What Are Developed Markets?

Key Takeaways:

  • Although there is no standardized definition of developed markets, the term generally refers to economies in highly industrialized (first-world) countries.
  • Different financial institutions or index providers may hold different criteria for market categorization.
  • Categorization can change over time as institutions adjust their evaluations, or as economic situations change.

The term “developed” is often used to refer to markets with more advanced economic development. Investors may encounter this term when selecting investments from different countries. Other market classification terms may include: developing, emerging, frontier and more. Understanding the terminology used for market classification can be helpful when evaluating your own portfolio.

Developed Market Characteristics

Developed markets generally include countries such as the US, UK, Australia, Japan and more. If you are invested in equity or debt securities issued by a company or government within these regions, you are invested in a developed market.

But what does that term mean? After all, there is no universally standardized definition of a developed market. Different organizations may have their own way of defining a developed market and measuring the performance of global equity markets. One organization may define a country as developed, where another organization may define it as still developing.

Despite the differences in criteria, there are some common traits and characteristics, including the following:

  • High levels of liquidity in debt and equity markets: Investment volume is generally higher in developed markets.
  • Political and financial stability: More political and financial stability often means less risk.
  • Open to foreign investment: Providing accessibility to global investors encourages a higher volume of investment and transactions.
  • Investors can access and control their funds: Domestic and international investors can convert their cash to investments and investments into cash relatively easily.
  • High economic development: Developed markets are often in countries with relatively stable and developed economies.
  • Strong regulatory framework: Legal protection could protect the integrity, interests and ethical boundaries of market participants.
  • Higher per capita income: Developed markets experience higher levels of economic development. Therefore, those who reside and work within those regions tend to have higher per capita income than those who live and work in less-developed countries or regions.

Developing Markets: Emerging and Frontier

Developing markets may refer to emerging or frontier markets. Emerging markets may share some characteristics with developed markets, but most don’t meet all the criteria necessary to be considered developed. One way to think about emerging markets is they occupy a transitional space between “developing” to becoming fully “developed.”

Frontier markets are even smaller than emerging markets. Investors may find it more difficult to get money into and out of the country for investment. Frontier markets are often more illiquid and carry higher risks for investors than emerging markets.

Classification Changes

The global economy is subject to changes and transformations over time. Some economies develop at a faster rate than others, while some recede toward a less-developed stage. To adapt to and identify these changes, institutions and index providers periodically review their classifications. They occasionally issue upgrades or downgrades depending on the current status of a given country. Even within the different classification categories, there may be significant differences between countries. When evaluating investments from different countries, you may wish to look beyond just the classification and instead focus on the fundamentals to see if it the right investment for your needs.

Investing in Developed Markets

There are multiple ways to invest in developed markets. You can gain direct exposure by purchasing individual company equities or debt securities, or you could invest in exchange traded funds or mutual funds that focus specifically on these markets.

Understanding the nuances of market classification and how it fits into your portfolio strategy is not always easy. If you would like to learn more about developed markets, or how exposure to global markets could fit into your portfolio, contact us today. We may be able to help.

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Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.