Can Emerging Markets Keep Rallying in 2026?

Even when you look at years like last year, 'cause you were quoting how well emerging markets did last year and, and it did do very well. If you look at individual country returns there, the best performing country worldwide last year was Columbia. And I'm willing to bet a lot of people didn't have that on their Bingo card. If you're like, tell me the best performing- I read that article at the beginning of the year. I knew it, of course it was Columbia. Welcome to the Informed Investor where we break down the latest financial headlines, bringing in research and insights to help you separate the news from the noise. China, Brazil, Taiwan, are these countries that you want in your investment portfolio? That's what we'll dive into today on the Informed Investor is Emerging Markets. I'm Mark Gochnour. I'll be joined today by Jake DeKinder and Rob Harvey. And Rob, you are back in the seat. It's good to have you back on the show. Thanks for having me back. Glad to be here. You were here for taxes. Yep. And your official title is Co-Head of Product Specialists. That's right. And you know we're talking about emerging markets and I have to say, it looks like you just emerged from the woods man. I knew you were gonna go there. Looks like a lumberjack Too beforehand. So, looks good on you though. Thanks dude. I appreciate it. Alright, couple of headlines, then let's get into it here. Should you have emerging markets in your portfolio? How to decide? or an emerging market supercycle has just begun? So let me give you some more numbers. One answers the other there a little bit, but go ahead. Alright, I got some numbers for you 'cause you guys know I'm a DB accountant and I love data here. Let's look at the returns going into 2025. So the 10 year numbers ending 2024, the US was 12.6% annualized, emerging markets 3.90. That's a tough run. Tough run. Yep. And we are getting questions, "Why would I even own emerging markets?" So then we get to 2025, emerging markets were up 31% last year, US was up about 17%. Alright you never know when these things are gonna come, but let's get into, should we even own them? Talk a little bit about emerging markets compared to developed markets. So let's start with that, Rob. Yeah. What are some of the characteristics of an emerging market relative to a developed market? Yeah so it's helpful to define some of this right off the bat, but it's also important to note that not everybody has the same definition for emerging markets. So what are some of the things that we see commonly, some of the common characteristics across emerging markets? It tends to be the case that maybe there's currency controls in some of these countries. You tend to see costs be higher. You tend to see spreads be a little bit wider right? And we've talked a little bit before about also what's happening from an economic perspective in some of these countries is gonna look different. But again, as I said at the beginning, not everybody is in agreement. So there's not like a universal definition where all asset managers and all index providers get together and say, this is emerging markets. We talk about South Korea, it's a great example. South Korea in some commercial indices is considered developed and in some commercial indices is considered emerging. If you look at pictures of Seoul, it looks like New York. It looks like Tokyo, right? It's a very tech heavy, progressive society. So you think, okay, well that's developed, right? But then in December of last year, I should say two years ago now 2024, martial law breaks out and now it doesn't really look so developed anymore. So as a developer or is it emerging? Well it depends on who you ask. So when we talk about emerging markets, there are some characteristics that are common, but there's opinions that are being layered in here too. And so a lot of this comes down to what do you think emerging markets is, right? So there's a little bit of that. Another thing that we get questions about is you think about the size of a country, it's economy or GDP in some, I think there's a natural, I guess, way to think about that as an investor to say, well it's got a big economy, it must be a developed country, but it doesn't necessarily look that way. You take a country like China for example, right? The world's second biggest economy. But then it's still considered emerging markets. Well the chart that we have on that I think is one of the coolest things. I mean, we love showing it at conferences and the visual of it is absolutely incredible. That rather than cutting it up by geographic boundaries, or you could even look at it by economic output, right? It looks very different from the chart, which shows what's the market cap of each of these countries is a really interesting way to look at it. And I think your China example is a great one, right? Massive economy, but when it comes to really investible stock market, especially for, you know, maybe the way that you want do it really small. Yes and one of the things that I love about that chart, Jake, is when you do it for equities and then you do it for fixed income, all of a sudden the world looks completely different. Japan blows up on the map, whereas it's a lot smaller inequities. And same thing with China, like you just see differences there, different from geographical regions, different from economic output, right, so yeah. Well these things ebb and flow too in terms of what percentage of the market cap do emerging markets represent versus developed countries versus the US and Jake, you do a great job talking about this at some of the different events where you look at how that's evolved and changed over time. So maybe get some perspective on market weights from a US dev in emerging markets. Well these things, what the US makes up, what developed ex US sort of these international developed countries and what emerging markets, it's not constant through time, right? I mean we've seen this, we've seen over the last several decades a pretty decent growth in the emerging markets percentage relative to the rest of the market or relative to the rest of the world. US is really high right now. And at the current time you have to have international developed that's really small. But again, go back 10 years ago, it looks different. Go