August 2024 | Read time: 3 minutes

Source: MSCI, data as of June 30, 2024

Why Macroeconomics Are the ‘X Factor’ in Emerging Markets Investing 

Tapping the growth potential of emerging markets opens up a world of investment opportunities, but not all emerging economies are created equal.

Consider the significant dispersion of returns by country, which illustrates both the grand challenges and potentially greater rewards of investing in emerging markets. With a range of about 75% between the highest- and lowest-performing countries, it’s unsurprising investors struggle to manage portfolio inflows with an eye toward the future. 

A tale of two
Many passive funds apply a one-size-fits-all approach to emerging markets investing, simply selecting holdings based on size and location. An active manager evaluates government policies, regulatory environments, economic growth conditions, and interest rate cycles to determine best where to invest. 

When it comes to active managers, however, it remains a tale of two: Many active managers overlook macro-considerations to provide broad exposure across emerging markets — or adhere to strict investment processes relying solely on bottom-up stock selection.  

A top-down approach to investing looks at the full picture. Pinpointing the ‘X-factor’ in each region, whether tethered to geopolitical events, volatile currencies, commodity prices, tariffs, sanctions, trade wars, or other economic headwinds, is likely to generate drastically different returns across emerging market countries.  

Investors are searching for the upshot of emerging markets. Having an active manager who incorporates macro-top-down factors into the investment process and combines them with strong stock selections can mitigate risk and provide investors with exposure to fast-growing economies around the world. 

Close-up of Brazil vs. Taiwan

The disperse range of opportunities in emerging markets can be seen clearly between the nations of Taiwan and Brazil:

• In Taiwan, the Taiwan Semiconductor Manufacturing Co., which accounts for roughly one-third of the Taiwan Stock Exchange’s main index (TAIEX), has benefitted from surging demand for advanced chips used to power cloud computing and AI. 
• This is in stark contrast to Brazil, which has slipped 19% YTD, following a promising 33% rise in 2023. The decline is attributed to a blend of fiscal concerns around government spending, a fall in iron ore prices, and government intervention at Petrobras, one of the nation’s largest companies. Still, the oil and gas giant managed to outperform Brazil's Ibovespa index.