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Developed, developing and border markets

Investment analysts often divide markets into developed, developing, and borderline ones. Although there are no common criteria and classification rules, the idea is that as we move from developed to developing and borderline markets, risks and volatility increase significantly, legislative protection of investors weakens or disappears altogether, and requirements for transparency of corporate activities and disclosure become less stringent and perfect. Almost all investment institutions view the United States as a developed market, and Russia as a leading emerging market. In recent years, many investors have focused on the emerging markets of the BRIC countries – Brazil, Russia, India and China. It is believed that these four markets have high potential and are most attractive to investors.

On the example of BRIC markets, some key factors that distinguish emerging markets from developed ones are clearly visible. These include restrictions on foreign investment and capital flows; devaluation of the national currency or crises; long periods of inflation; high level of state intervention, regulation and participation in the capital of companies; the dependence of the economy on several industries, the lack of a diversified economic base; undeveloped financial infrastructure. Of course, none of the markets suffer from all of these shortcomings at the same time, but most of the emerging markets are facing one or another of the above at some point. Moreover, their history is usually quite short – for example, the markets of South Korea and Greece, which today are considered developed or almost developed, as far back as the 1970s and 1980s. belonged to the category of developing.

Brazil has a long history of inflation among the BRIC countries, which was only brought under control in the 1990s, as well as long periods of devaluation of the national currency. Even today, concerns remain about its monetary policy, when the economy begins to slow down. China maintains significant restrictions on capital movements, and the shares of most Chinese companies are available only to Chinese citizens or residents. India has relatively recently moved away from a policy of tight government regulation and control, which restricted markets and corporate investment, and through this, held back the growth of the economy as a whole. But in the last 10-15 years, the economic policies of India and China are increasingly approaching the economic policies of the developed capitalist countries, which stimulates the growth of their economies. Finally, for most developing markets, state participation in the capital of public companies is more characteristic than in developed markets.

Significant reserves of natural resources, especially oil and gas, provide good support to the Russian economy. Although this is certainly an advantage, the Russian stock market is too dependent on the energy sector. Such a concentration on a single sector is typical for emerging markets. In addition, as in most developing countries, the banking and financial systems of Russia are focused on serving the domestic market, and most international operations are carried out by global banks based in developed countries.

Inflation in Russia at the end of 2014 and the beginning of 2015 is associated with a fall in oil prices on the world market. Graphs of the dollar and oil prices The graphs show the relationship between the decline in oil prices on the world market and the corresponding growth of the dollar against the ruble, which is characteristic of emerging markets in which a large part of the income from trading in raw materials.

For investors, the distinction between developed and emerging markets is more of a difference between shades of gray than a contrast between black and white. As shown in 2008, when all stock markets — developed, developing, and border — collapsed almost simultaneously, the differences are not as deep as they might seem. Of course, the market and the economy tied to one sector or industry are usually more volatile than a diversified market with many strong sectors. In the same way, in conditions of a significant state presence, the stock market can experience sharp fluctuations, price movements and trend changes under the influence of not only economic, but also political events. Restrictions on foreign investment narrow the shareholder base, which makes the stock market more susceptible to the vagaries of the national economy. Based on the above, it can be assumed that the Russian market is subject to stronger rises and falls than the US stock market. The dynamics of the RTS index, the S & P 500 and oil prices confirm that the Russian market is prone to stronger movements than the American one. The RTS index is quoted in US dollars.

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