back 20 years ago, it looks different. Go back 30 years ago. These things change through time and you need to take that into account when you think about what your allocation might look like as well. Yep. That's absolutely right. You think about, to your point nineties, early nineties in particular, emerging markets was maybe 2% of the market capitalization. Now it's 11 to 12%. But it's fluctuated, right? It hasn't been a straight trend line up. It's been ups and downs throughout. And we get a lot of questions of, so if I was gonna go into emerging markets, how much should I put in? And we don't have the right answer, right? And it's not our job to to sort of say that. But I do think a good starting point for everybody can be what is the global market cap look like? And then do you maybe want to have a home bias? Totally agree. To maybe your local country. I mean we see that here in the US that financial professionals many times will have that. If you go talk with Canadian advisors, it may look like that, if you go talk with Australian ones, I think it's natural at times to have a home but would you agree with that completely? And let's just mention home bias- Little bit more percentage in. You just have a higher percentage of portfolio in your country than what it is in the market cap weighted. Right and for US investors, as you're saying, we think about home bias as more US. And so it's almost foreign to us that anybody would be underweight at the US. You go to countries like Chile for example, they have a very heavy home bias to emerging markets. Emerging markets might be half of their overall asset allocation. What you said about Canada is true. What you said about Australia is true. Right? And there's nothing wrong with that. And the right asset allocation for you should be something that you stick with, something that you feel confident about. But the argument here is, I think exactly what you said, look at market capitalization weights as a starting point. And then also don't forget to add in some emerging markets. Some doesn't have to be market weight, doesn't have to be overweight. You should have some in there, right? It should be a part of your portfolio. Let's go back to some of the characteristics you mentioned that might differentiate emerging from a developed country. You mentioned maybe there's some currency controls, capital controls. That over time where hey, you can only pull out so much money depending on what's going on in their economy or situation at the point. Rule of law, sometimes a little bit stronger perhaps in developed versus emerging countries. So with that in play, how do I think about an expected return between a developed country and an emerging country? Would I expect a little bit higher return in emerging to sort of compensate for some of those things I have to take on? Yeah, I'll talk about this in two sections. One is sort of the return aspect 'cause you did mention the previous 10 years, which is important. But then I also wanna talk about the role of emerging markets outside of just thinking about which region's gonna shoot the lights out 'cause that's also an important consideration. Let's talk about performance. A lot of people when they're thinking about emerging markets expect it to do better because there are, you know, some of these higher costs associated or maybe, you know, you mentioned there might be restrictions in those companies. Well you know, if I'm going to be doing that, I should demand a higher return. And whether or not emerging markets has performed better than US kind of depends on the window of time that you're looking at. You mentioned the 10 years, the past 10 years, tough time for emerging markets. How about we go back to another 10, 15 years before that? Think about in the 10 years through 2009, we call that the lost decade in the US. US investors lost close to 1% annualized over that 10 year period on their investments. How did emerging markets do? They did flow right? Jake, this is part of your talk that you gave of about educating investors that the ebbs and flows are different and the growth of wealth that you experience depends on when you put that dollar into the market and where you put it. So do emerging markets outperform US equities? Sometimes yes. And sometimes no. But this gets to sort of my second point, which is the role of having emerging markets in your portfolio isn't necessarily that you're gonna massively outperform in every year or even on average. Although you know an expectation, there's gonna be good times and bad times. The role of it is that emerging market equities are not perfectly correlated with US equities. And that's a benefit to investors. That helps smooth the investment experience. When the US is doing poorly, maybe the emerging market part of your portfolio can do well and vice versa is also true. And we as a market, we as investors put a lot of attention and importance on smoothing the investment experience out. And that's a good reminder. I mean look in a diversified portfolio, not everything's gonna, many times not everything's gonna perform really well all at the same time. That's kind of the benefit of diversification. So you brought up how emerging markets did over the last 10 years underperform the US right? It probably hasn't moved in lockstep. So you get a diversification benefit. Go back to the lost decade that you both, I believe cited there, when we go back to sort of the 2000 time period. And it's really the opposite. They're also not moving in lockstep except emerging markets performed a lot better than the US did during that period. And I just find it interesting 'cause I feel like right now emerging markets has been getting beat up a little bit maybe before last year, right? Because it did have a good year last year. But you know, you go back to 2010 and we think about all of the calls that we got, guess what? Nobody was calling asking us about the S&P 500 right? Everybody was like, I want some more of that emerging markets right? And so it's a little bit of performance chasing that we just constantly see through time, right? And that's a little bit of what's going on with emerging markets right now. Totally agree. Well and Jake, you're talking about diversification. I also think about it in the context of some of these big companies