Explore the misconceptions surrounding emerging markets and discover why they are crucial for a well-diversified investment portfolio. Learn from expert insights on the growth potential and risks associated with these dynamic economies.
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Whatever you think about Emerging Market (EM) equities, you’re probably wrong. The popular misconception is that EM indices are a single, monolithic, low-tech, high-risk/potential-high-reward bucket. The reality is far more nuanced and far more interesting, especially if you’re building a well-diversified investment portfolio.
When it comes to offshore diversification, most local investors automatically think of Developed Market (DM) indices, such as the S&P 500 or the MSCI World Index. And while these indices have added significant value to investor portfolios since 2010 (largely on the back of tremendous technology sector growth), looking ahead, investors may be well served by adding a diversified global equity exposure in the form of emerging market equities.
Common misconceptions about emerging markets
EMs are often characterised as politically unstable, commodity-driven, and highly dependent on global cycles. But while these risks remain relevant in parts of the universe, this view is increasingly outdated. EMs are diverse, spanning multiple regions and development stages, with many economies becoming more domestically driven. They are also home to globally competitive companies, resulting in a wide range of risk and return profiles across the asset class.
You’re looking at regions like Asia-Pacific (including countries like China, India, South Korea, Taiwan, etc), Latin America (Brazil, Chile, etc), Europe (Czech Republic, Poland, Turkey, etc), Africa (Egypt, South Africa, etc), and the Middle East (Qatar, Saudi Arabia, UAE, etc). When you’re investing in EM funds, all these countries (and others) represent a diverse range of geographies and industries.
EMs embody both growth potential and risk. On the opportunity side, many EM economies typically benefit from faster economic growth as they develop. This growth is driven by favourable demographics, rising consumption, infrastructure investment, and expanding labour forces, as populations tend to be younger and growing.
Sectors covered by emerging markets
Another false assumption is the idea that EM funds are light on tech and heavy on resources. In fact, EMs are diversified across all Global Industry Classification Standard (GICS) sectors.
MSCI data (30 April 2026) shows the Emerging Markets Index has higher weightings in Information Technology (36.76% vs 27.61% in MSCI World Index) and Financials (19.66% vs 15.99%), while Healthcare (2.72% vs 8.77%) and Industrials (7.52% vs 11.76%) are lower.
This reflects the structure of EM economies, where technology hardware, financial services, commodities, and materials play a more prominent role.
How EMs enhance a diversified portfolio
When you’re building a portfolio, choosing between EM and DM funds shouldn’t be an either/or debate. If anything, EM funds provide a compelling complement to those well-known DM indices – whether it’s a broad EM option or a country-specific EM fund.
While DMs are dominated by large, mature companies and economies, EM exposure offers access to potentially faster‑growing economies, broader geographic diversification – and, in many cases, more attractive valuations. Analysts have in recent years pointed to stretched valuations in DM equities, contrasted with EM Market equity valuations more in line with long-term aggregates.
This positioning was based on higher expected returns due to lower valuations, comparing the MSCI World’s price-to-earnings (P/E) ratio of approximately 24.4 to the MSCI Emerging Markets P/E of 18.5 as at 30 April 2026. Our belief was also that EMs offered more attractive economic growth prospects and attractive upside potential, while adding important sector diversification from the high-tech exposure offered by DM equities.
Emerging Markets offer significant long‑term potential and have delivered competitive performance relative to the MSCI World and S&P 500 over certain periods. As part of a diversified portfolio, EM exposure can provide both growth opportunities and diversification benefits. And while volatility is higher with EMs, patient investors who can tolerate risk may benefit from the structural growth trends present across EM economies, including Africa and beyond.
* Mphelo is the senior portfolio manager at Satrix.
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