Emerging market equities have delivered some of the most spectacular returns in modern investment history — and some of the most severe losses. The story of EM investing is one of extraordinary structural growth potential intersecting with genuine political, currency and governance risks that have at various points been catastrophic for investors who failed to appreciate them. For HNW investors with globally diversified portfolios, emerging markets deserve a considered, sized and disciplined allocation — not a blanket embrace or blanket avoidance.
Capital is at risk. Past performance is not a reliable indicator of future results. This guide is for information purposes only and does not constitute regulated investment advice.
What Are Emerging Markets?
The MSCI Emerging Markets (EM) Index, the most widely referenced benchmark, currently includes approximately 24 countries, among them China, India, Taiwan, South Korea, Brazil, South Africa, Saudi Arabia, Mexico and Indonesia. The classification reflects a combination of economic development level, market accessibility for foreign investors and market infrastructure maturity.
As of 2026, the index is approximately:
- 25–30% China (though this has fluctuated significantly with geopolitical developments and MSCI's periodic reclassification decisions)
- 20–22% India (rising rapidly as index weight reflects India's market growth)
- 15% Taiwan (dominated by semiconductor manufacturers)
- 12% South Korea (though partially reclassified toward developed market status in some indices)
- The remainder spread across Brazil, South Africa, Mexico, Saudi Arabia, Indonesia, and others
These weightings shift materially as markets are added, removed or reclassified. Investors should check current compositions when selecting products.
The Investment Case for Emerging Markets
Demographics and economic growth: The EM countries collectively contain approximately 5.5 billion people. Median ages are significantly younger than in developed markets; urbanisation is continuing; middle-class consumption is expanding. These structural forces historically underpin long-run earnings growth in consumer, financial and technology sectors.
Valuation discount: Historically, EM equities trade at a significant discount to developed markets on price-to-earnings and price-to-book measures. As of 2026, the MSCI EM Index trades at a meaningful discount to the MSCI World on forward earnings multiples, partly reflecting geopolitical risk, partly reflecting lower average profit margins, and partly reflecting investor risk aversion following several years of underperformance.
Diversification: EM equities have historically exhibited moderate correlation to developed market equities over full cycles, particularly when the cycle drivers are different (e.g., commodity prices in EM versus technology earnings in DM). However, correlations spike sharply during global risk-off episodes.
Rising domestic institutional base: In markets such as India, Brazil and South Korea, the growth of domestic pension funds, mutual fund industries and retail investor participation is creating a more self-sustaining bid for local equities, reducing dependence on foreign capital flows.
The Risks — Laid Out Honestly
Country and political risk: EM investing means accepting material exposure to political developments in countries with varying levels of institutional quality. Government intervention in markets (particularly in China, but also in other EM countries), capital controls, nationalisations, currency crises and elections that sharply change economic policy direction are all plausible scenarios.
China risk: With China representing a large share of major EM indices, EM investors carry significant China exposure by default. China's regulatory crackdown on technology and private education sectors in 2021 erased hundreds of billions of dollars of market value. Ongoing US-China trade and technology tensions, the question of Taiwan, and the opacity of state-directed capital allocation are ongoing concerns for Chinese equity investors.
Currency risk: EM currencies are typically more volatile than major developed market currencies. A portfolio that delivers strong returns in local currency can still underperform for a USD, EUR or GBP-based investor if the local currency depreciates significantly. Hedging EM currency risk is expensive and practically difficult; most EM funds carry unhedged currency exposure.
Corporate governance: Accounting standards, related-party transactions, minority shareholder rights and auditor independence standards vary enormously across EM markets. Frauds and governance failures (examples include Luckin Coffee in China, Satyam in India, Steinhoff in South Africa) have materially eroded returns for investors.
Liquidity: Trading in EM markets can be significantly more expensive than in developed markets. Transaction costs (spreads, impact costs, taxes on transactions) and market depth limitations make large-position management more challenging.
Market access barriers: Foreign ownership limits, capital repatriation restrictions and regulatory approval requirements affect investor access in some EM countries. India, for instance, has periodically restricted foreign portfolio investment categories.
