In focus - Thought Leadership

A new approach to investing in emerging markets

Gavin Ralston and Kristjan Mee propose a new way of investing in emerging markets to benefit from the opening up of China’s capital markets.


Kristjan Mee

Kristjan Mee

Strategist, Research and Analytics

Gavin Ralston

Gavin Ralston

Head of Official Institutions and Thought Leadership

In recent times, China has been front and centre of investors’ minds. In 2018 MSCI added China’s onshore stock market to its suite of global equity benchmark indices. Although the initial weight of A-shares is small, the decision is an important milestone. Investors will now have to decide how to access this part of China’s equity universe and how much to allocate to onshore equities. In this paper we present an alternative approach to investing in emerging markets which addresses this issue. We believe that a separate China A-share exposure in addition to an emerging markets allocation is better equipped to capture the potential of China than a purely global emerging markets strategy.

Before discussing the China investment opportunity we will make a few comments about investing in emerging markets more broadly. The decision to invest in emerging markets is usually based on the belief that faster economic growth in these countries will lead to higher investment returns. The reality is not as straightforward.

First, investors should be careful not to confuse the term emerging market with the term emerging economy. For example, several countries which feature in MSCI’s Emerging and even Frontier (the stage below emerging) market indices could be classified as advanced economies (Figure 1). South Korea and Taiwan are obvious examples.

The IMF ranks countries based on purely economic criteria, such as export diversification and the degree of integration into the global financial system. In contrast, index inclusion is governed by considerations about market size, liquidity and accessibility as well as economic status or prospects. Poor accessibility, particularly to the onshore market, is a key reason why Chinese equities have been extremely underrepresented in global equity indices.

Figure 1: An emerging market is not necessarily an emerging economy

* Argentina and Saudi Arabia will be promoted to the MSCI EM Index in June 2019.
** The West African Economic and Monetary Union (WAEMU) consists of the following countries: Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo.
Source: IMF, MSCI and Schroders. Data as at January 2019.


Read the full report


Important Information
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. For risks associated with investment in securities in emerging and less developed markets, please refer to the relevant offering document.
The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
This material including the website has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.