EM Dynamics

Emerging Perspectives for EM Investing

Welcome to the next edition of EM Dynamics, your guide to the forces shaping emerging markets investments.

What does it take to generate excess returns in emerging markets? After a volatile couple of years, MSCI researchers showed that where and how investors allocate funds can make a dramatic difference to performance.

Read on for more insights, including a unique take on the relationship between free float data and price performance.

Styles and factors behind EM alpha

For investors looking to capture the full diversification potential of EM investing, understanding the drivers of excess returns can be a critical input for portfolio construction.

In China, for example, the top active funds¹ outperformed the broader Chinese equity market by over 10% in 2021 to 2023, according to MSCI Research. Our research found that style and market factors were especially important drivers of excess returns. In the offshore market, the top funds had greater exposure to high-dividend-yield and value factors, as well as low active exposure to beta and growth and large-cap stocks.

To help investors understand these drivers, our analysts developed a three-tier framework, highlighting the impact of top-down, bottom-up, and ecosystem factors.

Return-driver framework of top China funds

Source: Foundations of Dedicated China Allocations: Part 4 (page 7), MSCI

Read the report →

Watch the webinar →

This research underlines the importance of in-depth knowledge for investors considering an allocation to EM.

MSCI has developed a number of tools and datasets to help investors understand the underlying drivers of returns across the broader EM universe.

•	Economic exposure: Our analysis suggests that EM equities are sensitive to the performance of the economies where most of their revenues originate. Understanding these geographic exposures can help investors assess the diversification of their portfolio in a landscape of shifting geopolitics and trade lines. The MSCI Economic Exposure tool offers one way to build a revenue-based portfolio.
•	Thematic investing: Structural shifts such as technological advancements or changing consumer behaviors can create opportunities to capture long-term EM growth. MSCI’s thematic investing framework is designed to help investors align their exposure with key megatrends that we expect to shape the future: Environment & Resources, Transformative Technologies, Health & Healthcare, and Society & Lifestyle.
•	Free float data: Free float, the proportion of shares available for purchase in a listed company, can vary significantly across the EM universe. MSCI researchers used 20 years of free float data with the aim of showing how improvements in free float correlate to positive price performance. Recently, we expanded our free float data set to include Indonesia, Korea, and the GCC region – among others – giving investors more insight into these dynamic equity markets. Download the latest brochure here.

Read more about datasets for diverse exposures from the MSCI research team.

Navigate the EM Landscape

Over the past 30+ years, investors have turned to EM for diversification, accelerated economic growth exposure, and potential for excess returns.

India’s weight in the MSCI Emerging Markets Investible Market Index has hit an all-time high of 20% at the end of June. We studied patterns in factor, thematic and industry exposures to gauge how the equity market may change in the future. Read our findings.

How might ESG affect EM performance? We analyzed MSCI ESG Ratings' long-term performance in emerging and developed markets. Controlling for risk factors, we found higher-rated companies outperformed lower-rated ones. Read the analysis.

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¹	MSCI Research compared mutual funds that invest in the broader China market with China-mainland funds that primarily invest in China A-share market.

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