IN FOCUS6-8 min read

Emerging markets’ year to forget: why there is more to it than meets the eye

Emerging market stocks disappointed last year, but it’s worth looking under the bonnet of the headline market return to see the full picture.



Andrew Rymer, CFA
Senior Strategist, Strategic Research Unit

Global equities enjoyed a third consecutive year of robust returns in 2021, in what some commentators dubbed  “the everything rally”. Everything except emerging market (and Japanese) equities, that is. With the MSCI World Index delivering a gain of almost 22% in US dollar terms, the MSCI Emerging Markets Index was down by over -2%.

But looking at these figures in isolation masks the reality of what happened across the 25 emerging markets in the MSCI Emerging Markets Index. From a country perspective, the returns dispersion was over 83%; from a gain of 55% in the Czech Republic to a -28% fall in Turkey. And of the 25 markets, 15 of them delivered positive returns. In fact, seven of these, which account for a combined 36% of the index, delivered gains in excess of 20% in dollar terms.   

Emerging markets are a heterogenous group, as we have discussed before. It is nonetheless an important point, and understanding the different market dynamics is as relevant as ever. 

Index performance

The headline decline of -2.5% for the MSCI Emerging Markets Index in 2021 was significantly below that of the MSCI World Index, which was up 21.8%. That is the largest negative performance gap to developed markets since 2013, the year of the taper tantrum. Prior to this, a performance gap of this magnitude had not been seen since 1997 and 1998, which respectively saw the Asian Crisis and the Russian Financial Crisis.

Emerging markets are in a better position compared to 2013, when the US Federal Reserve began to taper its post global financial crisis quantitative easing programme. Much of the weakness of emerging markets this year, as we illustrate below, is related to China and the regulatory crackdown, and is not simply a response to rising US bond yields.

But even so, US dollar strength has been negative for emerging market stocks and currencies. And the inverse relationship in the relative performance of emerging markets and developed markets with the US dollar is well documented. The chart below demonstrates this point.


Country performance

Within the MSCI Emerging Markets Index there was a wide dispersion in country returns in 2021. The Czech Republic delivered a gain of 55.0% while Turkey was down -28.4% in dollar terms. The Czech Republic is of course a very small index market, but the UAE (+50.2%) and Saudi Arabia (+37.9%) also generated robust returns.

This wide dispersion in country returns is not unusual, as this chart illustrates.


Although the overall index was down -2.5%, the median country return was +7.5%; a gap of 10%. The main driver of this is China, which represented close to 40% of the index at the start of the year, and which fell -21.7%. South Korea, with an index weight of 13.5% at the start of 2021, was down -8.4%. Brazil, with a 5% index weight at the outset of 2021, was down -17.4%. The remaining markets which finished in negative territory had a combined weight of just 5%.

Of the 25 index markets, 15 of them delivered positive returns. In fact, seven of these, which account for a combined 36% of the index, delivered gains in excess of 20% in dollar terms.  

This is quite a reversal when compared with 2020, a year which saw the MSCI Emerging Markets return 18.3% and outperform global stocks. And amid such strong performance in 2020, only seven of the 27 index markets delivered positive returns.   

Regional performance

Of the three regions, emerging Asia and Latin America both recorded negative returns of around -5% and -8% respectively. In Latin America, only Mexico finished in positive territory.

By contrast, the more energy-heavy and cyclical emerging Europe posted an 18% return. Within the region, all markets except for Turkey advanced; a reversal from 2020 when every emerging European market was down.

Emerging Asia posted a negative calendar year return, following two years of gains.


Sector performance

Amid the strong recovery in global energy prices through 2021, it is perhaps not a surprise to see that energy was the best-performing sector, returning almost 22%. Utilities (13.2%) and IT (10.4%) also delivered double-digit gains in US dollar terms, with industrials (8.6%) and financials (8.6%) not far behind.

At the other end of the scale, consumer discretionary, real estate and healthcare all fell by -20% or more. Communication services was down -9%, followed by consumer staples at -5%.

Sector performance in 2021 also emphasises the outperformance of the value factor, which is reviewed below, with energy leading and financials and industrials also outperforming.

As with country performance, sector performance has also seen a reasonable dispersion in return by calendar year, as shown below. Of course, there have been sector categorisation and stock classification changes on various occasions over the past 20 years, but the point is still valid.


Stock performance

With over 1,400 stocks in the MSCI Emerging Markets Index, the range of returns was unsurprisingly wide. The strongest return came from South Korean retailer F&F Co, which was up 409%. At the other end of the scale, heavily impacted by regulatory change, was China’s TAL Education Group, down -94.5%.

This wide range of stock level returns is not unusual. Even after removing outliers, the dispersion has been wide historically, as this next chart illustrates. 2021 could be seen as a typical year in a historical context.


Investment style

Style analysis can look at a range of factors, but two common factors are that of Growth and Value.    

On a global basis, the Value style only modestly outperformed Growth in 2021. The MSCI World Value Index returned 21.9% while the MSCI World Growth Index was up 21.2% in dollar terms.

By contrast, style performance was more divergent in emerging markets. The MSCI EM Value Index delivered a positive return of 4.5% while the MSCI EM Growth Index was down 8.2%.

Looking at index returns for styles has its downfalls, given issues of categorisation and stocks potentially moving baskets. But if we view it from another perspective, active fund manager performance, similar trends come through.

Data from Copley Fund Research shows that fund managers investing using a Value approach generated the strongest outperformance over the year. On the other hand, those with an Aggressive Growth style underperformed.


While large capitalisation emerging market stocks had a challenging year in 2021, the outcome was very different for smaller emerging stocks.

The MSCI Emerging Market Large Cap Index was down -3.8%, with similar performance drivers to that of the main MSCI Emerging Markets Index.

By contrast, the MSCI Emerging Markets Small Cap Index registered a robust return of 19.3%. Why the stark difference? Small cap index performance was driven by the strong performance of India and Taiwan, which, along with South Korea, are the largest index countries. China finished in negative territory but it is a smaller share of the overall index and so was less of a drag.

Why does this matter?

It is important to emphasise that past performance is not a guide to future performance. And that is particularly important in emerging markets where the index has seen significant change, in terms of countries, sectors and stocks over the past 30 years.

This analysis is useful in highlighting the complexity of investing in emerging markets. Headline performance often hides what are a range of countries with economies at different stages of the economic cycle, with different economic structures, and different stock market compositions.

Over the last 20 years, the diversity within emerging markets has consistently led to high cross-sectional returns at both a country and stock level. This continues to be the case, and as we have highlighted previously, potentially creates opportunities for active managers in emerging markets to add value through country allocation and stock selection.

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Andrew Rymer, CFA
Senior Strategist, Strategic Research Unit


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