Introduction to Trading on Emerging Markets News

November 17, 2022 13:58

What is one of the main influences on asset prices in emerging markets? Trading news!

In this article, you will read how trading news breaks down into:

  • the elements which make up emerging market volatility,
  • differences between mature and emerging markets,
  • and the news reports to watch.

“The world is tilting towards emerging markets.” Antoine van Agtmael.

At the beginning of his banking career, Dutch economist Antoine van Agtmael coined the term emerging markets to describe developing economies like Africa, China and Brazil. He advocated investing in these markets based on their raw materials and human resources, to name a few aspects of their potential.

When he first became interested in emerging markets, his interest wasn’t shared by others in the trading and investing community, which was mainly focused on mature markets and wary of the high-risk nature of developing economies. These days, there's a very different perception of emerging markets because China, to take just one example, has since become the second-largest global economy.

“In 50 years, China will be the anchoring economy of the world.” Antoine van Agtmael (2007 speech ‘The Emerging Markets Century’).

Do you agree with the quotation above? It’s certainly a bold statement considering the US’ economic size and power and the elements of volatility in the emerging markets. Even if many economists no longer consider China to be an emerging market but a fully developed one, the Asian giant is a major trading partner with advancing economies like Africa, and therefore exposed to any big shifts in the continent’s fortunes.

Elements of volatility in emerging markets

The elements of volatility play a key role in emerging economies.

Sudden, sharp changes in macroeconomic indicators, market crashes and political uncertainty are the main news triggers of volatility. They impact supply and demand for raw materials, fossil fuels and precious metals.

Taking a real-world example, in April 1990, Brazil’s inflation rate reached a high of 6,821.31 percent. In December 1998, it fell to a record low of 1.65 percent. So far this year, price growth has fluctuated between 6.47 percent and 12.13 percent, a relatively tame bandwidth for Brazil’s inflation rate.

As the largest country in South America, Brazil is a significant producer of iron ore, crude oil, coffee beans, gold and the bauxite used to make aluminium, amongst others. Volatility could trigger changes in the prices of any or all the country’s natural resources.

List of emerging market countries

The broadest definition of an emerging market is one that shows rapid advances in its economic infrastructure. This can include steps forward in the areas of monetary policy, fiscal policy, industrial development, urban and rural development and market operations, to name a few. On the shortlist are the BRICS countries: Brazil, Russia, India, China and South Africa.

Differences between mature and emerging markets

Mature markets have well-established economic infrastructures and are stable relative to emerging markets. In some cases, growth rates can be much higher in emerging market countries compared to mature economies.

Inflation, foreign currency reserves and interest rates can be much more volatile in emerging markets, impacting on investment sentiment and often causing wild swings in stock market prices. How open the country is to foreign exchange inflows also differentiates emerging markets. Fully mature markets are completely open to foreign exchange and rarely impose capital controls unless there is an emergency.

Another key difference between mature and emerging markets is the transparency and regularity of macroeconomic reports. These are used in mature markets to analyze and forecast possible price trends in addition to putting current conditions into perspective. In emerging markets, economic reports might be less available or difficult to find, making it hard to analyze investments and trades.

Emerging markets news

In a transparent market, there are thousands of macroeconomic and company reports to refer to when analyzing stocks, bonds, real estate, currency exchange rates and other financial instruments.

Emerging markets tend to have fewer regular reports and those to watch are Gross Domestic Product (GDP) reports, interest rate decisions, inflation reports and updates about raw materials. Given the role played by inequality and unemployment in social upheavals, emerging markets can also be highly sensitive to news like elections, changes in the legal system, and political unrest.

In conclusion, if you’re considering trading emerging currencies or investing in emerging market stocks, it’s important to research and follow the news from those countries. Factoring in a higher chance of volatility and staying informed can support your risk management and decision-making processes.

Read our article about how to trade on news in mature markets.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.