What is... | May 22, 2015

What is a developed market?

The phrase “First World problems” is such a common saying it’s an internet sensation. Tales of #FWP are a gentle reminder that problems in the developed world are different and often pale in comparison to struggles experienced elsewhere.

Likewise, differences are also seen between developed markets and elsewhere when it comes to investing. Understanding the growth and the risk and return dynamics of different types of markets can be important.

Shifting goal posts
As the term “developed” suggests, developed or “advanced” markets are countries that have been analysed as further along a typical expansion curve. There is no universally agreed definition on the criteria for being a developed market, and the likes of S&P Dow Jones, MSCI, the FTSE, and Russell Investments keep slightly different lists.

In May 2015, the lists named about 26 countries as developed markets, out of about 206 under consideration. That included most of western and northern Europe, the US, Canada, Israel, and Far East countries such as Japan and Singapore as well as Australia and New Zealand.

They are classified in terms of the conditions for investment – which is partly why these lists comprise a smaller, more select group than the 34 “developed” economies that are OECD members and the 37 classified as “advanced” economies by the International Monetary Fund (IMF).

According to S&P Dow Jones Indices in 2015, a developed market must have a gross domestic product per capita, with purchasing power parity, of at least USD15,000 a year as well as fulfil other criteria, as explained here.

Countries can move in and out of the various lists as their circumstances change but this does not happen often. For example, S&P Dow Jones reclassified Greece from “developed” to “emerging” in September 2014, due to a range of market and economic issues.

Whether to invest in developed or emerging markets
Opportunities for investing in emerging markets are frequently talked about – not least because the economies in these still-developing locations tend to expand much faster than the rest of the world. If emerging markets can offer high returns, be aware they will likely have a risk profile to match. Developed markets may offer more stability and a degree of security that suits those seeking less risk.

Low growth – but not no growth
Developed markets may be more politically stable as well, although economic growth tends to be slower than in emerging markets.

"Advanced" economies tend to have well developed financial markets where it is relatively easy for both residents and non-residents to buy and sell shares, bonds and other financial instruments. They also tend to have better legal frameworks to safeguard people’s investments as well as other categories of exposure.

Balancing out inevitable risk
There are no completely safe options in investing and individual circumstances will dictate the best approach. A rule of thumb is to consider a mix of investments, across developing and developed markets.

If investors only put money into developed markets, they miss an opportunity to diversify. Diversifying your investments in a simple yet effective way to spread risk, as economist Chris Dillow suggests in this eZonomics article, can be a generally sensible strategy for investing.


eZonomics team
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