Emerging Markets (EMs) as a group are something of a mixed bag. One might justifiably wonder why such an obviously high-technology country such as South Korea is considered an emerging market, nevertheless it is.[1] Investment research firms like MSCI make the rules regarding which countries and companies are included in the index and the asset management industry, particularly passive investors, pay careful attention. The MSCI Emerging Markets Index contains companies listed in all four corners of the world [2]. What could they possibly have in common?!
The 1990s were a strange time
There was a sense of inevitability that permeated the atmosphere of the 1990s [3]. One of the decades top selling albums was, of course, Nirvana’s Nevermind. In the same year as Smells Like Teen Spirit hit the airwaves (1991) the Soviet Union unceremoniously dissolved itself. Into the vacuum stepped unrestrained capitalism. Everywhere, market forces were the answer, and whilst there were no doubt voices at the time calling for restraint in the wholesale adoption of such reforms, the general feeling was that there was no choice. A plethora of countries with diverse cultures, histories and geographies decided in short order to let the market allocate capital and permit foreign investment. Money poured in, and for the first half of the decade EM equity markets soared. In hindsight it was too much to expect countries with virtually no relevant institutional architecture or market experience to survive the tidal wave of foreign interest. One crisis after another ensued: the 1994 Mexican Peso Crisis, the 1997 Asian Financial Crisis[4] and then finally, the 1998 Russian default.
Picking up the pieces, from the turn of the millennium to the Global Financial Crisis
The lessons from the first chapter of the EM story were hard learned. Consequently, policymakers in these countries made sweeping changes to the way their economies were managed. Their overriding concern in the wake of the chaos was to enhance resilience. As we wrote at the very beginning, EMs are a diverse group, so it is a little unfair to lump them all together, but on the necessity of reform there was near universal agreement. By the early 2000s, investors had largely forgotten about the various mishaps of the previous decade. The emergence of China and several years of economic reorganisation, breathed new life into EM investing. In 2001 the term ‘BRICs’ was coined by Goldman Sachs[5] and between 2003 and 2008 EMs went on a tear. China’s economic miracle over the decade fuelled a commodities boom that benefitted EMs in particular. It also helped that the Dotcom Bubble had burst by then and a newish investment destination was desperately needed.
For a few dollars more
There is an important negative relationship between the US Dollar and EM equities. A strong Dollar tends to act as a headwind to EM equity returns. There are several reasons for this[6], but the period of Dollar strength post 2008 has borne this out. Until quite recently EMs have significantly underperformed developed markets. The recent excellent relative performance of the MSCI EM Index has much to do with construction of the index itself, rather than Dollar weakness per se[7]. Taiwan and South Korea constitute more than fifty percent of it. This is not an accident. These two countries are at the epicentre of the AI hardware infrastructure boom [8]. Taiwan Semiconductor Manufacturing Company (TSMC) is 15% of the index [9].
Should investors just ignore the index
When the index was first constituted in 1988, we would argue that the characterisation of each country as ‘emerging’ was probably justified. One could reasonably make the argument that the ten original countries were at a similar point in their economic and stock market journey[10], which is to say precisely that they were starting from scratch. This is a more difficult case to make now. Things have moved on and our sense is that the term EM is less useful.
Investors allocating to EM index trackers are not participating in the economic or market conditions of the countries in question. Instead, they are making a conviction bet on a global technology hardware supercycle. There is of course nothing intrinsically wrong with doing so, but to us it seems to ignore the original reasons to invest in EMs. Were we writing this piece in 1990, we’d be interested in countries with, amongst others, the following relevant characteristics:
- Regulatory reform encouraging economic growth, minority shareholder protections and property rights
- Rising consumer spending and the emergence of a middle class
- Expansion of state capacity incl. infrastructure
- Under-researched financial markets and modest global economic integration coupled with general lack of well-capitalised external competition
After consideration, our conclusion is that the term EM is probably no longer of much use in portfolio construction or for the purposes of diversification. What we ought to be looking for are investments focused on the original dimensions detailed above which made EM investing attractive to begin with. This might mean funds focused on specific countries, or strategies where the target countries are at a lower rung on the ladder economic development.
Riccardo Persona, CFA
[1] See further https://www.msci.com/indexes/index/891800/msci-em-emerging-markets-index-2
[2] See above. MSCI have a specific definition of an EM for the purposes of inclusion in their index. However, this piece is about what we as investors consider EM investing
[3] For an excellent cultural history of the period see The Nineties A Book by Chuck Klosterman
[4] At the time the Peso Crisis was also referred to as the Tequilla Crisis, which would probably be impossible toda
[5] Brazil, Russian, India and China https://www.goldmansachs.com/our-firm/history/moments/2001-brics
[6] A detailed analysis of the relationship is beyond the scope of this piece, but a key consideration is that EMs tend to borrow in Dollars. Therefore, a strong dollar increases the costs of doing so in their local currency. Often critical imports like oil are also priced in Dollars. As the Dollar price of these inputs increase the local currency in question tends to weaken.
[7] The Dollar Index (DXY) has fallen from 108 (31/12/24) to 101 (30/06/26). Over the period the MSCI EM Index is up approx. 80%.
[8] See further https://www.msci.com/indexes/index/891800/msci-em-emerging-markets-index-2. We wrote about this in our 2026 Outlook https://whitman.co.uk/news/outlook-2026-and-beyond
[9] See note 8 above
[10] See https://www.msci.com/indexes/group/emerging-markets-indexes#shifting-landscape
