Exposure to emerging markets makes sense
- Robin Powell
- Feb 21
- 3 min read
We live in a global economy, yet many investors still have portfolios focused mainly on developed markets. A common blind spot is a lack of exposure to emerging markets.
This bias is often driven by familiarity. Investors tend to allocate heavily to domestic equities, neglecting the potential benefits of diversifying into emerging markets.
SHERIFA ISSIFU from S&P Dow Jones Indices says this underrepresentation can be a missed opportunity, especially when growth in countries like China and India has outpaced the developed world.
KEY TAKEAWAYS
1. Emerging markets have outperformed
Over the last 20 years, emerging markets have often delivered stronger returns than developed markets, with China and India leading the way in GDP growth and equity performance.
2. Diversification reduces risk
While individual emerging markets can be volatile, a broad and diversified allocation helps manage risk by reducing reliance on any single country or region.
3. Indexing still works
Despite perceptions, active funds struggle in this space. Research shows that most active managers underperform the broad emerging markets index over the long term.
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https://www.evidenceinvestor.com/post/is-there-a-link-between-gdp-growth-and-emerging-market-returns
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TRANSCRIPT
Robin Powell: We live in a global economy, and yet many investors have little exposure to large parts of it.
Most of us, in fact, are biased towards developed markets, and particularly towards companies in our own country.
Sherifa Issifu: Investors are often heavily allocated to domestic equity. So for the US, heavily invested in US equity for other international investors, they are invested in their own markets.
And when they do have a global equity piece, it's often the focus is us. Large cap indices like S&P 500.
So emerging markets and other opportunity sets are often overlooked.
RP: So-called home bias tends to have a negative impact on returns.
In the first two decades of this century, for example, emerging markets such as China and India outperformed the likes of the US, the UK and mainland Europe.
SI: Over the past 20 years, we've seen a broad based benchmark for emerging market equities. The S&P emerging BMI outperformed its developed market counterparts, and China and India have been at the forefront of this.
They've been two heavyweights of emerging markets.
So even from an economic point of view, we've seen that it's had great GDP growth more than the single digits, often in the double digits.
RP: One of the downsides with emerging markets is that they tend to be more volatile than developed markets. But you can reduce volatility through diversification.
SI: Within emerging markets there have been risks historically. So we have seen some case studies of crises such as Argentina's credit default. And we've seen the textbook case of hyperinflation in Zimbabwe.
But if you are invested in a broad way to emerging markets, your risk or your allocation to any single country would be quite small.
RP: It’s often suggested that investors in emerging markets are better off using actively managed funds. But the evidence shows that only a very small proportion of active funds outperform over meaningful periods of time.
SI: Our SPIVA reports, which is S&P index versus active. Shows unequivocally that indexing has worked for emerging markets.
So over the last 20 years, 92% of active equity managers have underperformed a broad market index, which is the S&P, IFC composite.
RP: So, emerging markets are an opportunity that most investors shouldn’t miss. The key is to diversify and focus on the long term.
