Bloomsbury blog Investing in emerging markets for the right reasons

Bloomsbury newsletter, 12 August 2025

A recent Bank of America poll found that 37% of fund managers are overweight (allocated more than market share) on emerging markets equities - the highest level since February 2023. This surge in interest is driven by renewed optimism about the Chinese economy and poor expectations for the US dollar. At Bloomsbury Associates, we generally advise overweight allocations to emerging markets in our portfolios, but our rationale differs significantly from these short-term market sentiments.

But first, what is an emerging market? In finance, emerging markets refers to nations that are transitioning towards greater industrialisation and global market integration, but are not yet considered fully developed. Countries commonly classified as emerging markets include China, India, and Brazil. The geographical composition of a large emerging markets fund (iShares Core MSCI Emerging Markets ETF) is included below.

The case for tilting portfolios towards emerging markets (overweighting them) is well-documented in financial science. Over the long term, emerging markets equities have historically delivered a premium compared to developed markets.

The reasons the emerging markets premium exists are up for debate. In financial science, this (and other) premiums are often explained through both rational and behavioural lenses.

From a rational markets perspective, investments in emerging markets are inherently riskier than those in developed markets. For example, there is a higher risk of political instability, weaker institutions, and more volatile currency fluctuations. According to this view, investors demand higher returns to compensate for these risks, resulting in a long-term premium.

However, the field of behavioural finance has a different perspective, suggesting that emerging markets companies are undervalued simply because they're unfamiliar to global investors. Institutional and retail investors in the West gravitate towards recognisable names like Disney or Apple, not because they offer a better investment outcome, but because they're familiar. This "home bias" and brand recognition can lead to persistent misprising, contributing to the long-term premium observed in emerging markets.

Regardless of the cause, the outcome is the same. Our firm's approach to strategic asset allocation takes a long-term view of these and other phenomena, grounded in evidence and guided by financial science.

For investors who want a proven, evidence-based approach to capturing higher returns, a dedicated allocation to emerging markets is worth serious consideration. Not because China's economic fortunes have turned, or because of American turbulence, but because they deliver superior returns over the long term.