Emerging markets have enjoyed a good 2025 so far, but these higher-risk geographies have heavily lagged their developed counterparts over the long term. Hyped-up opportunities in nations from Brazil to China have often ended in disappointment – how should investors factor in this year\u2019s rally?<\/p>\n
In sterling terms, the MSCI EM index delivered a net return of 10 per cent to the end of August. That was double the 5 per cent return for the developed market focused MSCI World index.<\/p>\n
While emerging markets are often pointed to as an opportunity for diversification and growth, with their generally better demographics and more rapid economic expansion, the trend of long-term developed market outperformance was accelerated post-pandemic given the attraction of US tech stocks. <\/p>\n
Yet Bank of America\u2019s August global fund manager survey flagged that managers were 37 per cent overweight emerging market equities, the highest level since February 2023. A record 91 per cent of managers said US equities were overvalued. <\/p>\n
Strategists at BlackRock pointed this week to three key drivers which have increased the attractiveness of emerging markets: a weaker US dollar, an improved macroeconomic backdrop and \u201cmega forces\u201d such as the semiconductor production market in Taiwan and South Korea and Chile and Peru\u2019s position in critical minerals. <\/p>\n
The 10 per cent fall in the US dollar this year against a basket of foreign currencies, on concerns about the potential end of American economic and trade dominance, is the most important theme here. Emerging markets\u2019 exposure to US-denominated debt means repayments are easier with a weaker greenback, while exports are supported. This strengthens earnings and valuations. <\/p>\n
From a diversification perspective, emerging markets should play some part in a portfolio given market characteristics and their material importance to the global economy. Our four Alpha tactical asset allocation portfolios have between a 5 and 9 per cent allocation to the MSCI EM index<\/a>. <\/p>\n However, simply owning the EM index through an exchange traded fund rather than being selective does come with certain considerations. The MSCI EM index is dominated by a handful of markets. Chinese equities take almost a third of the index, Taiwan is on 19 per cent, India on 16 per cent and South Korea on 10 per cent. That means heavy exposure to Asia.<\/p>\n AI chipmaker Taiwan Semiconductor Manufacturing Company (TW:2330), which we have flagged as a value play<\/a>, makes up a huge 10.3 per cent of the index. That is almost double the weighting of second-largest stock, Chinese social media and online services business Tencent (HK:700). <\/p>\n The index\u2019s performance obscures vastly different outcomes across key markets and presents some big investment decisions.<\/p>\n For example, how to approach China and India which have had starkly different performances this year<\/a>. China has rebounded and driven the emerging markets performance this year, while India has struggled amid 50 per cent US tariffs and concerns about elevated valuations. <\/p>\n This highlights that, as with opportunities in developed markets, selectivity is important in emerging geographies. <\/p>\n The IC\u2019s Val Cipriani picked out Ashoka India Equity (AIE) as a standout investment trust option in India<\/a>. Dave Baxter flagged<\/a> Invesco Global Emerging Markets (GB00BJ04FP47), which has delivered a double-digit return this year and has lower exposure to China than the index. <\/p>\n BlackRock\u2019s strategists, while broadly neutral on emerging market equities, pointed to India\u2019s young population and progress with digitisation as an opportunity. They also argued that it\u2019s a good moment to \u201clock in yields in local-currency bonds in Hungary, the Czech Republic, South Africa, Brazil, Mexico and Colombia\u201d. <\/p>\n For investors prepared to deal with the volatility of emerging markets, they trade at a wide discount. The MSCI EM trades on 13 times forward earnings, a 35 per cent discount to the MSCI World. <\/p>\n","protected":false},"excerpt":{"rendered":"Emerging markets have enjoyed a good 2025 so far, but these higher-risk geographies have heavily lagged their developed…\n","protected":false},"author":2,"featured_media":11497,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[12319,12321,114,1576,85,46,190,545,12320],"class_list":{"0":"post-11496","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets","8":"tag-alpha","9":"tag-alpha-weekly-analysis","10":"tag-business","11":"tag-emerging-markets","12":"tag-il","13":"tag-israel","14":"tag-markets","15":"tag-opinion","16":"tag-stocks-shares"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/11496","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=11496"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/11496\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/11497"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=11496"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=11496"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=11496"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}