Emerging Markets  

Why emerging markets are an attractive opportunity 

  • Describe why emerging markets are an attractive proposition
  • Explain how to make investment choices in emerging markets
  • Identify why emerging market debt might be attractive right now
Why emerging markets are an attractive opportunity 
(FT Money)

Despite only being conceived as an investment universe in the 1980s, emerging markets have come to represent a significant part of a diversified global investment portfolio.

Emerging markets have been responsible for 67 per cent of global GDP growth in the past decade, are home to some of the world’s most innovative companies and benefit from long-term demographic changes. 

But investing in an emerging market is not without risk, after all, by their very nature, 'emerging' countries are typically less stable (both economically and politically), have lower standards of governance and have less accessible capital markets. 

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And far from being a homogenous region, emerging markets are vast and opportunities and risks differ significantly.

Since its formation, the composition of the emerging markets asset class has changed more than any other investment universe and once accepted groupings, such as the BRICs (Brazil, Russia, India, China), no longer make sense in today’s economic and political environment. 

To outperform and avoid pitfalls, investors must understand the nuances of each region and asset class, consider the wider macroeconomic landscape and adopt a risk-managed, selective approach.  

Emerging market equities 

Over the past decade, emerging markets have outperformed developed markets, but in 2022 they underperformed.  

A war in Eastern Europe, the ongoing impact of Covid-19 (particularly China’s zero-Covid policy) and an aggressive hiking cycle by developed market central banks weighed on the prospects of emerging market nations. Commodity countries outperformed manufacturing countries.

Xavier Hovasse, head of emerging equities at Carmignac





And similar to equity markets in the west, value clearly outperformed growth, with utilities, energy and financials among the best-performing sectors.  

Political risk was also a clear factor on investors’ minds. The war in Ukraine has undoubtedly changed the way global investors consider asset allocation, increasing dramatically the country risk premium for both Taiwan and China.

But 2023 should be very different. In particular, the reopening of China should boost economic growth throughout the emerging world, especially in Asia and Latin America.

Nevertheless, the economic landscape is still fragile and we believe a highly selective approach and concentrated portfolio with a high active share is optimum. 

Indeed, good stock selection is essential. 

As emerging market investors, our objective is to identify, in each country, under-penetrated sectors with long-term attractive and sustainable growth prospects, with at least 10 years of growth ahead of them. Once we have identified attractive sectors for each country, we try to select the companies that are best positioned to capture this growth potential. 

It is also necessary to pay particular attention to a company’s profitability and cash generation, level of indebtedness and ability to self-finance growth. We focus on stocks that have a capital light business model, low gearing ratio, solid free cash flow, are friendly to minority shareholders and exhibit good corporate governance.