Emerging markets

January 2022

After outperforming for much of the 2000s, emerging market stocks have underperformed US equities since the Global Financial Crisis (GFC), resulting in disappointment on the part of US investors, especially since emerging market GDP growth has outpaced US economic growth.

Moreover, the composition of the emerging market opportunity set has changed meaningfully since most institutions made their initial investments in the asset class. Both the country and sector weightings have undergone radical changes. This begs the question: what role should emerging market equities play in institutional portfolios now?

In this document we examine the changing composition of emerging market equity indices, explore the rationale behind investments in emerging market stocks, discuss what role they should play in the portfolios of institutional investors, and review the approaches to investing in emerging markets. We conclude with a recommendation that emerging market equities should play a meaningful role in most investors’ portfolios.