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CIO Academy - Emerging Market Equities, Unbundled: Why investors should move beyond ‘indiscriminate EM beta’
Highlights: Emerging market equities are no longer a single, homogenous, portfolio building block that historically acted as a portfolio diversifier to developed markets. With around 45 per cent of MSCI EM index comprising of the technology sector, broad EM allocations can embed more “tech beta” than investors assume. The practical implication for multi-asset portfolios is straightforward: indiscriminate exposure to EM equities beta can deliver unintended concentration. For discerning investors, the right response to this new dynamic is to avoid relying on market-cap index to get exposure to EM equities. Instead, treat EM as a menu of distinct factors, thematics and macro exposures that can be tactically adjusted.
- What’s changed in EM equities and why it matters?
– Concentration: Returns are increasingly driven by a narrow set of large tech names (notably North Asian semis/memory at ~30 per cent of the index). This can amplify swings and drawdowns.
– Correlation: Tech heavy EM may act as a satellite expression of the global AI capex cycle, reducing diversification. As such market expectations & leverage matter as much as earnings.
– Macro sensitivity: Tighter financial conditions (yields/USD/liquidity) and geopolitics – collectively raise the hurdle rate for EM risk assets.
- Portfolio implications: With the old EM equities playbook ageing, a new framework is needed:
a) Don’t outsource portfolio construction to the index:
– Know what you own and attribute drivers: split exposure into tech/AI hardware, commodities, financials, domestic demand.
– Stress-test for: USD strength, higher US yields, liquidity tightening and AI volatility.
b) Diversify within EM by factor and macro regime. Build a blend across:
– AI ecosystem exposure (selectively sized) + real assets/commodity sensitivity + fundamentals-led markets with stronger policy credibility/external buffers.
c) Separate “growth” from “value traps”: Prefer markets where earnings durability is supported by credible policy frameworks, resilient external balances and domestic fundamentals, especially as global financial conditions tighten
- What do we like? Selective EM Asia AI/tech; EMs seeing cyclical recovery; Deep value plays with stronger fundamentals vs performance; Energy exporters vs importers that display Energy and Resource resilience