Should I add Emerging Markets to my Portfolio?

Emerging markets are characterized by rapid GDP growth, industrialization, increasing market liquidity, political instability, currency volatility, improving public infrastructure and a large, young consumer-driven population.  As a group, emerging markets represent about 70% of the world’s population and make up approximately 25% of global equity market capitalization. While there are several widely used standards or benchmarks for emerging market equities, we rely on the MSCI Emerging Markets Index (EM) which is a market capitalization index covering 24 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and the United Arab Emirates.  (Note that Russia, formerly a member of BRICS, is no longer included as MSCI reclassified it as a stand-alone market beginning in 2022.) Emerging markets range from economic powerhouses like China, India and South Korea to deeply challenged markets like Brazil and to smaller economies like Chile, Hungary and Poland. As economies in transition, emerging markets gain increased visibility and political clout, which require the adoption of sound macroeconomic policies, including the privatization of state-owned businesses, efficient access for foreign investors and a demonstrated openness to fair international trade.

While the emerging economies may be in transition, investors are now able to invest in emerging markets with precision. By the numbers, the EM space includes over $1.5 trillion in AUM (assets under management) and represents about 11% of international equities as measured by the All-Country World Index (ACWI). As you might expect, the Region allocation in EM is overweight to Asia-Pacific (80%), with smaller allocations in Europe/Middle East/Africa (12%) and Latin America (8%). Not surprisingly, the 4 largest country allocations are all in Asia – China (28%), Taiwan (21%), India (15%) and South Korea (13%). Sector allocations show a growth bias with large concentrations in Technology (30%), Financials (20%) and Consumer Discretionary (10%).  Since early 2025, EM has outperformed the S&P 500 as US equity market volatility, fiscal strain and policy uncertainty has prompted investors to reassess their global equity allocations. Valuation disparity has also been a factor as US equities traded at over 21 times forward earnings, compared to just 12 times for EM equities – one of the widest valuation spreads in over 20 years. How is EM performing compared to ACWI? While 3-year share price performance is similar – ACWI (+20.29%) and EM (+20.11%), the picture over the past year is quite different with EM (+57.12%) outperforming ACWI (+38.01%). 

Do emerging markets offer investment opportunities for the typical investor?  The answer is yes.  The risks posed by emerging markets require that the investor be willing to accept greater stock price volatility and investment risk in return for the opportunity to realize large gains.  The primary reason for adding emerging markets to an allocation is to increase the portfolio’s expected return. In addition to improving risk-adjusted returns, emerging markets also provide diversification benefits as they are generally less correlated with developed markets like the United States and Europe. The correlation between US Large Cap stocks (S&P 500) and EM is about 0.45, which tells us that price movement of US large cap stocks and emerging market stocks is synchronized just 45% of the time. By their nature, emerging markets are not predictable and sometimes veer off course (political turmoil and natural disasters are possible causes) so patience and a longer term perspective are required. Emerging market equities are best suited to growth-oriented portfolio allocations and should comprise approximately 25% of your international allocation or about 5% of your overall portfolio.