One way to win big in emerging markets is to catch the early onset of a country’s wealth surge. The tipping point is often a reform-driven drop in the cost of raising capital.

Emerging-market (EM) wealth creation follows an established pattern: Pro-growth reforms or improving terms of trade reduce a country’s cost of capital, luring more companies to the public markets. The markets become more diverse and liquid—and more enticing to investors. In a virtuous feedback loop, rising investment inflows further reduce capital costs, spurring more public listings and even greater investor interest.

Recent examples include India, Brazil and the United Arab Emirates (UAE). Although the drivers differ, each country enjoyed spectacular growth in the scale and value of its equity market (Display) after implementing economic or capital-market reforms, in some cases bolstered by favorable export trends. We believe Argentina and Vietnam are on the cusp of such a cycle today.

INDIA—REFORM DUO RESTORED INVESTOR CONFIDENCE

The recent blossoming of India’s capital markets began with the arrival of two committed reformers—Raghuram Rajan as Reserve Bank of India governor in 2013 and Narendra Modi as prime minister in April 2014. Although still a work in progress, India’s promarket agenda has made noticeable strides in deregulating key sectors of the economy, simplifying the national tax code and relaxing foreign-investment rules. Since September 2013, the number of publicly listed companies has grown 11% (left Display, below), while average daily trading volume has nearly doubled, to US$3.5 billion.

BRAZIL—COMMODITY BOOM PAVED THE WAY

Brazil’s capital-market growth spurt came with the China-driven commodity boom of the early to mid-2000s. It also got a nudge from new government policies aimed at spurring economic growth, taming inflation, reducing its dependence on external debt and increasing reserves. From mid-2002 through 2008, the country’s capital markets exploded in size, with the number of liquid stocks rising from seven to 45 (middle Display, above) and daily trading volumes on the Bovespa increasing eightfold, to US$1.7 billion.

UAE—INDEX UPGRADE MARKED TURNING POINT

The UAE’s tipping point came in 2013. That year, several capital-market reforms were announced in preparation of the country’s entry into the MSCI Emerging Markets Index the following year. The government eased the initial public offering (IPO) process, eliminated segregated trading accounts and toughened rules governing securities lending and borrowing and mutual funds, among other reforms. From mid-2013 through 2014, the size of the country’s IPOs rocketed from US$90 million to US$3.2 billion (right Display, above), while daily trading volume rose from an average of around US$50 million to a range of US$300−US$400 million.