Emerging Market Investing: A Guide for International Investors

The Case for Emerging Market Exposure

Emerging markets — broadly, countries with developing economies and financial markets at an earlier stage of institutional development than the US, Europe, or Japan — represent a substantial and growing share of global economic output. As of 2026, EM economies collectively account for well over half of global GDP on a purchasing power parity basis, yet EM equities represent a much smaller fraction of global stock market capitalisation.

This gap — between economic weight and market weight — has long been cited as justification for EM exposure in international portfolios. As EM capital markets deepen, corporate governance improves, and middle-class consumption drives earnings growth, the argument runs that EM equities offer a structural tailwind.

The reality is more nuanced. EM equities have had long periods of underperformance relative to US and developed market equities — most notably 2010–2020, when EM lagged significantly. Returns have been highly cyclical, driven by commodity price cycles, USD strength (EM currencies and assets often weaken when the dollar strengthens), and China-specific events.

For internationally mobile investors, EM deserves a place in a diversified portfolio — but with open eyes about the risks, realistic time horizons, and appropriate position sizing.

What Counts as an Emerging Market?

The most widely used classification framework is maintained by MSCI, whose Emerging Markets index is the benchmark for most global EM equity funds and ETFs. MSCI classifies markets into three tiers:

• Developed markets: US, UK, Germany, Japan, Australia, Canada, France, Switzerland, and others — 23 countries.
• Emerging markets: China, India, Taiwan, South Korea, Brazil, South Africa, Saudi Arabia, Mexico, Indonesia, Thailand, Malaysia, and others — approximately 24 countries.
• Frontier markets: Smaller, less developed markets including Vietnam, Nigeria, Kenya, Romania, and others.

FTSE Russell maintains an alternative index with slightly different classifications — notably, South Korea is classified as a developed market by FTSE but remains EM in MSCI's framework. Investors in MSCI EM ETFs have South Korea exposure; those in FTSE EM ETFs (like Vanguard's FTSE EM fund) do not. This matters when comparing funds.

Why Invest in Emerging Markets?

Growth Potential

Emerging market economies typically grow faster than developed ones. India, Indonesia, Vietnam, and others have sustained GDP growth rates of 5–8%+ in recent years. Faster economic growth does not automatically translate into higher equity returns (corporate earnings can lag GDP growth; foreign investors may not capture the benefit), but it creates a favourable backdrop for long-term earnings expansion.

Demographic Tailwind

Many EM countries have young, growing populations — a demographic dividend that supports labour force expansion and consumption growth. India, for example, has a median age below 30. Contrasted with ageing populations in Japan, Germany, and much of Western Europe, the demographic argument for EM exposure is structurally compelling over a 20–30 year horizon.

Growing Middle Class

Rising incomes in EM countries create expanding consumer markets for goods, services, financial products, and technology. Companies serving these domestic consumption trends — whether Indian financial services firms, Indonesian e-commerce platforms, or Brazilian consumer goods businesses — offer growth stories not available in mature developed markets.

Valuation

EM equities have frequently traded at significant valuation discounts relative to developed markets, particularly US equities. As of 2026, EM as a whole trades at price-to-earnings ratios meaningfully below the S&P 500's elevated valuation — though some of this discount is structurally justified by lower corporate governance standards and higher political risk.

The Risks of Emerging Market Investing

Political Risk

Many EM countries have less stable political institutions, more frequent policy reversals, and greater risk of expropriation, nationalisation, or market closure. Russia was removed from MSCI indices in 2022 following its invasion of Ukraine and the subsequent imposition of international sanctions, which effectively made Russian securities uninvestable for many foreign investors. Investors who held Russia-weighted EM funds faced significant losses on that component.

Political risk is not confined to Russia. Government policy has abruptly changed in China (technology sector crackdowns, education sector nationalisation), Turkey (unorthodox monetary policy), Brazil (fiscal policy uncertainty), and elsewhere.

Currency Risk

EM currencies are generally more volatile than developed market currencies. They often weaken when global risk appetite falls or when the US dollar strengthens, compounding equity losses for foreign investors. An EM fund held in GBP by a UK investor is subject both to the equity market movement in local currency and the currency movement against sterling.

Currency risk in EM is largely unhedgeable at reasonable cost — the forward markets for many EM currencies are illiquid or expensive, and the cost of hedging often exceeds the yield pickup. Most EM equity exposure is therefore taken unhedged, accepting currency volatility as part of the investment.

Corporate Governance

EM companies often operate under weaker corporate governance frameworks than their developed market peers. Minority shareholder protections may be limited, related-party transactions are more common, accounting standards may be less rigorous, and management may prioritise controlling shareholders over minority investors.

China presents a specific governance concern through VIE (Variable Interest Entity) structures: many US-listed Chinese technology companies are structured so that foreign investors technically hold shares in an offshore holding company with contractual claims on the operating entity, rather than direct ownership. These structures have not been definitively tested in Chinese courts, and regulatory changes could undermine their enforceability.

Index Concentration: The China Problem

The MSCI EM index has been heavily concentrated in China — at times over 35% of the index. This means that an EM ETF is substantially a bet on China alongside a diversified developing world portfolio. Investors who wish to gain diversified EM exposure without outsized China risk can:

• Use EM ex-China ETFs (e.g., iShares MSCI EM ex China UCITS ETF), which excludes China entirely and reweights the remainder.
• Use a blend of an EM ex-China ETF plus a dedicated China allocation at their own chosen weight.
• Select an active EM manager with discretion to underweight China.

