The Case Against EM Equities

Questioning the emerging markets growth story

June 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • EM equities are highly correlated to US stocks & high yield bonds, limiting diversification benefits
  • They outperform primarily when the USD is depreciating, making it a currency play
  • The largest MSCI EM index members will experience 50% population declines


Seeing latex slowly dripping out of rubber trees into wooden bowls on a plantation in Malaysia was a fascinating experience as a teenager. We had a great local guide that described how the milky substance had to be collected daily, which would then be processed into rubber. He also mentioned that he was living on the plantation with his seven children, which he attributed to the lack of electricity post sunset.

Many people expected the COVID-19 crisis to result in a population boom. After all, most couples have been locked up with not much to do. However, some preliminary statistics for 2020 show that in some countries the number of births actually declined. In China, there were 15% fewer births according to their Ministry of Public Security. In South Korea, deaths exceeded births for the first time as per their health ministry.

Low birth rates are not only an issue for developed markets, but also for many emerging ones. Given that the change in the working population is one important driver of GDP, this trend will result in lower economic growth. In turn, this makes the long-term outlook for stocks less attractive (read EM Debt: To Hold, or Not to Hold?).

Emerging markets (EM) stocks have been marketed in recent times as a way to escape the expensive valuations of US equities. Although the performance of EM stocks has been disappointing over the last decade, investors should be forward and not backward looking.

However, there are also some structural arguments against emerging markets stocks that investors should consider, and we outline them in this research note.


The average price-to-earnings multiple of the MSCI EM Index, which is the most well-known and tracked index for emerging market stocks, is approximately 19x currently. It is roughly comparable to that o