When finance professionals learn about investing in the emerging markets, they are taught to look out for certain key statistics that can provide indications of whether those markets are suitable candidates for investment.

Some of the main indicators looked at include the country’s:

1. Budget Deficit to GDP: A general guideline is that ratios greater than 4% indicate substantial credit risk.
2. Debt to GDP: Debt levels exceeding 50% of GDP signal that the country may be over-levered and may cause currency devaluations.
3. Current Account to GDP: Again, anything above a deficit more than 4% of GDP is seen as problematic.
4. Expected GDP Growth: Given an emerging markets’ added risk, investors should expect a growth rate of at least 4% as compensation.

The above indicators are supposed to be helpful in identifying the emerging markets to invest in and those to stay away from. However, if we look at these figures for some major emerging markets today and include the United States (nearly always used as the “benchmark” developed economy) as a comparison, it paints an interesting picture.

The figures may not be 100% accurate, but the implications are clear. If all the countries in this table were considered emerging markets, the United States would be the “emerging market” that most investors would choose NOT to invest in. So much for being a “benchmark” for comparison!

Which brings us to the question lingering in many investor’s minds – have developed markets and economies lost their “superiority” over the developing economies, permanently? In other words, when financial advisors look to invest a retiree’s portfolio, they would traditionally place the segment of the portfolio that they can take more risk with in emerging markets. But today, has the more risky option changed from the developing markets to the developed markets like the US and Britain?

Disclosure: Long Market

Image Credit: jcolman under a Creative Commons license

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