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Investors are warming to emerging market stocks - here’s how to add them to your ISA
Key points
Investors are showing increased appetite for emerging market equities
Diversification benefits and long-term growth potential need to be weighed with risks from currency exposures to tariffs
Consider an active vs a passive approach based on risk appetite
Investors are showing increased interest for emerging market equities as they seek diversification amid concerns about high valuations in the US.
According to Bank of America, a net 37% of fund managers are overweight EM stocks, the highest since February 2023. Almost half (49%) believe EM stocks are undervalued, while 91% think the US is overvalued.
A turnaround in expectations for China’s growth and a weaker dollar are tailwinds for emerging markets. The dollar is down about 10% this year and fund managers polled by the bank expect further declines. A weaker USD supports emerging markets via lower borrowing costs and allowing their central banks to cut rates. A lot of EM nations have dollar-denominated debt, which becomes easier to service when the USD weakens.
The MSCI EM Index is up about 16% in dollar terms this year, ahead of both Wall Street and MSCI’s index of developed world stocks.
Growing economic activity across Africa, Asia, Latin America and Europe is spurring a rethink of the EM space relative to developed markets, and the performance is showing. Among the top-performing ISA-eligible ETFs in July the Xtrackers MSCI Thailand UCITS ETF and the Amundi MSCI China Tech UCITS ETF in the top three.
Passive UCITS ETFs – Broad Emerging Markets Exposure
These ETFs track major benchmarks like MSCI EM or FTSE Emerging Markets. Ongoing charges figure (OCF), sometimes referred to as total expense ratio (TER), usually sit around 0.14%-0.20%.
With about £20bn assets under management, the largest ETF in the space is the iShares Core MSCI EM IMI UCITS USD (Acc) ETF (EMIM), which tracks the MSCI Emerging Markets Investable Market Index (IMI). Its major holdings of Taiwan Semiconductor Manufacturing Company, Alibaba, Tencent, Samsung and HDFC Bank show a weighting towards Asia.
A popular option is the iShares MSCI Emerging Markets UCITS ETF (IEMA), which reflects the return of the MSCI Emerging Markets Index.
It’s about 10% weighted to Taiwan Semiconductor Manufacturing Company, reflecting this company’s ascent following the rapid rise of its foundry business manufacturing chips for AI. The ETF also has a heavy skew to China via holdings of Tencent, Alibaba and the iShares MSCI China A UCITS ETF (CNYA). Another is the M&G Global Emerging Markets ETF, with holdings of TSMC and Prosus.
Providing access to a different benchmark but employing much the same approach - and holdings - is the Vanguard FTSE Emerging Markets UCITS ETF (VDEM).
Active Alternative – Emerging Market Investment Trusts
Screening for ISA-eligible mutual funds in the Global Emerging Market Equity category, we can see the top-performing investment trusts in the space. Delivering a 32% return over the last year is the Templeton BRIC Fund. The fund mainly invests in equities of companies of any market capitalisation that are located in, or derive significant business from Brazil, Russia, India and China, including Hong Kong and Taiwan.
Another is the Fidelity Emerging Markets Fund, whose two biggest holdings are South Africa’s Naspers and TSMC.
Smaller funds can be looked at - for instance the Invesco FTSE RAFI Emerging Markets UCITS ETF (PSRM), which has delivered 30% over the last three years.
Frontier Markets - Even More Emerging
Another to consider is the Templeton Frontier Markets (W GBP) Accumulation Fund, which has been investing heavily in the Philippines and Vietnam and delivered over 100% returns over the last 5 years.
These are so-called Frontier Markets, which may offer exposure to an even-more compelling long-term - and potentially riskier - growth story. Vietnam is in the process of carrying out financial market reforms aimed at elevating its status to an Emerging Market, which could see it attract much greater inflows of foreign capital. Indeed, some of the best returns this year have stemmed from Frontier Markets such as Kenya, Pakistan, Hungary and Bangladesh.
Risks to Consider
Emerging markets risk: this is the risk related to investing in countries that have less developed political, economic, legal and regulatory systems, and that may be impacted by political/economic instability.
Foreign Currency risk: the risk of loss arising from exchange-rate fluctuations or due to exchange control regulations. If the dollar were to suddenly rally, it would hit EM markets.
Liquidity risk: the risk that arises when adverse market conditions affect the ability to sell assets when necessary. This is particularly relevant to some of the smaller actively-managed funds.
Next Steps
Select a fund type: Passive UCITS ETF for broad low-cost exposure, or active trust if you're comfortable with active management and higher fees.
Decide dividend structure: Accumulating (reinvests automatically) vs Distributing (pays regular dividends).
Choose domicile/broker: Funds are mostly Ireland- or Luxembourg-domiciled, widely available in the UK/EU.
Review ongoing costs, replication type, and fund size to match your preferences.
This content is marketing material and should not be regarded as investment advice. Trading financial instruments carries risks and historic performance is not a guarantee of future results.
The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options.
The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options.