Emerging markets investing: Why country selection matters

For three decades, emerging markets have been sold on a simple story: faster growth, younger populations and deeper integration into world trade, and this narrative has helped build a large asset class. But treating EM as a single bloc hides the diversity of the universe – and, in our view, caps the returns investors could be earning from it.

One EM index today contains technology exporters such as Taiwan and South Korea, vast domestic economies such as India and Indonesia, manufacturing hubs such as China and Vietnam, resource producers such as Brazil and Chile, and capital-rich Gulf states such as Saudi Arabia and the UAE. These are not variations on a theme: they differ in economic structure, institutional strength and sensitivity to external shocks. Those differences, rather than the headline growth rate, determine if investors can thrive in EM.

The uncomfortable evidence is that GDP growth does not reliably convert into equity returns. Academic evidence finds no dependable relationship between economic expansion and subsequent market performance. Growth can enrich sections of a population without ever benefiting listed companies.

For equity investors, growth has to survive a transmission chain: activity to revenues, revenues to profits, profits to earnings per share. Every link can break – through poor investment decisions, state intervention, share dilution, weak minority protections or currency depreciation. For bond investors, the chain is different but no less demanding: growth must strengthen government revenues and debt sustainability, while credible monetary and fiscal policy preserves the real value of the initial nominal investment and coupons.

So it’s not which economy grows fastest, but which economies convert productive growth into sustainable earnings and real investor returns.

Valuation dispersion inside the index is extreme. At end-May 2026, MSCI India traded at roughly 20.2x forward earnings, against 11.6x for China, 11.0x for Indonesia and 9.7x for Brazil. Volatility is just as differentiated, with some countries very sensitive to US dollar movements, like Brazil and Korea. The differences in valuation and volatility reflect index concentration, sector cyclicality, currency behavior and liquidity at least as much as macroeconomic stability.

Asia offers the strongest earnings machinery, but no single model. China is a selective value proposition after years of deflation: cheap, but requiring evidence that growth reaches returns on capital and benefits minority shareholders. India is the structural compounder, with genuine breadth across banks, industrials, consumer and healthcare, but on a valuation that already prices in considerable execution. Taiwan and Korea show that domestic GDP is almost irrelevant to their earnings with large tech companies, exposed to global AI investment, dominating. Owning them means taking large, concentrated positions in the AI capital-expenditure cycle – a very different risk from ‘EM growth’.

Southeast Asia spans Indonesia's value-and-income profile with low multiples and high yields, but a narrow, financials-heavy index, while Vietnam has a higher-growth, higher-expectation model, where 8% growth in 2025 sits alongside credit, governance and liquidity risks that warrant a higher required return.

Latin America has attractive valuations and real yields, but slower trend growth, and greater macro volatility. Brazil, at under 10x forward earnings with a dividend yield above 5%¹, is the central case. Valuation support is balanced against fiscal risk.

EMEA divides three ways: Central Europe is converging with the developed EU and creating significant wealth along the way in countries like Poland. In the Arabian Gulf, sovereign balance-sheets are strong, but the test is converting oil and gas wealth into profitable non-resource industry and services.

None of this makes EM independent of the global cycle, with US dollar strength still a dominant driver of EM equity and local-currency bond returns, sometimes mattering more than interest-rate differentials. The shift to local-currency bond issuance has transferred forex risk to global investors. Indebtedness should be judged not by headline debt but by funding currency, domestic market depth, external vulnerability and policy credibility.

For advisers and wealth managers, the EM decision is no longer about how much to invest. It is which parts, at what price, and for what purpose? Do you seek growth, income or diversification? Choosing an active manager, rather than a completely passive index approach, may be preferable to find the best combination of earnings conversion, policy credibility and valuation. In bonds, accept high yields only where credibility protects their real value.

To conclude, in emerging markets, dispersion is not an inconvenience, it is a significant opportunity.

This article is an excerpt of a special topic in Robeco’s 5-year Expected Returns publication.

Footnote

¹Past performance is no guarantee of future results. The value of the investments may fluctuate. Based on end-May 2026 data for MSCI Brazil.