Emerging Market Equities: The Case For, the Case Against, and How to Allocate

Emerging market equities have long occupied a privileged place in the narratives of global investing. Demographics, economic growth, a rising middle class, and valuation discounts relative to developed markets — the bull case has been made consistently and persuasively for three decades.

The return record of the past decade has been far less convincing. Understanding why EM equities have underperformed, whether the long-term case remains intact, and how to allocate to them intelligently requires a more rigorous analysis than the usual promotional material offers.

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What emerging markets are

The MSCI Emerging Markets Index — the standard benchmark for EM equity investing — includes approximately 1,400 companies across 24 countries. As of 2026, the major country weights are approximately:

• China: 27–30%
• India: 18–20%
• Taiwan: 16–18%
• South Korea: 11–13%
• Brazil: 4–5%
• Saudi Arabia: 3–4%
• South Africa: 3%
• Mexico: 2.5%
• Thailand, Indonesia, Malaysia: 1–2% each

Collectively, EM countries represent approximately 13–15% of total world market capitalisation in the MSCI ACWI (All Country World Index) — a significant underweight relative to their economic size (approximately 43% of global GDP at purchasing power parity).

The index composition has evolved significantly over the decades. Korea was only promoted to developed market status by FTSE (but not MSCI) in 2009. Saudi Arabia was added to MSCI EM in 2019. China A-shares (mainland China stocks listed in Shanghai and Shenzhen) have been progressively included since 2018. The composition will continue to evolve.

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The bull case for emerging markets

Demographics and population growth: EM countries have younger, faster-growing populations than developed markets (DM). India's median age is approximately 29; Germany's is approximately 46. A younger workforce drives consumption growth, creates more workers to support retirees, and generates the economic dynamism that supports corporate earnings growth.

Economic growth: EM GDP growth has historically run at 3–5% per year versus 1–2% for DM. Higher nominal GDP growth creates larger markets, higher corporate revenues, and — over the long run — higher corporate earnings.

Valuation discount: EM equities have historically traded at a significant discount to DM equities on most valuation metrics. As of 2026, the MSCI EM Index trades at approximately 12–14× forward earnings versus 18–20× for the MSCI World (DM). This valuation gap implies either that EM equities are undervalued, or that investors are rationally pricing in structural risks (geopolitical, governance, currency).

The rising middle class thesis: Hundreds of millions of people across India, Indonesia, Vietnam, Mexico, and other EM countries are moving from subsistence income levels to consumer-class income levels. This structural consumer spending expansion benefits domestic consumer companies in these markets.

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The honest return record

The investment case for EM equities sounds compelling. The actual return record of the past decade is sobering.

Over the 10 years to end 2025, the MSCI Emerging Markets Index returned approximately 6–8% per year in USD terms — compared to roughly 12–13% per year for the MSCI World (DM) index. In GBP terms the gap is similar. An investor who replaced their global equity holding with EM equities in 2015 received materially less than half the return they would have achieved by simply staying in the global developed market index, though a strong EM recovery in 2024–25 narrowed the longer-run gap.

The primary driver of EM underperformance over this period: China. China fell from approximately 30%+ of MSCI EM at its peak to approximately 27% following index rebalancing, but more importantly, Chinese equity markets dramatically underperformed. The reasons were multiple: regulatory crackdowns on technology companies (2021), property market distress (Evergrande and the broader property sector crisis from 2021), COVID-era economic disruption, and persistent geopolitical tension with the US. The MSCI China index declined approximately 50% from its peak in 2021 to its trough in 2023 — a decline that dragged down the entire MSCI EM index.

This does not prove that EM equities are a bad long-term investment. It proves that they can underperform for extended periods, and that concentration in a single country (China) creates significant return risk.

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The China question

China's dominant weight in MSCI EM (approximately 27–30%) is both the opportunity and the risk. Understanding the China investment case requires engaging with several structural concerns:

Geopolitical risk: US-China tensions over trade, technology, and Taiwan have escalated since 2018. US investors face restrictions on investing in certain Chinese technology companies. UK investors face no current restrictions but the political environment is volatile.

Taiwan risk: Taiwan (approximately 16–18% of MSCI EM) produces a substantial proportion of the world's most advanced semiconductors (TSMC). Any military confrontation over Taiwan's status would have severe consequences for these investments and for global supply chains.

