- Many emerging markets outside of China offer attractive opportunities.
- We see promising potential in countries with younger populations and forward-looking policies, such as India, Indonesia, and Mexico.
- In the post-pandemic global economy, reshoring is changing the relative advantages of markets.
- Learn more about investment opportunities in emerging markets outside China by exploring our ETF.
Emerging market equities offer a wide variety of exciting investment opportunities, but many of these are often overshadowed by the dominance of China both in terms of index weight and investors’ mindshare. We believe an ex-China strategy could be a valuable addition to investor portfolios for a number of reasons. The benefits include a potentially more attractive performance profile, greater diversification benefits, and the ability to focus on some of the more exciting companies, countries, and themes in emerging markets for benchmark-aware strategies.
China stocks dominate the EM index
Historically, China has been a performance headwind and a geopolitical risk driver. Over the trailing three- and five-year periods, the MSCI China Index has seen negative absolute returns, weighing on results for the MSCI Emerging Market Index. We also believe ongoing tensions both within China and on the global stage could continue to cause concern among investors and serve as an overhang on Chinese stocks.
Unsurprisingly, China is the largest country in the MSCI Emerging Market Index. Since year-end 2014, China’s weight in the MSCI Emerging Market Index has grown by almost a third, rising from a 22% weight to a 30% weight. Today, China has 748 stocks in the MSCI Emerging Market Index, which accounts for roughly 52% of the total number of index constituents (1,421 stocks total as of August 31, 2023).
China’s index share was boosted by the 2018 inclusion of a small portion of the A share market, which represents publicly listed shares of mainland Chinese companies trading on two exchanges — the Shanghai Stock Exchange and the Shenzhen Stock Exchange. While the original inclusion of A shares brought the weight to 5%, our base case is that inclusion continues to grow over time. Based on an MSCI hypothetical projection published in 2018, 100% inclusion would have brought China’s total weight to over 40% of the MSCI Emerging Market Index. In short, we believe the emerging market index has become a “China+” index at the expense of exposure to the more dynamic and faster-growing economies of the developing world.