For decades, emerging markets traded as a macro asset class, a leveraged expression of the dollar cycle, domestic growth, and external balances (we discuss this further in 10 Rules of Country Selection in Emerging Markets). Today, the EM equity index looks very different. It has become increasingly dominated by a few mega-cap technology companies whose fortunes are tied more closely to AI investment and global supply chains than to traditional EM macro drivers.
Yet many global allocators still approach EM as a macro asset class tied to currencies, domestic growth, and external balances. This creates a growing disconnect: in its current form, the EM index increasingly functions as an indirect play on global technology investment and US-led AI capital expenditure.
As a result, investors seeking diversification away from US equities may not achieve the intended outcome through passive EM exposure alone. Furthermore, research by Arslanalp et al. (IMF, 2020) highlights that benchmark-driven allocations can amplify the role of external factors at the expense of domestic fundamentals, increasing the risk of flows that are disconnected from local economic conditions.
For allocators aiming to express macro views, a more targeted approach may be required. Active strategies, in this context, offer the flexibility to align portfolios with underlying macro drivers rather than with the backward-looking composition of the index.
