Em… what are the emerging markets?
The term “Emerging Markets” is used by the investing community to describe the economies of a group of countries that increasingly reliant on industrialisation and consumption to power their economies. The “emerging” in the name is talking to the path rather than their current state.
Signs to look out for include an increasing economic growth rate, buoyant trade, enhanced foreign direct investment, improved infrastructure, a growing population, and a generally higher standard of living. Additionally, these countries are experiencing improvements in their financial and capital markets.
So, …about investing in Emerging Markets?
From an investing standpoint, investing in companies operating in the emerging markets region comes with risks typically higher than those associated with investing in markets such as the US, UK, and Europe.
Growth potential remains robust—these economies are growing faster, their populations are younger, and their companies are increasingly competitive on the global stage. Additionally, they are far more advanced in technological sectors such as mobile payments, renewable energy, and electric vehicles.
Interesting…so which countries are currently in…
The investing community typically uses Morgan Stanley Capital International’s (MSCI) classification index. The MSCI Emerging Markets index currently considers the following countries grouped as a region as ‘emerging markets’: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The MSCI Emerging Markets Index captures large and mid cap representation and has 1,189 constituents.
About those risks…
The risks are real and varied. Political instability in the countries where companies operate, regulatory unpredictability, fluctuating currencies, or poor corporate governance standards can all make it harder to translate corporate profits into high stock market returns.
How to think about value?
Emerging markets have historically traded at a discount, which may reflect the higher risk you are taking; however, bear in mind that lower accounting standards, poor corporate governance structures can also justify a different valuation.
That said, the current average price-to-earnings ratio of 15x remains significantly lower than in other regions.
As for dividends, pay-out tends to be competitive, with the current average dividend yield set at 2.5%. Dividend policies in emerging markets vary significantly by country and sector. Consider currency fluctuations and withholding taxes in any calculation.
How about at sector-level exposure?
The composition of emerging markets varies, reflecting the economic growth drivers of a specific country.
At the sector level, technology and financials constitute a significant portion, reflecting the systems essential to economic development. Energy and materials sectors also carry considerable weight, particularly in resource-rich countries. Consumer sectors are growing rapidly as the middle class expands, driven by increasing demand for e-commerce, food and beverage, and retail services due to rising incomes. Communication services encompass major telecom companies who have billions of subscribers, as well as entertainment which capture the growing demand in leisure activities.
How about returns?
The emerging markets region has experienced a prolonged period of underperformance compared to other regions, such as the US, UK, or Europe, until more recently. This underperformance occurred despite some economies in the region experiencing significantly faster growth.
The performance gap also narrowed due to factors such as the weakness of the US dollar, commodity prices, and geopolitical tensions. A stronger dollar typically pressures emerging market valuations as it increases debt servicing costs for dollar-denominated borrowing and makes exports less competitive; conversely, the opposite happens when the dollar is weak.
The MSCI Emerging Markets Index outpaced broader universes, gaining 19.02% in USD year-to-date through to end of August 2025.
How best to invest?
ETFs represent the most accessible option for most investors however it is advisable to consult a financial advisor before investing in emerging markets. It may be a good way to diversify your portfolio, as 2025 has proven, but you need to get comfortable with the additional risk you will be taking, as well as the very long-term view you will have to adopt to achieve a decent return.
High returns are not guaranteed; therefore, any allocation to this region should be made in conjunction with the rest of your portfolio and your risk tolerance level.
This article is not financial or personal advice. We are not financial advisers. The information contained in this article is designed for educational and informational purposes only. It is provided solely to enable you to make your own choices. Always remember that if you choose to invest, the value of your investments can fall or rise, so you could get back less than you invested. So, it is essential to seek advice from a qualified, authorised and registered professional. Note also that past performance is not a reliable indicator of the future performance of any investment.
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