Submerging Markets

With all the talk about investors dumping U.S. assets in favour of Europe, what about the emerging markets? There are many different indices that can give investors exposure to stocks outside of the 23 countries that are considered developed. The most commonly used benchmark is the MSCI Emerging Markets Index (EEM). It’s currently down about 15% from its 2022 peak, which is also the same level it reached back in 2007.

At the heart of the problem is China, which accounts for roughly a third of the index. Aggressive state intervention, particularly in the tech sector, opaque policymaking, and a real estate sector on life support have all shattered investor confidence. As a result, capital continues to flee the world’s second-largest economy, and the main Chinese stock index remains more than 35% below its pre-COVID highs.

India, by contrast, has been a rousing success story. The Nifty 50 seems to never go down. However, the Rupee also seems to never go up, and Indian stocks comprise only 20% of the EEM index. Next is Taiwan—well, mostly TSMC— at just under 20%. The remaining 30% is spread across a mere eighteen other countries, and as such, the index is not as globally diversified as one might expect.

Before you're tempted to overweight African or South American stocks—because, you know, there’s so much potential—keep in mind that many of these markets are still down more than 50% since the Global Financial Crisis. So, how much should we allocate to emerging markets as part of a diversified equity portfolio? Anything less than 5% is unlikely to move the needle, but anything more than 20% risks serious underperformance.