The concentration problem hiding inside the EM allocation

There is a version of the Emerging Markets (EM) story that sounds compelling: strong demographic tailwinds, rising middle classes, growing domestic consumption, a long runway of industrialisation across multiple regions. Then there is what the benchmark actually owns.

The gap between the two, according to Tim Murphy, co-chief executive at Genium Investment Partners, is now wide enough to be a genuine problem for investors.

Emerging markets index concentration has reached a striking point. Technology and communication services now account for more than half the MSCI Emerging Markets index. Taiwan has overtaken both China and India in benchmark weight. The top three stocks, all technology names, represent around 30 per cent of the index. TSMC alone is close to 15 percent.

Murphy’s concern is that the benchmarks investors use to access emerging markets have drifted far from the economic story those markets are supposed to tell. Technology concentration has crowded out the consumer, commodity and regional growth narratives that originally made the asset class compelling.

The implications run through both passive and active strategies. Passive investors are picking up increasingly concentrated, top-heavy exposure without necessarily realising it. Active managers face a different version of the same problem.

“We’re seeing this live in both passive and active strategies,” Murphy says. “Active through significant relative underperformance where managers are underweight stocks like TSMC, Samsung and SK Hynix.”

The scale of emerging markets index concentration means the benchmark has become a performance trap as much as a construction problem.

Behaviour, not just benchmarks

Murphy’s concern is not purely technical. The concentration problem has a behavioural dimension that he thinks the industry has been slow to confront.

Investors who load up on US technology and AI names and then reach into EM for diversification often get more of the same. The theme is identical. Only the wrapper changes. The label changed; the underlying exposure did not.

“They got packed full of US tech and AI names and sought diversification in Asian tech and AI names,” Murphy says. “We’ve never framed emerging markets this way to our clients and we’re acutely aware of the distortions it’s creating in the market and in investor behaviour.”

Genium treats EM as a single sub-asset class within global equities. That framing provides access to a combination of China, India, Asian technology, commodity-linked markets and frontier economies simultaneously.

The case for splitting the allocation into discrete country or thematic sleeves may exist for large institutional or family office portfolios, Murphy acknowledges. But even then, whether the additional complexity genuinely adds to outcomes deserves scrutiny. “We’re not sure it is,” he says.

“Common benchmarks used in emerging markets have become rather disconnected from broader emerging market thematics and their macro tailwinds.”

China, India and the governance layer

On China, Murphy resists the binary framing that tends to dominate the conversation. The question of whether China is investable or not, which dominated much of the period between 2022 and 2024, is not one Genium finds particularly useful. “We tend not to frame single countries as opportunities or risks or as investable or uninvestable,” Murphy says.

China is a major global economic force and the largest single country in the EM index. Like any market, it contains both value opportunities and governance hazards within the same universe.

In practice, active stock selection in EM must carry a serious governance assessment. Where governance concerns are elevated, a margin of safety is applied or the position is avoided entirely. The country call, in isolation, tells you less than that work.

India is a similar story. Murphy agrees the macro tailwinds are real and likely to persist: demographics, rising household wealth, formalisation of the economy and strong domestic capital formation.

Some managers Genium works with carry significant overweights to India. Both top-down macro views and the observation that Indian companies tend to score well on governance relative to other EM peers drive the positioning. Others let bottom-up stock selection determine their country exposure organically. Murphy sees merit in both approaches.

The less-discussed side of the India story is the structural complexity behind the headline growth figures.

“India also comes with significant levels of bureaucracy, including some dysfunction between federal and state wants and needs, and is susceptible to large inflows and outflows of foreign capital,” Murphy says.

High valuations and sensitivity to capital flows mean investors need to hold the structural thesis alongside realistic assumptions about cyclical volatility.

The outlook and the currency question

Murphy is broadly positive on the EM outlook and has been for some time. The period from 2024 into 2025 validated that view, and the first half of 2026 has continued in a similar direction.

The valuation gap between EM and developed markets, which was very wide entering this run, has narrowed somewhat. Murphy expects that narrowing to continue through 2026, supported by valuation appeal, growth and macro tailwinds in key markets, and some US dollar weakness. His qualification is that the breadth of winners inside EM remains too narrow for comfort.

On currency, Genium’s approach reflects a deliberate risk-first philosophy. The default position for global growth assets, including EM equities, is to hold exposure unhedged.

The rationale is structural: the Australian dollar’s strong correlation with China, commodities and broader risk sentiment means an unhedged position has historically provided natural downside protection when EM equities themselves are under pressure.

“We’d rather see global growth asset positioning protect on the downside than outperform in roaring bull markets,” Murphy says.

Active currency calls are made infrequently. The costs, execution timing and the difficulty of maintaining consistency make regular hedging adjustments unattractive.

Murphy observes that most advisers either hold a fully unhedged position or a 50/50 split, and that broadly reflects appropriate discipline.

“Not easy to get consistently right, and there can be a significant mismatch between an AUD/USD lens and the underlying exposures you’re currency hedging in a portfolio,” he says.

The broader message from Murphy is that the EM conversation needs to be reset. Emerging markets index concentration is not a neutral starting point. It reflects a decade of market cap shifts that have loaded the index with technology, crowding out the consumer exposure, commodity links and regional diversity that made the asset class compelling in the first place.

Investors who understand that are better placed to use EM actively. Those who do not are likely making a more specific, and more concentrated, bet than they realise.