital

investment with industrialized countries. Trade and capital flows are directed more

toward new market opportunities, and less by political consideration.

Third, the increasing two-way trade and capital flows between emerging markets and

industrialized countries reflect the transition from dependency to global

interdependency. The accelerated information exchange, especially with the aid of the

Internet, is integrating emerging markets into the global market at a faster pace.

Challenges

In their effort to create a market economy and to ensure sustainable development,

emerging markets still face big challenges that come from fundamental problems

associated with their traditional economic and political systems. A market economy

requires those countries to redefine the role of the government in the development

process and to reduce the government's undue intervention. Another serious problem

that those countries have to confront is controlling corruption, which distorts the

business environment and impedes the development process.

Emerging Markets 6
An even more challenging task for those countries is to undertake structural reforms

with their financial system, legal system, and political system, so as to guarantee a

disciplined and stable economy that is relatively free of political disturbances and

interference.

Prospects

Emerging markets are the "key swing factor" in the future growth of world trade and

global financial stability, and they will become critical players in global politics. They

have a huge untapped potential and they are determined to undertake domestic

reforms to support sustainable economic growth. If they can maintain political

stability and succeed with their structural reforms, their future is promising.

MSCI list (Morgan Stanley Capital International) as of April 2009, MSCI

classified the following 22 countries as emerging markets:

1. Brazil 9. Indonesia 17. Russia

2. Chile 10. Israel 18. South

3. China 11. Malaysia Africa

4. Colombia 12. Mexico 19. South

5. Czech 13. Morocco Korea

Republic 14. Peru 20. Taiwan

6. Egypt 15. Philippines 21. Thailand

7. Hungary 16. Poland

22. Turkey
8. India

Emerging Markets 7
 The BRIC Emerging Economies

Sao Parulo, Brazil .

Goldman Sachs argues that the economic potential of Brazil, Russia, India, and China

is such that they could become among the four most dominant economies by the year

2050. The thesis was proposed by Jim O'Neill, global economist at Goldman Sachs.

These countries encompass over 25% of the world's land coverage and 40% of the

world's population and hold a combined GDP (PPP) of 15.435 trillion dollars. On

almost every scale, they would be the largest entity on the global stage. These four

countries are among the biggest and fastest growing emerging markets.However, it is

not the intent of Goldman Sachs to argue that these four countries are a political

alliance (such as the European Union) or any formal trading association, like ASEAN.

Nevertheless, they have taken steps to increase their political cooperation, mainly as a

way of influencing the United States position on major trade accords, or, through the

implicit threat of political cooperation, as a way of extracting political concessions

from the United States, such as the proposed nuclear cooperation with India.

Emerging Markets 8
Dreaming with BRICs: The Path to 2050

Moscow, Russia.

The BRIC thesis (defended in the paper Dreaming with BRICs: The Path to 2050)

recognizes that Brazil, Russia, India and China have changed their political systems to

embrace global capitalism. Goldman Sachs pr, to be the dominant global suppliers of

manufactured goods and services while Brazil and Russia would become similarly

dominant as suppliers of raw materials. Cooperation is thus hypothesized to be a

logical next step among the BRICs because Brazil and Russia together form the

logical commodity suppliers to India and China. Thus, the BRICs have the potential

to form a powerful economic bloc to the exclusion of the modern-day states currently

of "Group of Eight" status. Brazil is dominant in soy and iron ore while Russia has

enormous supplies of oil and natural gas.

Following the end of the Cold War or even before, the governments comprising BRIC

all initiated economic or political reforms to allow their countries to enter the world

economy. In order to compete, these countries have simultaneously stressed

education, foreign investment, domestic consumption, and domestic entrepreneurship.

Emerging Markets 9
Follow-up report

Mumbai, India.

The Goldman Sachs global economics team released a follow-up report to its initial

BRIC study in 2004.The report states that in BRIC nations, the number of people with

an annual income over a threshold of $3,000, will double in number within three years

and reach 800 million people within a decade. This predicts a massive rise in the size

of the middle class in these nations. In 2025, it is calculated that the number of people

in BRIC nations earning over $15,000 may reach over 200 million. This indicates that

a huge pickup in demand will not be restricted to basic goods but impact higher-

priced goods as well. According to the report, first China and then a decade later India

will begin to dominate the world economy.

