EM growth should, on average, outpace developed market growth. However, to be successful in EM investing, one must look beyond China. EM economies are diverse, and this offers several opportunities for investors looking to diversify.
Any decision to allocate to emerging market (EM) equities is typically predicated on growth. The size of China’s economy and its rate of growth, which have a significant impact on EM returns, also weigh on such decisions. Figure 1 illustrates the equity market correlation of various EM economies to China against those economies’ export exposure to China. In general, this means, the more export exposure an EM economy has to China, the more correlated is its equity market to the country. For instance, countries such as Taiwan, Korea, Thailand, South Africa, Chile and Peru, which have higher export exposures to China, have higher sensitivity to movements in China’s equity market. However, this also means that India, Indonesia, Russia, Poland, Brazil and Mexico, which have relatively lower export exposures to China, have lower sensitivity to China’s equity market. In other words, this correlation perspective demonstrates that EM economies are not all the same and significant opportunities exist beyond China’s orbit.