Surely not another EM derivative....
The term Emerging Markets was coined in 1981 by a World Bank economist. In 1988 the MSCI EM Index was launched. Today there is over US$1.3tn of assets benchmarked to this Index.
In the early 2000's when Emerging Markets rose to the attention of investors globally, it was a focus on BRIC's as put forward by Jim O'Neill of Goldman Sachs. This increased the attention of Emerging Markets as an asset class. The asset was seen as a grouping of countries which were homogenous for their higher GDP growth, attractive demographics and rising wealth.
However, apart from a phase in 2003-2007 where investors allocated to this grouping, under the guise of a falling USD and increasing globalisation, the asset class has largely underperformed expectations.
Truth be told, Emerging Markets is not an asset class. The 25 odd countries which form "Emerging Markets" are classified as developing by the MSCI. They haven't made the cut into being classified as developed. Some of the filters include:
Not one of these filters talks about "high-growth" or "young-demographics". Hence these countries are grouped together with the expectation of being the fastest growing economies, hosting companies which are experiencing strong corporate growth due to underlying fundamentals.
Imagine a scenario where 25 kids are waiting to get picked into two football teams. The last 5 or 6 kids to be picked are left embarrassed - yet they do not form a team based on exclusion! That is not what makes them homogenous.
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Brazil, Russia and the Middle East are driven by commodities. Asian economies driven by demographics and trade. Within this, Korea and Taiwan being largely developed already, rather than emerging! Eastern Europe having its own issues with geo-politics, currency etc. The MSCI EM has suffered many boom bust cycles in country weightings - which lead investors to keep challenging it - for example, Malaysia used to be as high as 40% weighting, China hit 40% in 2021, other countries have come and gone! Once you get dumped from this team you end up in another team - MSCI Frontier Markets!
Most Global Equity fund's identify companies like Samsung, Taiwan Semiconductors and HDFC Bank as a part of their portfolios, without investors requiring a separate category for "Emerging Market" investing.
Meanwhile investors have grown increasingly frustrated as the old adage of a weaker USD, rising commodity prices or positive demographics has not led to a strong outcome investors following the MSCI EM. Over the last 15 years we have seen attempted departures into BRIC's, Asia ex-Japan, ASEAN, Greater China and the latest development, EM ex-China. This is apparently one of the fastest growing categories in for US investors right now!
However, it begs the question, what about selection of one economy, which has more predictable dynamics rather than seeking a collaboration of a non-homogenous group of economies - to achieve a more desirable output. Is it not easier to predict the outcome of one economy, rather than a grouping? A group of non-homogenous economies will have some positives, mixed in with some negatives.
There seems to be a whole series of career and business risks thrown in with this decision. Allocation to a grouping can give the comfort of feeling safe in die-worse-ification. Association to consensus, traditional benchmark thinking also feels safer doesn't it? At least you aren't out on your own and taking a view on an individual region, which you have no control or insights over.