emerging and frontier markets

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  • Emerging and Frontier Markets

    BEFM013: Investment Instruments

    Dr. Rohit Sonika

    Business School

    University of Exeter

    17th October 2015

    E. Ang 000347

    J. Xiao 017209

    Y. Abbas 002415

    Z. Liu 012946

  • Page 2 of 46

    Abstract

    In this essay, we will provide an overview of three different kinds of economies:

    Developed Emerging, and Frontier Markets. We will then look at a small selection

    of each kind of economy, state their basic characteristics, and offer a breakdown

    of each countrys economic sectors. Finally, we will compare and contrast the

    markets, to illustrate the differences between each type of economy. Kindly note,

    that we have included the three economies of developed countries to set a

    benchmark to be compared to the emerging and frontier markets.

  • Page 3 of 46

    Table of Contents 1. Introduction ............................................................................................................................................... 5

    2. Emerging Markets.......................................................................................................................................... 6

    2.1 Why Emerging Markets are Appealing to Investors ................................................................................ 7

    2.2 Risk in Emerging Market .......................................................................................................................... 8

    2.2.1 Political and Sovereign Risk .............................................................................................................. 8

    2.2.2 Volatility ............................................................................................................................................ 8

    2.2.3 Liquidity ............................................................................................................................................ 9

    2.3 China ........................................................................................................................................................ 9

    2.3.1 Business Culture and Issues ............................................................................................................ 10

    2.3.2 Market Sectors ............................................................................................................................... 11

    2.3.3 Trade Balance ................................................................................................................................. 11

    2.4 Turkey .................................................................................................................................................... 12

    2.4.1 Business Culture ............................................................................................................................. 12

    2.4.2 Market Sectors ............................................................................................................................... 13

    2.4.3 Trade Balance ................................................................................................................................. 13

    3. Frontier Markets .......................................................................................................................................... 14

    3.1 Why Frontier Markets Show Appeal ..................................................................................................... 15

    3.2 Risk Analysis for Frontier Markets ......................................................................................................... 16

    3.2.1 Political and Sovereign Risks........................................................................................................... 16

    3.2.2 Volatility .......................................................................................................................................... 16

    3.2.3 Liquidity .......................................................................................................................................... 17

    3.2.4 Corruption ...................................................................................................................................... 18

    3.3 Nigeria ................................................................................................................................................... 18

    3.3.1 Market sector ................................................................................................................................. 19

    3.3.2 Business culture .............................................................................................................................. 19

    3.3.3 Investment Characteristics ............................................................................................................. 19

    3.4 Saudi Arabia ........................................................................................................................................... 20

    3.4.1 Business Culture ............................................................................................................................. 21

    3.4.2 Market Sector ................................................................................................................................. 21

    3.4.3 Investment Characteristics ............................................................................................................. 21

    3.5 Croatia ................................................................................................................................................... 23

    3.5.1 Business Culture ............................................................................................................................. 23

    3.5.2 Market Sectors ............................................................................................................................... 23

  • Page 4 of 46

    3.5.3 Investment Characteristics ............................................................................................................. 24

    3.6 Concluding Frontier Markets ................................................................................................................. 25

    4. Developed Economies ................................................................................................................................. 25

    4.1 Norway .................................................................................................................................................. 25

    4.1.1 Business Culture ............................................................................................................................. 26

    4.1.2 Market Sectors ............................................................................................................................... 26

    4.1.3 Investment Characteristics ............................................................................................................. 26

    4.2 The United States of America ................................................................................................................ 27

    4.2.1 Business Culture ............................................................................................................................. 28

    4.2.2 Growth Engines: Research, Development, and Entrepreneurship................................................. 29

    4.2.3 Components of the Economy ......................................................................................................... 29

    4.2.4 Investment Characteristics ............................................................................................................. 29

    4.2.5 Capital Flows ................................................................................................................................... 31

    4.3 Japan ...................................................................................................................................................... 31

    4.3.1 Market Sectors ............................................................................................................................... 32

    4.3.2 Investment Characteristics ............................................................................................................. 33

    5. Compare and Contrast................................................................................................................................. 35

    6. Conclusion ................................................................................................................................................... 38

    References ....................................................................................................................................................... 40

  • Page 5 of 46

    1. Introduction

    The global economy has classified its markets into two main categories: developed markets, and

    emerging markets. Before the term emerging markets was coined, these countries were referred to

    as Less Economically Developed Countries LEDC. The term LEDC did not have a positive

    connotation, and it neglected to describe the potential of these markets, and thus, by the 1970s, the

    name was changed to Emerging Markets (NASDAQ). Those two market classifications

    Developed and Emerging have been put in place based on certain economic characteristics each

    individual country enjoys. For example, developed

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