within emerging markets. So for example, Samsung, TSMC, you know the semiconductor manufacturer. Alibaba, Tencent. Do I want those in my portfolio? Yeah I probably want exposure to some of these just massive big global companies. It's just good diversification but also it's a major part of an economy that I just wanna have exposure to. Well completely think about that. We're telling you that of the global market, you've got 10 or 11% that are in emerging markets. Like you don't want to have exposure to 10% by market cap there. I mean I go back almost to sort of the history of Dimensional a little bit. I mean Dimensional was kind of founded on this idea of a lot of these institutions have a lot of exposure to big companies that are out there. Wouldn't you want to have some exposure to small companies? I mean that's what David and Rex went out and started having conversations about. It's just, it's a logical way from a diversification standpoint to approach it. And I think EM, emerging markets is the same way. Yeah and you do hear a narrative that kind of goes up against that a little bit that's very common where people say, "Well look, you know, large US companies are multinational. They've got supply chains in emerging markets, they've got customers in emerging markets." So aren't we all kind of emerging markets? And the answer is no, we're not. And the reason that you can tell that it's worth it to have exposure to these companies directly is because again, they're not moving the same, you know. Your Coca-Colas look different from your Taiwan semis. They should. And that's a good thing for investors. And we hear all the time be like, "Oh well let's think about the S&P 500 and these multinational companies. Aren't I already getting exposure to emerging markets?" And there's maybe some argument to be made for that, right? Okay, let's move from the big companies down into the mid-size companies, down into the small size companies. I mean, yes, there's companies that are global in nature, I hear you on that. But if you go to a lot of these countries, the mid and the small and the value companies that are there, they may derive a decent amount of their revenues from the local markets. And if you want to capture the emerging markets, small cap or value premium, you better make sure you go and invest in some of those companies. Yep, absolutely. Yeah absolutely right. And last year again is a good example of that. 31% in emerging markets, 17 in the US, these stocks just behave differently completely. Let's talk about expectations a little bit in emerging markets. So I think about that, some of the questions that we get over time is, hey, when you think about emerging market companies, you know, maybe they're not followed as closely by some of the analysts and things out there. There's an opportunity for an active manager to identify mispricing or a valued company. How do you think about that? Yeah, I think this is going back to Jake's point too, Richard. Well everybody can name a couple of emerging market companies right off the bat, right? We all know Samsung, we all know Taiwan Semi. I mean we all know Alibaba, but then there's thousands of other companies that are smaller than that giving you a lot of that local market exposure. And so one of the narratives that we hear a lot is, well there's just less analyst coverage. People aren't paying attention to those companies. So there should be more opportunity for active managers to go in there and be successful in stock picking 'cause you know, you hear the argument a lot that the US is essentially a more efficient market and emerging markets is sort of, you know, a different frontier where you can say, well, you know, it's a little bit of the wild west out there. No one knows about Hungary, no one knows about China small caps, which obviously isn't true, the secret's out. But when you look at the performance of active managers, that really tells the story. Because if there were a tremendous amount of opportunities to do stock picking and fundamental analysis successfully, you would expect to see that active managers did really well in emerging markets. And when you look at the 20 year numbers for emerging markets, active managers, it's awful. 22% of them have outperformed net fees. Terrible, your odds of picking a good active manager in emerging markets are very low. If you look at that across lots of markets, emerging markets, developed markets in US, everything put together, we know, and we've talked about this a lot, your odds of finding an active manager are poor there too. So essentially is, and what you'd expect is true, it's hard to beat the market by stock picking. It doesn't matter if you're in emerging markets or developed markets. Well also think about, I think you said this earlier, that when you go to emerging markets accessing those markets, trading those markets, you could see wider spreads. It could be a little bit more costly to do that, right? And so now I've got an active strategy that maybe they take a stock picking strategy, maybe the turnover's a little bit higher, maybe it's more of a concentrated approach. Maybe it's more of a costly, I mean you're really just starting behind the eight ball you when you trying to take that approach in something like emerging markets when you can see those spreads really wide and it's expensive to trade there. Very true that price discovery, you know, even if it is easier, you're right, a lot of that gets eroded through the higher cost, the wider spreads. And so I think that's something to think about very carefully where even if there is opportunity, what do you care about? You care about what are your net of fees after tax returns look like? And the punchline is here is, you know, a lot of the maybe the perceived benefit of being in a sort of a less efficient market comes with costs. And that eats into those returns. It does and you also said tax and I'm surprised Gochnour didn't just jump on the tax comment. He wanted to. He did. I had to zip it. You had to zip it. But that's actually, you know, if we think about something to talk about in the future, sort of like what does it cost to trade markets and how you go about it, that could be a cool topic. It'd be great topic. I love it. Talk about some trading. Hey, let me give you some numbers