Yet despite the balance of growth, swinging so decisively towards the BRIC

economies, the average wealth level of individuals in the more advanced economies

will continue to far outstrip the BRIC economy average. Goldman Sachs estimates

that by 2025 the income per capita in the six most populous EU countries will exceed

$35,000, whereas only about 500 million people in the BRIC economies will have

similar income levels.

The report also highlights India's great inefficiency in energy use and mentions the

dramatic under-representation of these economies in the global capital markets. The

report also emphasizes the enormous populations that exist within the BRIC nations,

which makes it relatively easy for their aggregate wealth to eclipse the G6, while per-

Emerging Markets 10
capita income levels remain far below the norm of today's industrialized countries.

This phenomenon, too, will affect world markets as multinational corporations will

attempt to take advantage of the enormous potential markets in the BRICs by

producing, for example, far cheaper automobiles and other manufactured goods

affordable to the consumers within the BRICs in lieu of the luxury models that

currently bring the most income to automobile manufacturers. India and China have

already started making their presence felt in the service and manufacturing sector

respectively in the global arena. Developed economies of the world have already

taken serious note of this fact.

A Goldman Sachs paper published later in December 2005 explained why Mexico

and South Korea were not included in the original BRICs. According to the paper,

among the other countries they looked at, only Mexico and South Korea have the

potential to rival the BRICs, but they are economies that they decided to exclude

initially because they looked at them as already more developed.

Follow-up report

Pudong, Shanghai, China.

This report compiled by lead authors Tushar Poddar and Eva Yi gives insight into

"India's Rising Growth Potential". It reveals updated projection figures attributed to

the rising growth trends in India over the last four years. Goldman Sachs assert that

"India's influence on the world economy will be bigger and quicker than implied in

our previously published BRICs research". They noted significant areas of research

Emerging Markets 11
and development, and expansion that is happening in the country, which will lead to

the prosperity of the growing middle-class.

"India has 10 of the 30 fastest-growing urban areas in the world and, based on current

trends, we estimate a massive 700 million people will move to cities by 2050. This

will have significant implications for demand for urban infrastructure, real estate, and

services."

In the revised 2007 figures, based on increased and sustaining growth, more inflows

into foreign direct investment, Goldman Sachs predicts that "from 2007 to 2020,

India's GDP per capita in US$ terms will quadruple", and that the Indian economy

will surpass the United States (in US$) by 2050. It states that the four nations as a

group will overtake the G7 in 2032.

BRIC Summit

Leaders at the 1st BRIC summit. From left are:

1. President Luiz Inácio Lula da Silva of Brazil;

2. President Dmitry Medvedev of Russia;

3. President Hu Jintao of China, and

4. Prime Minister Manmohan Singh of India.

The BRIC countries met for their first official summit

on 16 June 2009, in Yekaterinburg, Russia, with Luiz

Inácio Lula da Silva, Dmitry Medvedev, Manmohan Singh, and Hu Jintao, the

respective leaders of Brazil, Russia, India and China, all attending. The core focus of

the summit was related to improving the current global economic situation and

Emerging Markets 12
discussing how the four countries can better work together in the future, as well as a

more general push to reform financial institutions. There was also discussion

surrounding how developing nations, such as those members of BRIC, could be better

involved in global affairs in the future. In the aftermath of the summit the BRIC

nations suggested that there was a need for a new global reserve currency that is

'diversified, stable and predictable' The statement that was released stopped short of

making a direct attack on the perceived 'dominance' of the US dollar, something

which the Russians have been critical of; however, it still led to a fall in the value of

the dollar against other major currencies.

The foreign ministers of the BRIC countries had met previously on May 16, 2008 also

in Yekaterinburg.

One week prior to the summit, Brazil offered $10 billion to the International

Monetary Fund. It was the first time that the country had ever made such a loan.

Brazil had previously received loans from the IMF and this announcement was treated

as a significant demonstration of how Brazil's economic position had changed. China

also announced plans to invest a total of $50.1 billion and Russia planned to invest

$10 billion.

