Emerging markets are often grouped together as a single asset class by the financial media when discussing where the markets are headed. In reality, emerging markets differ greatly in terms of both their underlying economies and their financial performance. International investors should carefully consider these differences when analyzing investment opportunities around the world in order to avoid missing opportunities.


In this article, we’ll take a look at why international investors shouldn’t group all emerging markets together as a single asset class and instead individually analyze them.

Economic Similarities & Differences

Emerging markets share a number of similarities that characterize them as “emerging markets”, as opposed to developed markets like the United States or European Union. While the definition of an emerging market isn’t universally accepted, the MSCI defines emerging markets in terms of the number of quoted companies of a certain size and “free float”, plus factors like a market’s openness to foreign ownership and capital.

Of course, the number and size of public companies operating within a country has little bearing on its stock market performance. Emerging markets widely differ in a number of important ways that investors should consider, including:

• Industry Concentration – Investors should take a look at what industries constitute the majority of a country’s public equities. For instance, India’s tech exposure will have a significantly different risk/reward profile than Brazil’s commodity exposure.

• Commodity Exposure – Commodity prices can have a significant influence on the profitability of public equities involved in related sectors, which makes commodity exposure an especially important consideration for investors.
• Export End Markets – A recession in Europe could hurt some emerging markets that export primarily to Europe, but a health U.S. economy could mean that those markets exporting to the U.S. could do just fine.

Most of this information can be found by looking at the prospectuses of exchange-traded funds (“ETFs”) covering these countries of interest.

Performance Similarities & Differences

Emerging markets tend to be grouped together by investors due to the advent of ETFs targeting emerging market countries as a whole. For instance, the iShares MSCI Emerging Markets Index ETF (NYSE: EEM) is a $21 billion fund that invests broadly across all emerging markets. A decline in those markets that the ETF holds the greater equity in could result in a decline across all markets, and even have somewhat of a real impact through associated selling.

A second factor that can play a systemic role in emerging market performance the U.S. interest rate. Since many emerging markets have dollar-denominated debt and rely on foreign investment, low interest rates can increase capital flows and encourage debt, while high interest rates can reduce capital flows and make debt more expensive to service. These can be important considerations for international investors, especially during unusual situtations.

On an individual level, emerging markets have very different performance characteristics across just about every category. Argentina was the top performing market between January and September of 2015 at 37.48%, for example, while Peru (it’s neighbor in many ways) was among the worst performing at -12.45%. The moral of the story is that there are always outperforming and outperforming markets, even when looking across just emerging markets.

Key Takeaway Points

• International investors shouldn’t automatically group all emerging markets into the same basket, even when the financial media is doing so.
• By looking closely at individual countries, investors may be able to identify undervalued markets that have been experienced unjustified selling pressure.
• Investors can find a lot of the information they need by looking at prospectuses for emerging market country ETFs.