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Published on September 14, 2021

I am stepping back to do a quick survey of the broader Emerging Markets (EM) space. The broad EM index has dramatically underperformed as compared to developed markets for the last decade.

Emerging Markets ETF vs. SPY relative performance  over 10 years

The current narrative in the market is that the US dollar will depreciate over the long run (consensus and historically accurate), and EM constituents with their higher growth and comparatively lower leverage and financialization will stand to benefit disproportionately.

I think parts of this narrative are true, but the view is insufficient to justify an investment. 

In this post, I will first tackle the homogenous narrative of Emerging Markets, then explain some of the drivers for the more recent EM index underperformance. Finally, we’ll take a look at some geographies or sectors that may be opportunity-rich over the medium term, as opportunities can be independent of the overarching narrative above.

The takeaway is that EM is a wide investment set, not one homogenous trade. Because of this, a broad EM-focused ETF may not be the best way to take advantage of opportunities. 

This article is more of a process piece focused on sourcing opportunities. It is also not based on fundamental valuation in the traditional sense. Instead, as you’ll see, I am looking for markets at the extremes in performance.

Emerging Markets Are Not an Asset Class

A legacy of the investment business is that people discuss EM as one giant group. This made a lot of sense in the past, as all emerging markets were largely dependent on outside investment for growth and were driven by only a few capital-intensive sectors (oil, mining, finance).  

The distribution is not nearly as narrow today. Look at the list of countries in the MSCI index below. Not all their developmental problems or economies are identical. 

Source: MSCI

The capital-rich oil producers of Saudi Arabia and the UAE have different fundamental drivers to the Philippines or Poland. So, go a step beyond EM as a single story to develop a fundamental thesis for investment in this space.

Ironically, while economies are developing differently within the index constituents, the index itself remains concentrated. In the past, large state-owned energy companies or financials across the largest EM countries (think Petrobras, Petronas, China Construction Bank, etc.) filled the index.

Now, it’s basically one big China-focused tech play. Here is the listing concentration from the Ishares EEM ETF, one of the most popular ETFs for EM exposure.  


China makes up a third of the exposures through well-known names like Alibaba, Tencent, Meituan, and JD. South Korea and Taiwan are also heavily linked to China through their exports and political risks. The Vanguard EM ETF (VWO), roughly 3x the size of EEM, has similar concentrations, except that it excludes South Korea for greater concentrations of China and Taiwan.

So, if anyone talks about broad Emerging Markets index performance, they are really talking about China.

When we look at the performance of the Chinese mega-caps—especially since February of this year—they are the primary driver of performance for the broad EM indices. The ETF feature at allows you to pull up the attributions. China has wiped out most of the positive performance from the rest of the index.

Source: on September 14, 2021, at 3:45 pm EST

At this juncture, I hope it’s clear that the indices are focused on China, and there is a world of opportunities beyond it to explore.

Combing the EM Opportunity Set

Once a month, I do a broad market review to gauge sentiment and macro-dynamics for EMs.  As part of this, I created an EM heatmap that looks at country-level ETFs to get a sense of performance dispersion. I try to focus on the leaders and the laggers for ideas. Here is what the table looks like as of the close on publication day.

Source: Castaway Capitalist and Google Finance, NB: Performance figures are ex-dividends

I like to look at the top and bottom three on the 1 and 3-year horizons for ideas. It is also helpful (but beyond this article) to note how the leaders and laggards rotate over time.

Currently, on the 3-year timeframe, Pakistan, Nigeria and Chile are the current laggards, down 30-40% over the period, while Taiwan, Russia, and Saudi Arabia are the leaders, up between 48-77%.

On the 1-year horizon, India, Argentina, and Mexico are leading with 45-48% gains, and Peru, China, and Pakistan make up the basement, all down 3-11%.

Now, I look at the charts to see the technicals with a list of countries in mind. Separately, I also try to get a sense of fundamental valuations. You can usually do this on the ETF sponsor website.  

India and Saudi Arabia are high multiple markets, where I have less of an edge or comfort level.  I have covered Russian opportunities extensively, in terms of the general market, specific opportunities, and infrastructure-related ideas

Mexico is also at somewhat high multiples currently and not one that interests me at the moment. 

In my latest newsletter, I’ve already pointed out that I think Taiwan looks a bit toppy, and the broader fundamental concerns regarding semiconductors and Taiwan security are well-known.



Argentina is interesting, as, from an index perspective, it is a bit like China.  The Global X Argentina ETF (NYSE: ARGT) has a major tech-focused weighting, Mercado Libre (Nasdaq: MELI), driving the underlying index. The rest of the index is more focused on financials and industrials, which look more bottomed out. In addition, the country has capital controls, which can make investing in non-ADR names more complicated.

On the laggards, Peru is driven by politics and a change in administration. China’s story is well known.  Nigeria is interesting, but I would caution investors in utilizing an ETF there. They also have exchange controls, so those dynamics need to be understood before going any further. 

That leaves Pakistan and Chile. Chile is more straightforward. From my perspective, politics have been the key driver of underperformance lately. With an economy by materials, principally copper, the index should be higher, given underlying commodity trends. The market, however, appears to be finding a bottom, and Chile via the Ishares ETF (NYSE: ECH) is looking set to maybe move higher. 



Pakistan is now in the middle of the Afghanistan woes, and lately, the market is selling the news. From a chart perspective, its ETF (NYSE: PAK) is in an intermediate down move testing the intermediate lows from the beginning of 2020. I have an unproven theory that Pakistan may be a beneficiary of the increased turmoil, but the chart is not suggesting that yet.



Finally, I will run screeners if I have charts I like in markets where I can buy individual stocks, as I discussed in my first Turkey post. I cannot trade single names in Chile or Pakistan, but I will review the available Argentina ADRs. My setup does not allow me to run a stock screener there, but I will go through them and see if there is a basis for an investment and a future article.   


EM is a wide opportunity set, and there can be more going on than the broad index suggests.  This article shows a good amount of dispersion across countries, and that periodic reviews of leaders and laggards can be a source of idea generation to add to an investor’s kit.

The Castaway Capitalist

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IMPORTANT DISCLOSURE: As of the date of publication, the Castaway Capitalist maintains a short position in EWT and holds various Russian equities disclosed in other posts.

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