Date Host country Host leader Location held

1st June 16, 2009 Russia Dmitry Medvedev Yekaterinburg
2nd April 16, 2010 Brazil Luiz Inácio Lula da Silva Brasilia

Emerging Markets 13
Brazil, Russia, India, and China (BRIC)

Brazil
President (head of state and government): Luiz Inácio Lula da Silva
 Currency- Real (US $1= 1.87)
 GDP (nominal)- $1.572 trillion [10th]
 GDP (PPP)- $2.024 trillion [9th]
 Per Capita- $7.7 thousand [60th]

Russia
President (head of state): Dmitry Medvedev
Prime Minister (head of government):
Vladimir Putin
 Currency- Ruble (US $1=30.362)
 GDP (nominal)- $1.676 trillion [8th]
 GDP (PPP)- $2.103 trillion [8th]
 Per Capita- $8.8 thousand [54th]

India
President (head of state): Pratibha Patil
Prime Minister (head of government):
Manmohan Singh
 Currency- Rupee (US $1=46.62)
 GDP (nominal)- $1.242 trillion [12th]
 GDP(PPP)- $3.298 trillion [4th]
 Per Capita- $1.0 thousand [139th]

China
President (head of state): Hu Jintao
Premier (head of government): Wen Jiabao
 Currency -Yuan (US $1=6.82)
 GDP (nominal)- $4.327 trillion [3rd]
 GDP(PPP)- $8.767 trillion [2nd]
Per Capita- $3.5 thousand [99th

Emerging Markets 14
BRIC: The world's biggest emerging economies

The world’s four biggest emerging economies are grabbing growing volumes of

global capital flows, with firms and fund managers increasingly viewing BRIC

consumer demand as a high-return, relatively safe investment bet. Brazil, Russia,

India and China, with 40% of the world’s population, account for about 20% of its

gross domestic product, a share Goldman Sachs said will rise to equal that of the G7

industrialized countries as early as 2032.

There was a sign this year of the shape of things to come as China overtook the US as

the world’s biggest car market. And as incomes of 2.5 billion people steadily rise,

company’s profits as well as stock markets will feel the effect. No surprise that cash

direct investment and portfolio capital — is increasingly gravitating to these giants.

Fund tracker EPFR Global said BRIC-geared equity funds absorbed almost $20

billion in January to November 2009. This is double 2007 levels and equivalent to

40% of what was taken by emerging stock funds, some of which also went to the

BRICs.“The trend of BRIC out performance has been very powerful and should

continue as growth is concentrated in these markets,” said Martial Godet, who helps

manage 37 billion euros in emerging stocks at BNP Paribas Asset Management in

Emerging Markets 15
Paris. “We are betting on the largest, highest-growth markets with the biggest

populations and good liquidity levels.”

To capitalise on BRIC consumer demand, Goldman Sachs suggests investing in a

basket of 50 developed market stocks positioned to benefit from the BRICs theme,

and one of 50 BRICs companies that are likely to emerge as global market winners.

Already, BRICs are outgunning broader emerging stocks the MSCI BRIC index is up

90% in 2009 versus 70% for MSCIEM ,with only China lagging.

An investment in Brazilian stocks in 2000 would have quadrupled by now while cash

put in emerging stocks would merely have doubled. And a buyer of world stocks

would have lost money. As monetary policies start to tighten next year, investors on

average expect BRIC stocks to rise 20-25% in 2010 after the near triple-digit returns

of 2009.

But in future the BRICs as the most liquid emerging markets will gain most from

higher allocations to emerging markets. Goldman Sachs economist Jim O’Neill, who

first came up with the BRIC concept, projects the BRICs to comprise almost half

global stock markets by 2050 from less than 10% now. He says it is inevitable more

cash will move to the BRIC markets.

“If you think of a GDP-weighted benchmark, it would be considerably higher than the

current MSCI-type ones,” O’Neill said, referring to indices that use GDP to weight

countries. “For some asset managers, especially the sovereign wealth funds, this is

what they are moving towards.”

Emerging Markets 16
Fund managers say cash will go where growth is — or where the value is. With

China and India posting the highest growth in the world, and Russia trading at a 40%

discount to emerging markets, the bloc should remain an investment magnet.

Consumer demand is seen as key to the post-crisis global recovery, and at the heart of

the BRIC story is the consumer.

This is the main driver behind the surging tide of direct investment into the BRICs

which took in 16% of global direct investment flows in 2008. This is a third up from

the previous year, a total $265 billion, or over half of what was received by the 16-

nation European Union, United Nations agency UNCTAD says. Take China’s car

market, which made headlines earlier this year. With 10 cars per 1,000 Chinese, there

is a lot more room for sales growth than the US which has one car for two people.

What is happening is a rebalancing of global consumption, away from advanced

economies and towards emerging markets, says Goldman Sachs, a process expedited

by the shock caused to household wealth and employment by the financial crisis.

GS predicts Chinese household consumption to rise 10% in 2010, with Brazilian and

Indian demand also up over 5%, while spending in the developed world remains flat.