China: Specific Considerations

China deserves a dedicated discussion given its size and complexity. The key China-specific risks as of 2026 include:

Regulatory risk: In 2021, Chinese regulators substantially curtailed the private tutoring sector, eliminated much of its commercial profitability overnight. Similar regulatory action hit internet platforms (Alibaba, Tencent), gaming companies, and other sectors. The risk that the Chinese Communist Party will prioritise political objectives over shareholder returns is real and ongoing.

Property sector crisis: China's property sector — which at its peak accounted for approximately 25–30% of GDP activity — has been in severe stress since 2021, when Evergrande defaulted on its debt and similar defaults followed. Stimulating economic recovery while managing property sector deleveraging remains a major challenge for Chinese policymakers.

Geopolitical risk — Taiwan: Taiwan is a major component of EM indices in its own right (through TSMC and other listed companies), and any military conflict between China and Taiwan would be economically catastrophic for the region. Markets have increasingly priced in some probability of this scenario, but the full consequence of a Taiwan conflict for investors in both China and Taiwan equity would be severe.

Capital controls: China maintains capital account controls that limit the ability of foreign investors to freely move money in and out of the market. MSCI-accessible A-shares are available via Stock Connect programmes, but the infrastructure and rules governing foreign investment in onshore Chinese equities continue to evolve.

The India vs China Allocation Debate

A common portfolio debate within EM is how to weight India relative to China. The contrasting narratives:

China bulls argue that valuations are cheap after years of underperformance, that regulatory crackdowns have mostly run their course, and that China's economic scale and technological capability provide a durable earnings base.

India bulls argue that India offers the structural tailwind of China a decade ago — rapid growth, young demographics, expanding middle class — without the geopolitical uncertainty around Taiwan, the VIE governance concerns, or the Communist Party's unpredictable regulatory interventions.

In practice, most balanced EM funds hold both. Investors with strong views on the China/India balance can tilt using country-specific ETFs (e.g., iShares MSCI India UCITS ETF) alongside a core EM position, or by selecting an active EM manager whose country allocation reflects their convictions.

EM Equity ETFs: Key Options

For UCITS-compliant international investors, the main EM equity ETF options as of 2026 include:

• Vanguard FTSE Emerging Markets UCITS ETF (VFEM): Tracks the FTSE Emerging Markets index. Note: excludes South Korea (FTSE classifies it as developed). Very low TER. Large AUM and high liquidity.
• iShares Core MSCI Emerging Markets UCITS ETF (EIMI): Tracks MSCI EM (includes South Korea). Physical replication, large AUM, Ireland-domiciled. One of the most widely held EM ETFs for European investors.
• Amundi MSCI Emerging Markets UCITS ETF: Alternative MSCI EM tracker, typically with a slightly lower TER.
• iShares MSCI EM ex China UCITS ETF: For investors who want EM exposure without China concentration.
• iShares MSCI India UCITS ETF: Country-specific India exposure.

Emerging Market Bonds

Beyond equities, EM exposure is also available via bonds — providing different risk/return characteristics:

USD-denominated EM sovereign bonds (hard currency bonds): Issued by EM governments in US dollars, eliminating local currency risk for the issuer and providing USD-denominated exposure for international investors. The J.P. Morgan EMBI (Emerging Market Bond Index) is the benchmark. Yield premiums over US Treasuries compensate for sovereign credit risk.

Local currency EM bonds: Issued in domestic currencies (Brazilian reais, Indian rupees, Indonesian rupiah). Offer higher yields but add currency risk. For investors with diversified currency requirements, this can be an additional diversification source.

EM corporate bonds: Corporate debt from EM companies, typically USD-denominated. Offer higher yields than sovereign bonds of the same country, reflecting additional corporate credit risk.

EM bonds have historically offered higher income than equivalent developed market bonds, and have a place in an income-focused international portfolio for investors who can accept the higher volatility and credit/currency risk.

Appropriate Sizing for International Portfolios

Given the higher volatility, political risk, and specific concentration concerns, EM typically warrants a satellite rather than a core allocation for most international investors. Indicative position sizes:

• Conservative international portfolio: 5–10% EM equities.
• Balanced international portfolio: 10–20% EM equities.
• Growth-oriented international portfolio: 20–30% EM equities.

Investors with personal or business connections to specific EM economies — for example, an internationally mobile professional who has lived and worked in India or the Gulf — may reasonably take higher conviction positions based on on-the-ground knowledge, within an overall portfolio risk framework.

How Global Investments Can Help

Global Investments works with internationally mobile clients across multiple EM regions. Our advisers have direct experience in markets including the UAE, Cyprus, Southeast Asia, and beyond — providing ground-level perspective on EM investment that goes beyond index composition.

We help clients determine the right EM allocation for their risk appetite and time horizon, select between country-specific and broad EM vehicles, assess the China/India balance, and ensure EM positions are held in the most tax-efficient structure for their residency and investment objectives.

To discuss how emerging markets might fit your international investment portfolio, contact our advisory team.

Capital is at risk. The value of investments and income from them can fall as well as rise, and you may get back less than you invest. Past performance is not a reliable indicator of future results. Tax treatment depends on individual circumstances and may change. Investments in emerging markets are subject to additional risks including currency, political, and liquidity risk. This article is for information purposes only and does not constitute personalised financial advice.