Emerging markets occupy an interesting position in the standard investment narrative: often described as offering exceptional long-term growth potential, frequently cited as a source of portfolio diversification, and just as frequently disappointing investors who expected consistent outperformance. Understanding the genuine opportunity — and the genuine risks — is essential before making any allocation decision.
The opportunity case: what EMs offer
The structural case for emerging markets rests on several foundations that are real and durable:
Economic growth rates in emerging markets are typically 2–3 times those of developed economies. Economies industrialising, urbanising, and building consumer markets go through phases of rapid growth that are simply not available in already-developed economies. China's extraordinary growth of the 2000s and 2010s, India's current trajectory, and Vietnam's manufacturing-led expansion are all examples.
Demographics favour most emerging markets. Countries like India (median age around 28), Indonesia, and Nigeria have young, growing populations — future workers, consumers, and taxpayers. Most developed economies face ageing populations and shrinking workforces; emerging markets are generally on the opposite side of this curve.
Rising middle classes in EM economies represent enormous expanding consumer markets. The growth of middle-class consumption in China, India, and South East Asia has driven demand for goods, services, financial products, and property that creates genuine investment opportunities.
Commodity resources: many emerging markets are significant commodity exporters — Brazil (iron ore, soybeans, oil), Saudi Arabia and Gulf states (oil and gas), Indonesia (coal, palm oil, minerals), Chile (copper). In an era of ongoing energy transition and infrastructure investment, commodity demand supports EM economies with natural resource endowments.
The risks: why EM often disappoints
Despite the structural growth story, emerging market equity indices have delivered disappointing total returns relative to developed market equities over many periods. The reasons are instructive:
Currency volatility: returns from EM investments, when translated back into the home currency of an international investor, are significantly affected by exchange rate movements. EM currencies tend to be more volatile than major developed market currencies — and the direction of movement often correlates with risk-off events (when global investors pull back from risk, they sell EM assets and currencies simultaneously). A 15% gain in an EM equity market can be more than offset by a 20% depreciation of the local currency.
Political risk: many emerging markets have less stable political environments than developed economies. Policy reversals — nationalisation of assets, capital controls, changes in foreign ownership rules, trade restrictions — can damage investment returns significantly. Turkey, Argentina, and others have provided sharp recent reminders of this risk.
Governance and rule of law: weaker investor protections, less consistent enforcement of contracts, and higher levels of corporate governance risk in some EM markets create additional hazards for equity investors. Minority shareholder rights may be poorly protected.
Liquidity risk: stock markets in smaller emerging markets can be significantly less liquid than developed markets. During periods of stress, selling positions at reasonable prices may be difficult.
US dollar dependency: many EM economies and corporates borrow in US dollars. When the dollar strengthens, debt service costs rise in local currency terms, creating financial stress. The "dollar doom loop" — EM currency weakness → higher dollar-denominated debt costs → further economic stress → further currency weakness — has been a recurring pattern.
The major markets in 2026
China: the largest component of most emerging market indices (typically 25–30% of MSCI EM). China's economy faces structural headwinds in 2026: a post-COVID hangover in consumer confidence, a property sector dealing with the aftermath of large developer defaults, demographic decline (population now shrinking), and geopolitical friction with Western economies affecting technology trade and supply chains. Chinese equities trade at significant valuation discounts to US equities, which may represent opportunity — or a persistent de-rating reflecting structural risk. Many investors are choosing to exclude or significantly underweight China deliberately.
India: widely regarded as the most compelling major emerging market in 2026. GDP growth of 6–7% per year; a 1.4 billion population with a median age in the late twenties; a technology and services sector of global competitiveness; and political stability under a central government focused on infrastructure investment. Indian equities are not cheap — the Nifty 50 trades at a premium to most EM peers — but the quality of the business ecosystem is improving. India's weight in EM indices has been growing.
ASEAN: South East Asia as a region offers attractive diversity — Vietnam (manufacturing beneficiary of supply chain shifts from China; high growth economy), Indonesia (the world's fourth-largest population; commodity-rich; democratic stability), Thailand (established industrial economy; tourism recovery post-COVID). The ASEAN markets trade at modest valuations and offer growing consumer market exposure.
Mexico: benefiting significantly from "nearshoring" — the shift of manufacturing capacity from Asia to locations closer to the US market. The proximity to the US and the USMCA (formerly NAFTA) trade agreement make Mexico attractive for this trend. Risks include political volatility and currency sensitivity to US trade policy.
Brazil: large, commodity-rich economy with sophisticated financial markets — but political volatility and fiscal concerns make it a perennial "should outperform but often disappoints" story. The valuations are often genuinely cheap; the execution risk is real.
Gulf states / Middle East: classified as emerging or developing markets by some indices (Saudi Arabia was included in MSCI EM in 2019; UAE and Qatar were added earlier). These markets have very different characteristics from traditional EMs — relatively high incomes per capita, stable currencies (most pegged to the USD), and economic diversification programmes underway. The Gulf markets offer exposure to the energy sector and to diversification away from the main EM themes.
How to access emerging markets safely
Diversified ETF: the simplest and cheapest route. The iShares MSCI Emerging Markets UCITS ETF (and similar products from Vanguard, HSBC, and others) provides broad exposure to the MSCI Emerging Markets index, covering 24–25 countries. Total expense ratios are typically 0.18–0.22% per year. The broad index includes significant China exposure; investors uncomfortable with this can access "ex-China" versions.
Regional or country ETFs: for those with specific views — India only, ASEAN focus, EM ex-China — specific regional ETFs are available and liquid on major European exchanges.
Actively managed EM funds: given the governance complexity and country dispersion in EM, some investors prefer active management — fund managers who can avoid poor-governance stocks, navigate country risk, and rotate between markets. The evidence on whether active management reliably adds value in EM is mixed; fees are higher than ETFs (OCFs of 0.8–1.5%+ for active EM funds).
EM bonds: emerging market debt offers higher yields than equivalent developed market bonds, compensating for credit risk and currency risk. Available in hard currency (USD-denominated — currency risk partially managed) or local currency (higher yield; higher currency volatility). Accessible through ETFs or bond funds.
Sizing the allocation appropriately
For most internationally mobile investors with diversified portfolios, the appropriate allocation to emerging markets falls in the range of 5–15% of the equity portion of the portfolio. This is enough to benefit from EM growth if it materialises, but not so much that EM-specific risks (currency, political, liquidity) materially damage the overall portfolio during periods of EM underperformance.
The "EM vs Frontier" distinction is worth noting for those with higher risk appetites: frontier markets (smaller, less liquid markets not classified as EM: Vietnam, Nigeria, Kenya, some Balkan markets) offer even higher potential growth rates and even higher risks. Frontier market allocation should generally be very small (1–3% maximum) and only for investors who genuinely understand and accept the specific risks.
The value of investments in emerging markets can fall as well as rise. Currency movements can significantly affect returns. Emerging market investments involve additional risks compared to developed markets, including political risk, liquidity risk, and currency volatility. This article does not constitute personal financial advice. Always seek independent professional advice appropriate to your circumstances.
How Global Investments can help
Our investment team reviews emerging market allocations within the context of each client's overall portfolio, tax situation, and risk tolerance. We can advise on appropriate vehicles, fund selection, and currency risk management within an EM allocation. Contact us to discuss your portfolio.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.