What are emerging markets?

Emerging markets are countries whose economies and financial markets are still developing toward the standards of the richest nations: often faster growth, but also less stable politics, currencies and market rules. Index providers classify countries using criteria such as economic development, openness to foreign investors, market liquidity and the reliability of trading and regulation.

The largest emerging markets in stock indices are China, India, Taiwan and South Korea, followed by countries such as Brazil, Saudi Arabia and South Africa. The MSCI Emerging Markets index covers around 24 countries. Classifications differ between providers: South Korea, for example, is an emerging market for MSCI and a developed one for FTSE.

Their share of the world market

Emerging markets produce around 40% of the world's economic output but make up only around a tenth of the value of global stock indices. The gap has several causes: many large companies in these countries are state-owned or closely held, so few of their shares are freely tradable; much of their economies is not listed on stock exchanges at all; and indices only include shares that foreign investors can actually buy.

The emerging-markets weight of a portfolio is:

w_{\text{EM}} = \frac{\sum_i V_i \, f_{i,\text{EM}}}{V_{\text{total}}}

where $V_i$ is the value of holding $i$ and $f_{i,\text{EM}}$ the share of it invested in emerging markets.

A simple illustration

A portfolio of €100,000 holds €80,000 in an MSCI World ETF, which contains no emerging markets, and €20,000 in an FTSE All-World ETF with about 10% in emerging markets:

w_{\text{EM}} = \frac{80{,}000 \times 0 + 20{,}000 \times 0.10}{100{,}000} = 2\%

The portfolio holds only about a fifth of the world market's share of emerging markets.

What they add

Diversification: economies, sectors and currencies different from those of the US and Europe.
Growth exposure: younger populations and faster-growing economies — although faster economic growth has not reliably translated into higher stock returns.
Valuation differences: emerging-market stocks have often traded at lower valuations than developed ones.

What comes with them

Higher volatility and deeper drawdowns, partly caused by currency moves.
Political and governance risk: capital controls, state intervention and weaker protection of minority shareholders. In 2022, Russian stocks were removed from indices and became untradable for foreign investors.
Long bad stretches: emerging markets as a whole lagged developed markets for much of the 2010s.

Holding them at roughly their market weight, through an all-world fund or a separate ETF, is the neutral choice; holding more or less is a deliberate bet.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

What is my exposure to emerging markets?

Your explicit Emerging Markets exposure is the MSCI EM (Emerging Markets) IMI Screened holding: 9.603,80 € (6,91%).

Note: the regional breakdown covers 86,91% of your portfolio, and Unclassified holdings are 13,09% — the figures above reflect only the covered classification.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

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