here. And we talked about one aspect of emerging markets is the volatility. You just see wider performance in emerging markets versus some developed markets. So again, I got my numbers here. I'd love to give a few data points. So what I'm gonna highlight here is the average of the worst performing country of a given year and the best performing country of a given year if that makes sense. And we'll talk about sort of what that difference is. So if you think about developed markets, going back in time, the average of the worst performing country was minus 16%. The average of the best performer was to 31%. So sort of that delta, that difference is 47% between the worst and the best any given year. In emerging markets, the average of the worst was 19% minus 19%. And the best was 54%. So you see it bit popped there on the upside. So that differential's 73%. So you just do see quite a big, I'll say dispersion or a wider return variance in emerging markets versus developed. Yeah and even when you look at years like last year, 'cause you were quoting how well emerging markets did last year and they did do very well. If you look at individual country returns there, the best performing country worldwide last year was Columbia. And I'm willing to bet a lot of people didn't have that on their bingo card. If you're like, tell me the best performing- I read that article at the beginning of the year. I knew it. Of course it was Columbia, right? So this is one of the benefits of having diversification is, and we talked about this at the beginning, we have that great slide that shows country by country emerging market returns. It's a quilt because there is no pattern there. Some years a country might be at the top and then the next one they're at the bottom. So you do have this wide range of outcomes, which is why it's helpful to be diversified across countries in emerging markets. So as a portfolio manager on emerging markets, which you did I think when you're in London right? In your London office, were there any, I'll say unique challenges to managing an emerging market relative to a developed country? Absolutely and a lot of the costs that we talked about there are things that you have to focus on. Implementation matters in the US. It matters in developed markets, it matters even more in emerging markets. You have to be careful about the way that you trade. You have to think very carefully about the liquidity. There's also a lot of different options to access companies. You know, you could buy the local line, you could buy a depository receipt in New York or London or what have you. So there's lots of, there's just a broader investment universe and how you access it. But there's also just basic considerations that you have to make when you're not buying US stocks. You know, foreign exchange for example. Do you have the currency in place to buy the stock when you want to buy the stock? Takes a little bit of planning, takes good implementation to make sure all of that goes smoothly. On top of that, there's also opportunities just by being strong operationally in a way that maybe other managers can't be. So for example, getting accounts set up in India, not an easy thing to do. Making sure that you can be confident that you're trading in accordance with what the regulators expect from, you know, a securities lending perspective in South Korea. Not something that every manager's comfortable with. So it really takes operational excellence and that focus, as I said before on implementation to set yourself apart. And that helps mitigate a lot of those costs that we talked about, right? Because if you're sloppy in the US, you'll pay for it. If you're sloppy in emerging markets, you're really gonna regret it, right? You really have to be careful in those markets. So the processes are incredibly important. Absolutely. Always in the country, but particularly in emerging. Very true. Yep. And you really have to have 'em defined. You mentioned by country what is about 23, 24 countries represent emerging markets? Yeah, it depends on how you define it, but yeah. So it's almost like you have to have a very defined process for those each individual country. Right 'cause you know it's gonna work differently in Columbia than it is in Saudi Arabia than it is in China. So you know, having a knowledge about sort of what's happening in each of those countries just at like an operational level is helpful. All right, so emerging markets can be a very effective diversifier, it behaves differently than the US market. And it gives you good exposure to some of these large economies and companies all around the world. Hey, you know one other point on that too is, is that we are talking about sort of that operational excellence, the ability to trade there, what you have to be cognizant of, I will say I think it's a very good time for investors in general 'cause again, if you go back 25, 30 years ago, the ability from sort of an expense ratio standpoint to access that, it was higher, right? And so that's one of the points I always bring up when we go and we talk with investors or we talk with advisors of, you've got the ability to access it in an efficient, diversified, relatively low cost manner. You may want to consider that in your allocation. Absolutely, there's never been a better time to be in emerging markets from that perspective, right? You see asset managers who are benefiting from scale, benefiting from efficiencies, should be passing along some of those cost savings to their investors and their clients over time, right? And that just makes it more affordable to get that important piece of your portfolio taken care of. Alright excellent, Rob, great to have you back. Thanks for joining us here today. Thanks for having me. You know, and Jake was talking about trading a little bit earlier, and I think that's a fantastic topic we can come back with in a future episode is thinking about trading and trading costs and everything that goes into that. So we'll have you back. Love to be here. You've done a lot of that in your career, so we'll bring you back for some trading conversations. Great. Looking forward to it. Alright, thanks for joining us today and all of you, thanks for joining us on The Informed Investor. We appreciate your time. 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