Global corporates have cottoned on. Japanese electronics firm Panasonic for instance

said last month it aims for 15-20% annual sales growth in the BRICs to compensate

for falling demand from Japan’s shrinking population. No wonder then that firms are

rushing to set up production in the BRICs — UNCTAD’s 2009-2011 investment

outlook survey found all four countries to be in the top five most favoured investment

destinations with China topping the list.“What investors in BRIC are saying is: we

believe in GEM (global emerging markets), but to a great extent, what’s happening in

GEM is in these four countries,” said Alex Tarver, who helps manage $1.9 billion in

Emerging Markets 17
BRIC stocks at HSBC. “It is a microcosm and one that’s large enough to drive

regional growth.”

Emerging Markets 18
Emerging Market India

India ranks among the well known emerging markets in the global economic scenario.

Since the economic liberalization policies were undertaken in the 1990s, emerging

market India has really prospered which has helped to boost the Indian economy to a

great extent.

Factors behind the favorable emerging market in India

In simple terms, emerging market is used to evaluate the socio economic scenario of

the country in terms of the growth of the market and industrial development.

According to the recent survey, there are around 28 emerging markets in the world

out of which India ranks in the second place.

The main factors behind this booming emerging market are the economic

liberalization and the perfect competition market, the high standard of living and per

capita income, the development of medical facilities and infrastructure, the increase in

foreign investments and so on. Over the few years, there has been a significant growth

of the Indian market which has resulted in the high Gross Domestic Product (GDP).

The average annual growth rate ranges between 6 to 7 %. The growth rate of GDP

was around 6.7 % during the financial year 2008-09.

To boost the emerging market India, the government is also taking some positive

steps. The main aim is to increase the growth rate to around 9 %. Due to the favorable

emerging market, more and more industries are being set up and the customer base is

also increasing. Currently, India is the 4th largest economic system in the world in

terms of the purchasing power parity.

Emerging Markets 19
The recent economic development has also put a positive impact on the various

sectors.

There has been a significant development in the agricultural, service and industrial

sector in the country. Today, to complement the rapid pace of economic growth, the

service sector contributes around 54 % of the annual Gross Domestic Product.

Foreign investment and emerging market India

The increase in foreign investment has also cast a favorable effect on the emerging

market in India. Due to the increase in demand, well known global companies are

investing in the Indian market. The foreign institutional investments (FII) amount has

reached around US$ 10 billion mark. In case of the Foreign direct investments (FDI,

there has been a significant increase of around 85.1 % from US$ 25.1 billion to US$

46.5 billion.

Emerging Markets 20
 Capital flows to emerging economies

The Institute of International Finance, a

bankers’ group, reckons that net flows of

private capital to emerging economies fell to

$435.2 billion in 2009, a fall of more than a

third from $667.1 billion in 2008. It expects

them to surge to $721.6 billion this year.

Private capital fled recession-hit emerging

economies in Europe, which saw flows fall

from $267.4 billion in 2008 to a mere $20.3 billion last year. Flows of official funds,

mainly money from multilateral institutions like the IMF, increased by more than

50% but could make up only a little of the slack. By contrast, private flows to fast-

growing emerging economies in Asia went up last year, by 44% to $236.3 billion.

They are expected to rise further in 2010

Emerging Markets 21
Emerging economies to drive global recovery in 2010

Emerging market economies having large domestic markets and ample savings will

continue to power the global economic recovery in 2010 The economic revival, which

is gaining steam, is led by policy-driven domestic demand in the emerging economies

of Asia and LatinAmerica, "For the first time in modern history, the developing world

particularly China, India and Brazil has supplanted the US in leading the world out of

recession "the agency said in a report today.

Noting that emerging economies with big domestic markets and ample savings would

continue to be the main drivers of the global recovery, the report said investment in

infrastructure would remain important in these markets. "Governments and central

banks around the world have spent more than USD 11 trillion to support the financial

sector and about USD 6trillion on fiscal stimulus programs,"

In the absence of these measures, private demand would have collapsed, and the

resulting social and economic costs would have been even greater. "However, costly

fiscal stimulus measures and bank bailouts, combined with lower revenues, have

rapidly eroded public finances, threatening longer-term fiscal sustainability in some

countries," it added.

Emerging Markets 22
 Bibliography

www. mapof India.com/India-as-emerging.market

en.wikipedia.org/wiki/Emerging_markets

www.emergingmarkets.org

www.ft.com/indepth/bric

www.euractiv.com/emerging-economies

Emerging Markets 23