Emerging Opportunities: Exploring the True DNA of Emerging Markets

Research

12 min read  |  In this paper, we explore the inherent characteristics of the emerging markets (EM) asset class through an economic lens and discuss the key investment criteria that differentiate emerging markets from developed markets. We also challenge the influence of existing benchmarks, which feature significant concentration problems at both the issuer and country level, on investors’ asset allocation decisions and managers’ security selection. In fact, just three countries – China, Korea, and Taiwan – comprise two-thirds of the index, amplifying such country-specific risks as China’s recent regulatory crackdown on certain sectors. Similarly, the ten largest stocks in the MSCI EM Index comprise about one-third of the index. Emulating such a concentrated benchmark with a similarly concentrated, low-active-share portfolio is arguably not prudent, nor “emerging.”