Why the outlook for emerging markets is improving after years of underperformance
Emerging markets have underperformed over the past decade. Alex Rankine explains what the outlook is.

It has been a miserable decade for emerging market (EM) investors, says David Thorpe in FT Adviser. EM shares have returned just a third as much as the global average. And recent performance has not been encouraging: the combined market capitalisation of the 24-country MSCI Emerging Markets index has fallen $4trn since early 2021, say Srinivasan Sivabalan and Karl Lester Yap on Bloomberg. Rising US interest rates and slowing global growth are weighing heavily on the asset class.
EMs don’t look expensive now, but the US dollar is the sector’s “puppet master”, James Sullivan of Tyndall Investment Management tells FT Adviser. “Ascertaining the true value of a market that is intrinsically linked to a foreign currency is fraught with jeopardy.” A strong dollar makes it more expensive for businesses that borrow in dollars but earn in local currency to service their debts. There are plenty of those in emerging markets. “US dollar credit to non-banks outside the US stands at $12.6trn, which represents 14.8% of world GDP, up from less than 10% in 2007.”
The dollar could easily go higher from here and that may make for a “rather unpleasant outcome”. And it’s not just companies that need to worry about debt. Emerging market sovereigns have increased their borrowing to 67%, up from 52% pre-pandemic, says The Wall Street Journal. Now the bill for the borrowing binge is coming due. “Interest expenses as a percentage of government revenue, at some 10%, are the highest since before the 2007-2008 panic.” That set-up has triggered “countless emerging-market crises” in the past.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Learning the lessons
On the plus side, central banks and governments in most emerging economies have learnt their lessons from previous crises and look well prepared to cope with a period of dollar strength, says Kimberley Sperrfechter of Capital Economics.
Yes, there are a few countries with “fragile external positions” (meaning they rely on foreign investors to fund their trade deficits), such as Turkey, Chile and “a handful of central European economies”. However, they are the exceptions in the EM universe.
In any case, not all emerging markets are doing badly. Commodity currencies such as the Brazilian real and South African rand have performed well this year. Global investors have been piling into Indonesia, says Dave Sebastian in The Wall Street Journal: foreign institutions pumped $5bn into local equities between January and April, even as they pulled funds from elsewhere in emerging Asia. “Indonesia is the world’s largest coal exporter and a producer of other key commodities such as oil, gas, nickel and palm oil.”
This hints at a dilemma for investors. “Emerging market indices are dominated by a handful of larger markets,” says Theo Andrew on ETF Stream.
In particular, China accounts for more than 30%, leaving any fund that tracks the overall asset class exposed to the whims of Beijing. Index providers have started to roll out emerging markets ex-China products, but investors want to go further and move towards “different themes within emerging markets” rather than simple country classifications.
For more on this topic see:
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
8 of the best properties for sale with shooting estates
The best properties for sale with shooting estates – from an estate in a designated Dark Sky area in Ayrshire, Scotland, to a hunting estate in Tuscany with a wild boar, mouflon, deer and hare shoot
-
Cohabiting families could face £82,000 inheritance tax bill under new rules
Without the tax breaks of marriage, including pensions in inheritance tax calculations – even if the person who dies was too young to ever draw on it – could push many cohabiting couples into paying inheritance tax
-
8 of the best properties for sale with shooting estates
The best properties for sale with shooting estates – from an estate in a designated Dark Sky area in Ayrshire, Scotland, to a hunting estate in Tuscany with a wild boar, mouflon, deer and hare shoot
-
What we can learn from Britain’s "Dashing Dozen" stocks
Stocks that consistently outperform the market are clearly doing something right. What can we learn from the UK's top performers and which ones are still buys?
-
The most likely outcome of the AI boom is a big fall
Opinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
The rise of Robin Zeng: China’s billionaire battery king
Robin Zeng, a pioneer in EV batteries, is vying with Li Ka-shing for the title of Hong Kong’s richest person. He is typical of a new kind of tycoon in China
-
Europe’s forgotten equities offer value, growth and strong cash flows
Opinion Jonathon Regis, co-portfolio manager, Developed Markets UCITS Strategy, Lansdowne Partners, highlights forgotten equities he'd put his money in
-
How retail investors can gain exposure to Lloyd’s of London
It’s hard for retail investors to get in on the action at Lloyd’s of London. Here are some of the ways to gain exposure
-
The flaw in Terry Smith’s strategy at Fundsmith
Opinion Fundsmith has invested in some excellent companies, but it has struggled to decide when to sell, says Max King
-
The goal of business is not profit, but virtue
Opinion Serve your customers well, and the profits will follow, according to a new book. It rarely works the other way around, says Stuart Watkins