What qualifies as "emerging"?
There's no single definition — different index providers (MSCI, FTSE Russell) use different criteria. Broadly, a country is classified as emerging if it has per capita income significantly below developed-market levels, less liquid capital markets, weaker institutions, and higher-than-average political or regulatory risk. The MSCI Emerging Markets Index includes 24 countries and represents about 12% of global market capitalisation — but roughly 60% of global population and growing share of global GDP.
The EM opportunity
The bull case for emerging markets is demographic and structural. Countries like India, Indonesia, and Nigeria have young, growing populations entering the workforce. As per capita incomes rise, hundreds of millions of people move from subsistence to consumer economies — buying cars, smartphones, financial services, and healthcare. Companies serving these transitions can grow at rates impossible in mature economies.
The EM risks
Higher growth doesn't automatically mean higher returns for foreign investors. Key risks include: currency risk (EM currencies often depreciate against the dollar, eroding returns); political risk (governments may nationalise assets, change regulations, or default on debt); liquidity risk (smaller markets can be difficult to exit quickly); and institutional risk (weaker rule of law, accounting standards, and shareholder protections).
A history of EM crises
The 1997 Asian financial crisis, Russia's 1998 default, Brazil's 1999 currency collapse, Argentina's repeated crises, and Turkey's inflation crisis of 2021–22 all remind investors that emerging market investing involves risks that rarely appear in developed markets. These crises tend to be sharp and severe — EM markets can fall 50–70% in a crisis year.
"Emerging markets are not an asset class for the faint-hearted — but over decades, the growth story tends to vindicate long-term investors."
What this means for you
Most global equity index funds include a 10–15% allocation to emerging markets automatically. If you want more exposure, you can add a dedicated EM fund — but only if you can tolerate significant volatility and are investing for the long term (10+ years). An EM allocation that works in theory but causes you to panic-sell during a crisis doesn't work in practice.