Developed market & Emerging Market

In investing, developed markets are those countries that are thought to be the most developed and therefore less risky.

Developed countries have established and reputable economies, capable of sustaining themselves. A developed market structure requires a completely free market without interference of outside bodies (e.g. government). It requires a free and open flow of information. It requires sufficient quantities available for trade so that buyers and sellers can make trades easily and quickly. It requires that no single player or association of players can control pricing or availability.

There is no one perfect market to hold up as an example. All of the major worldwide markets (oil, wheat, pork, etc.) have government interference. Some, like oil, have oligopolies that control both production and distribution. None of the markets worldwide have completely free flow of information.

Emerging markets strategies focus on traditional fixed income, value and growth equity investments in markets outside of the United States and Western Europe, including Asia and Latin America as well as Eastern Europe, Africa and the less developed Mediterranean economies.  Emerging markets are highly volatile and information relating to the securities traded in these markets is often difficult to obtain.  Such in developed markets offer excellent opportunities for the resourceful manager.

An emerging market is, in short, a country in the process of rapid growth and development with lower per capita incomes and less developed capital markets than developed countries. It includes the famed BRICs, Brazil, Russia, India, and China; and even the PIIGS (Portugal, Ireland, Italy, Greece, Spain – also known by the more politically correct moniker GIPSI).

The term emerging markets is commonly used to describe business and market activity in industrializing or emerging regions of the world. Emerging market is "a country where politics matters at least as much as economics to the markets."

Difference in Structure:

The most obvious difference between developed and emerging markets is a demographic one: the age of the population. According to the CIA World Fact book, the median age in Japan, Germany and Italy is 43. By contrast the median age in China is 34, in Brazil, 29, and in India, 25. That's a big age gap, and it's not just the BRIC countries that are younger than the developed markets. Many of the "Next Eleven" are equally youthful. Much as developed people like myself like to believe we are young at heart, these age differences are bound to have implications for marketers, particularly in regard to financial service, health care, and entertainment brands.

One of the biggest differences between developed and emerging markets is the popularity of recreational shopping. When asked what they do to relax, people in developed markets place retail therapy high on the list of preferred activities. By contrast, in emerging markets, where people devote most of their budgets to food and basic needs, TV provides the primary means of relaxation. People might like to shop more, but sitting in front of the TV is affordable.

And this touches on another important difference. Getting the best price is important to both developed and emerging market consumers, but the weight it carries versus brand choice is different. In emerging markets, brands are seen as an important mark of quality and status. People value the reassurance provided by a well-known brand name, and if they can, they may be willing to pay more for it. They believe it is important to get the right brand even if they have to shop around for it (or end up buying a look-alike). In developed markets, people are more likely to assume that all brands stocked by mainstream retailers like Tesco, Target, Home Depot, and Home-base will deliver the same basic quality. Thus they are more prone to use price as a differentiator.

Emerging market risk for equities and bonds is priced in, and always has been, because of historical risks affiliated with their governments, transparency and shareholder rights. But the developed markets were always considered risk free, or beta 1. That can no longer be the case.