The late 1980s was the first time that investors in the US started exploring investing in markets in their early stages of economic development. The MSCI emerging markets index was launched in 1988 and is now one of the major benchmarks used in asset allocation across the global equity markets. In the early days, emerging markets represented less than 1% of the worldwide equity markets. Now, emerging markets represent 12% of the MSCI all-country world index. What was true in the 80s is true now, too, with emerging markets accounting for some of the fastest-growing economies. The name 'emerging markets' tends to confuse a few into thinking that these countries have small economies and rudimentary financial systems. However, the classification looks at parameters including sustainability of economic development, size and liquidity of the capital markets, and ease of market accessibility. Hence the EM includes advanced economies like South Korea and Taiwan, large economies like India, Russia, and China, and smaller economies like Argentina, Hungary, and Peru.
Here’s GDP data for some of the emerging economies:
Source: World Bank
The emerging markets can be divided broadly based on geography, namely Emerging Asia, Emerging Europe, Emerging Middle East & Africa, and Emerging Americas.
Asia is home to most of the largest emerging markets. China, India, South Korea, and Taiwan alone account for 72% of the emerging markets by weight. Other countries from regions in the EM include Indonesia, Thailand, and Malaysia.
The Middle East and African components of the EM consist of the oil producing nations of Saudi Arabia, Kuwait, and Qatar, and others such as Egypt and South Africa.
Emerging Europe includes nations such as Poland and Czech Republic, Russia, Hungary, and Greece.
The American portion of the EM is made up of Mexico and South American countries like Brazil, Colombia, Chile, and Argentina.
The EM is also made up of a variety of sectors and industries. However, certain regions of the world have a more considerable prevalence of particular sectors.
The South American countries are more commodity export-driven and are dominated by metals and mining companies. With the advancement in e-commerce, more recently, such companies have also become popular in this region.
Similarly, the Middle East region is dominated by oil producers like Saudi Arabia and Kuwait. South Africa, too, has many precious metal explorers.
In Europe, Russia is a largely commodity-driven nation. However, the Russian Federation is also home to consumer and internet companies. The smaller European countries of Hungary, Poland, and the Czech Republic have a more diverse mix.
The Asian region is the largest and is also the most diverse with the tech giants of China, Korea, Taiwan, consumer companies and financial services firms of India, and healthcare and real estate companies of Thailand and Malaysia.
Investing in the EM as originally conceptualized was to add diversification and provide excess returns over the developed markets. Longer term, the EM has done better than developed markets. But the higher returns have come with greater variance. The recent years have been especially tough for EM investing. However, given the growth potential, EM stocks are expected to do well compared to their developed market peers in the long term. In the graph below, we compare the returns of the EM with the rest of the world. The MSCI EM IMI is an index of all available emerging market stocks, and it has outperformed the S&P 500 in the long run, albeit by a small margin, and has significantly outperformed the MSCI World ex USA index, which includes the stocks of all the developed markets excepting the US.
There has been considerable variance between the components of the EM as well. Even the GDP growth rates have varied significantly over the years.
Here is a snapshot of the comparison between the major EM countries of China, India, Brazil, and Russia.
EM investing can be achieved by investing in the ADRs of the stocks. The US is the primary destination for foreign companies wishing to raise additional capital. So, ADRs of stocks from many countries trade in the US exchanges. Some of the prominent EM ADRs include Chinese Tech companies like Alibaba (BABA), Baidu (BIDU) and NetEase (NTES), TSMC (TSM) of Taiwan, Brazilian commodity companies like Petrobras (PBR), and Vale (VALE). Argentina based ecommerce giant Mercado Libre (MELI), Russian Tech company Yandex (YNDX), and the Peruvian bank Credicorp (BAP) are also quite popular. However, the list of ADRs is quite small compared to the available universe of EM stocks. So, ETFs offer a better alternative to gain exposure to these markets.
EM ETFs are available in three categories:
Broad EM exposure ETFs are apt vehicles to gain exposure to the overall emerging markets without bias towards any sector or country. There are multiple indices for the EMs as well, and numerous ETFs benchmarked to those indices. The most popular ones are the MSCI and FTSE indices. Top ETFs for broad EM exposure include Vanguard EM stock Index ETF (VWO), iShares core MSCI ETF (IEMG), and iShares EM ETF (EEM)
And finally, sector and thematic ETFs such as the Emerging Markets Internet & eCommerce ETF (EMQQ), iShares EM Infrastructure ETF (EMIF), or the Emerging Markets Ex-State Owned enterprises ETF (XSOE) offer exposure to themes and sectors within the EM space.
In order to simplify the decision making for investors looking to build emerging markets exposure, Globalise offers a curated portfolio for the emerging markets, made up of a variety of ETFs across the EM spectrum.
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