Test Your Emerging-Markets IQ

Before taking the leap, investors should know the territory

 

By Chana R. Schoenberger, WSJ.com

How much do you know about emerging markets? Find out by taking this emerging-markets quiz.

Investing in these countries can carry significant risks. Political turmoil, uncertain legal systems that may not favor foreign investors, and currency risk are all possible pitfalls.

The payoff is a potential for higher returns as these economies expand. Many of these countries have a growing middle class that is clamoring increasingly for consumer goods. Some are also benefiting from high rates of infrastructure spending and from natural resources.

Test your understanding of emerging markets in the interactive quiz on the left—or read below for the text version with additional background material.

1. Which countries are considered emerging markets?

A. Spain and Peru

B. Peru and Russia

C. Russia and Belgium

D. Belgium and Hungary

Answer: B. While there is no agreed-upon definition for the term, most publications, nongovernmental organizations and bank researchers include the same dozen countries, with a handful of additions and subtractions. The largest economies in this group are the so-called BRICs, a Goldman Sachs-coined acronym for Brazil, Russia, India and China.

James Yang

MSCI Inc., MSCI -0.10% which compiles several benchmark indexes, lists the following countries as emerging markets: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand and Turkey.

After Greece’s sovereign-debt woes, MSCI is moving the country down from the developed to the emerging-markets index this month. Qatar and the United Arab Emirates are set to join MSCI’s emerging-markets index in May 2014, an upgrade from the frontier-markets list.

2. How do stock-dividend yields in emerging markets compare with those in the developed world?

A. Dividend yields are highest in emerging markets

B. Dividend yields are highest in Europe

C. Dividend yields are highest in the U.S.

D. They’re all yielding about the same

Answer: B. As of Oct. 31, a comparison of average dividend yields from several MSCI market indexes shows the Europe index had a yield of 3.26%, versus 2.63% for the Emerging Markets index and 1.92% for the U.S. Broad Market index. Dividend yields are a function of the amount of the dividend a company pays and the market value of the company’s shares. Differences in average yields among different markets fluctuate over time.

While stocks in some emerging countries, like Taiwan and Malaysia, have higher yields than in others, such as South Korea and India, companies in emerging markets are paying more attention to dividends as their investor base widens internationally.

“Generally, emerging-market companies increasingly understand investors want cash dividends,” says David Ruff, a portfolio manager at Forward Management LLC in San Francisco. “This gives the companies credibility with institutional investors and provides objective support for their financial statements,” Mr. Ruff says.

3. How do government-bond yields available in emerging markets compare with the yields found on U.S. Treasurys?

A. Emerging-markets government bond yields are higher

B. U.S. Treasury yields are higher

C. The yields are similar

Answer: A. Despite the recent U.S. government shutdown and threat of default by the Treasury, the perceived risk of missing or delaying interest payments is greater on the debts of emerging-markets governments, which consequently carry higher yields.

The reasons emerging-markets government paper is considered more risky can vary, but they include: less-dynamic economies and legal systems, more fragile government structures, less-developed central banks, and less-wealthy citizens, which means such countries tend to have lower tax revenues and a higher reliance on commodities and exports, says David Hinman, chief investment officer at SW Asset Management LLC.

Some of the difference is also because investors are taking more currency risk when they buy foreign-denominated bonds. For example, Brazilian 10-year bonds denominated in the Brazilian real yield 10.3%, Mr. Hinman says, compared with 10-year Treasurys at 2.5%. Brazilian 10-year bonds denominated in dollars yield 3.9%.

Corporate bonds also tend to yield more in emerging markets, Mr. Hinman says.

4. Which market outside the developed world has the public companies with the greatest value?

A. Russia B. Egypt

C. Morocco D. Hong Kong

Answer: D. Hong Kong, China, India and Brazil are among the world’s top 10 markets as measured by total market capitalization of their publicly traded stocks, according to the Central Intelligence Agency’s World Factbook. (Hong Kong, a semiautonomous region of China, is often considered an emerging market in its own right because it serves as a regional financial center.)

5. Which nation outside the developed world has the greatest economic output per capita, as measured by gross domestic product?

A. Brazil

B. Qatar

C. South Africa

D. China

Answer: B. Qatar, a tiny Persian Gulf state rich in natural-gas and oil resources, has the world’s highest GDP per capita, at $103,900. (This is measuring GDP on a purchasing-power-parity basis, which uses a currency exchange rate that equalizes the amount of money that buys the same item in several countries. The cost of a Big Mac, for instance, would be considered equal.) The CIA’s World Factbook lists the U.S. at No. 14 on this list, with $50,700 per capita.

6. How have investors felt about emerging-markets equity and bond funds over the past year?

A. They are running toward emerging markets

B. They are fleeing emerging markets

C. They are holding firm

Answer: A. Diversified emerging-markets stock mutual funds attracted $36 billion in net new money in the year through September, according to Morningstar Inc., while emerging-markets bond funds pulled in a net $6.5 billion.

Exchange-traded funds based on emerging markets also saw inflows. In the year through September, emerging-markets stock ETFs took in $8 billion, and emerging-markets bond ETFs attracted $537 million, according to Morningstar.

7. Which of these emerging economies makes it easiest for companies to do business?

A. Hungary

B. Russia

C. South Korea

D. Turkey

Answer: C. Among the top 10 economies in the World Bank’s latest annual Doing Business survey, the only ones outside of the developed world are Hong Kong at No. 2, Malaysia at No. 6, South Korea at No. 7 and Georgia at No. 8. Singapore led the list, followed by Hong Kong, New Zealand, the U.S. and Denmark.

8. How do the debt-to-GDP ratios in emerging nations compare with those in developed nations?

A. Worse

B. Better

C. The same

Answer: B. In the developed world, the average debt-to-GDP ratio tops 107%, Forward Management’s Mr. Ruff says. For emerging economies, that figure is 36%.

“There is some concern that [emerging-markets countries] have current-account deficits, but their fiscal situation is better than the developed world,” Mr. Ruff says.

Ms. Schoenberger is a writer in New York. Email her at reports@wsj.com.

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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