Regulatory and governance risk: China's government can change the rules under which listed companies operate quickly and without warning. The 2021 tech crackdown (which imposed severe restrictions on Alibaba, Tencent, Didi, and the private tutoring sector) destroyed billions of dollars of market value in weeks. Investors have no legal recourse in the way they would in a DM jurisdiction.

Variable Interest Entity (VIE) structure risk: Most Chinese technology companies listed in the US or Hong Kong use a VIE structure, which gives foreign investors economic exposure but not legal ownership of the underlying Chinese operating entity. Whether these structures would be enforceable in a political dispute over Chinese corporate ownership is uncertain.

For investors who want EM exposure without these China-specific risks, EM ex-China funds are available:

• iShares MSCI Emerging Markets ex China UCITS ETF
• Xtrackers MSCI Emerging Markets ex China Swap UCITS ETF

These provide exposure to India, Taiwan, South Korea, Brazil, Saudi Arabia, and other EM markets without the China weighting. The trade-off: you also eliminate the potential upside from a China recovery.

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When EM equities tend to outperform

EM equity performance is closely correlated with three external factors:

1. The USD: A weak US dollar is positive for EM. When the USD weakens, EM countries' USD-denominated debts become cheaper to service; commodity prices (largely priced in USD) tend to rise, benefiting commodity-exporting EM countries; and capital flows to EM in search of higher yields. The 2022–2023 period of USD strength was a significant headwind for EM.

2. Commodity prices: Many major EM countries are commodity exporters — Brazil (iron ore, soybeans), South Africa (gold, platinum), Saudi Arabia (oil), Indonesia (palm oil, coal). When commodity prices rise, these countries' terms of trade improve, their corporate earnings rise, and their currencies strengthen.

3. DM growth relative to EM: When DM growth slows relative to EM (the narrative from 2003–2010 was exactly this — DM was recovering slowly from the dot-com bust while China/India/Brazil were booming), capital flows to EM. When DM (particularly the US) grows strongly and its technology sector leads global markets, DM outperforms.

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The currency dimension

EM equity funds are almost universally unhedged for currency. When you hold an MSCI EM ETF, you receive returns in the local currencies of 24 countries, converted to GBP at the prevailing exchange rates. EM currencies are substantially more volatile than DM currencies — particularly in periods of risk aversion when capital flows back to USD "safe haven" assets.

Currency hedging EM equity portfolios is theoretically possible but practically problematic: it is expensive (the interest rate differential between EM currencies and GBP is wide and moves constantly), complex (24 currencies to hedge), and actually reduces the diversification benefit (part of the EM diversification value comes from the currency exposure).

Most investors accept unhedged EM equity exposure. This means: in a global risk-off event, EM equities fall in price AND EM currencies weaken against GBP simultaneously — a double negative for GBP-based investors. The upside is symmetric: in risk-on environments, EM equities rise and EM currencies strengthen.

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Practical allocation for HNW investors

A reasonable EM allocation for a growth-oriented HNW investor with a 10+ year horizon: 5–15% of the equity allocation. This provides:

• Meaningful exposure to long-term EM growth trends
• Diversification benefit from the different economic cycle drivers
• Valuation upside if EM returns to its long-run discount-narrowing trend

For investors concerned about China concentration: split the allocation between a standard MSCI EM fund (capturing China) and an EM ex-China fund, or use a dedicated India fund to add the highest-conviction single-country EM allocation.

Key ETF options:

• iShares Core MSCI Emerging Markets IMI UCITS ETF (EIMI): Broad MSCI EM exposure, very low cost
• Vanguard FTSE Emerging Markets UCITS ETF: Tracks FTSE EM index (slightly different country weights to MSCI)
• iShares MSCI Emerging Markets ex China UCITS ETF (EMXC): EM without China
• iShares MSCI India UCITS ETF (NDIA): Single-country India exposure

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The value of investments and the income from them can fall as well as rise. Emerging market investments involve greater risk than developed market investments, including political risk, regulatory risk, currency risk, and lower liquidity. Past performance is not a reliable indicator of future returns. This guide is for information only and does not constitute financial advice. Tax treatment depends on individual circumstances.

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How Global Investments can help

Global Investments advises internationally mobile high-net-worth clients on emerging market allocations that reflect their risk tolerance, currency situation, and views on individual EM countries. We provide access to diversified EM strategies, EM ex-China options, and single-country allocations, and help clients size their EM allocation appropriately relative to their overall equity portfolio.

Contact us at globalinvestments.net to discuss your EM strategy.