Country-Level Analysis: Key Markets as of 2026
India: The most structurally compelling EM story, in many analysts' views — 1.4 billion people, a democracy, strong rule of law relative to peers, a booming technology and services sector, and one of the fastest-growing large economies globally. Valuations are elevated (premium to other EM markets), and governance varies by company. Nonetheless, India's weight in global EM indices has grown substantially and is projected to continue growing.
China: Simultaneously the most controversial. Extraordinary corporate success stories in technology, consumer and industrial sectors sit alongside regulatory unpredictability, the shadow of potential military conflict over Taiwan, and deteriorating US-China relations. Active country-level decisions — whether to be overweight, underweight or to use an ex-China EM product — are increasingly central to EM portfolio construction.
Brazil: A commodity-rich giant with recurring governance challenges. Strong in agricultural commodities, natural resources and a growing fintech sector. Political risk is persistent; currency volatility is significant. Valuations have historically been very cheap relative to fundamentals.
Taiwan and South Korea: Both dominated by semiconductor and technology companies. Taiwan in particular (primarily TSMC) is an extraordinary quality franchise but carries geopolitical risk. Both countries are sometimes reclassified toward developed market status, depending on the index provider.
Saudi Arabia and the GCC: Following Saudi Aramco's listing and Vision 2030 economic reforms, Saudi Arabia has become a significant EM market. The GCC generally offers political stability and resource wealth, with growing non-oil sectors. Capital markets are relatively young but developing rapidly.
Portfolio Sizing and Implementation
How much EM?
Emerging markets represent roughly 12–15% of global market capitalisation (depending on inclusion decisions regarding China). A truly market-cap-weighted global portfolio would hold this proportion in EM. In practice:
- A conservative internationally mobile investor might hold 5–8% of equity portfolio in EM, recognising the volatility and governance challenges
- A moderate internationally mobile investor might hold 10–15%
- An investor with genuine expertise in or proximity to specific EM markets might go higher with a more focused mandate
Implementation options:
- Broad EM ETFs: The lowest-cost entry point. MSCI EM ETFs from iShares, Vanguard and Xtrackers are widely available in UCITS format. They provide broad, passive EM exposure with daily liquidity.
- Active EM equity funds: In EM markets, active management adds more value than in developed markets because mispricings are larger and country/corporate selection makes a larger difference to returns. Look for managers with deep country expertise, a track record through full cycles and genuine on-the-ground research capability.
- Single-country ETFs or funds: For larger portfolios, granular country-level positions (India ETFs, Brazil equity funds, ex-China EM products) allow more precise risk management and country-level decisions.
- EM small-cap funds: A higher-risk, higher-potential-return sub-category capturing the size premium within EM markets.
Tax Considerations
EM dividends typically attract withholding tax; rates vary by country. For investors in UCITS-domiciled funds, treaty-reduced withholding rates apply at fund level. Capital gains tax treatment depends on tax residency. Transaction taxes apply in some EM markets (e.g., India's Securities Transaction Tax, South Africa's Securities Transfer Tax). The overall tax cost of EM investing should be evaluated at portfolio level.
How Global Investments Can Help
Global Investments has decades of experience helping internationally mobile clients navigate emerging market allocations. We work with clients to define appropriate country weights, select high-quality EM managers or ETF products, and structure holdings for tax efficiency across multiple jurisdictions.
Our portfolio construction team monitors country-level risks, governance developments and valuation dynamics across EM markets, and provides regular review of clients' EM allocations against their risk tolerance and investment objectives.
To discuss emerging market exposure as part of your broader international portfolio, please contact our advisory team.
Investments can fall as well as rise. Emerging market investments carry significantly higher political, currency and liquidity risks than developed market equivalents. Tax rules vary by jurisdiction. This guide does not constitute regulated investment advice.
This guide is for general information only and does not constitute financial advice or a personal recommendation. The value of investments can fall as well as rise and you may get back less than you invest. Past performance is not a guide to future returns. Tax rules, investment regulations, and the availability of specific investment vehicles change — always verify current rules and seek advice from a qualified independent financial adviser before making any investment decisions.