Emerging markets: beyond the technology trade

The emerging markets story has become, in large part, a semiconductor story. Taiwan, South Korea and parts of China dominate the benchmark, and the returns from AI infrastructure and related supply chains have been strong enough to make that concentration easy to overlook.

Jay Kumar, founding director at Foresight Analytics, thinks overlooking it is a mistake for advisers serious about emerging market diversification.

“The EM narrative has become heavily concentrated around Asian technology, particularly semiconductors, AI infrastructure and related supply chains in Taiwan, South Korea and increasingly parts of China,” Kumar says. “While this concentration has delivered strong returns, it risks masking broader opportunities in domestic consumption, financials, healthcare and industrialisation across other EM regions.”

That distinction matters more than it might appear at the portfolio level. An allocation to a broad EM index or a popular EM fund may feel diversified by label, but the underlying exposure tells a different story.

Investors who believe they own the emerging world may in practice be running a concentrated bet on the global technology cycle, with some additional commodity and financial sector exposure alongside it.

“From a portfolio construction perspective, investors need to distinguish between EM technology exposure and genuinely diversified emerging market exposure,” Kumar says.

The point is not that technology exposure in EM is wrong. It is that advisers and their clients should understand what they are actually buying.

India: conviction with conditions

On India, Kumar is constructive but measured. Foresight remains strategically overweight despite valuations that by most measures look stretched.

The rationale is structural: demographics, rising household wealth, the formalisation of the economy and sustained domestic capital formation combine to create what Kumar describes as a long-duration growth story that is difficult to replicate elsewhere in the emerging world.

“We remain strategically overweight India despite elevated valuations,” he says. “The combination of favourable demographics, rising household wealth, formalisation of the economy and strong domestic capital formation provides a long-duration growth story that is difficult to replicate elsewhere. However, expectations are high, so manager selection and valuation discipline remain critical.”

The qualification matters. A market pricing in a premium growth story leaves limited room for disappointment, and Kumar is specific about where that disappointment could come from.

A US-Iran conflict and the resulting energy shock represents one credible risk scenario. India is heavily dependent on imported gas and petroleum products, meaning an energy price surge would feed directly into inflation and put pressure on the current account. A weaker rupee compounds the problem, extending the headwind for investors holding unhedged positions.

The message for advisers is not to avoid India. It is to hold the position with clear eyes: overweight where justified, but with the discipline to manage through cyclical setbacks rather than treating the structural thesis as protection against near-term volatility.

“Investors need to distinguish between EM technology exposure and genuinely diversified emerging market exposure.”

The currency layer advisers routinely skip

If the concentration problem is the most visible gap in how investors think about EM, Kumar argues that currency is probably the most under-explained. The India example is instructive here too.

Strong local market performance in rupee terms has not always translated into equivalent returns once Australian dollar movements are accounted for. The gap between what Indian equities delivered and what Australian investors actually received has at times been material.

“Currency movements can materially amplify or detract from underlying equity returns, particularly for Australian investors,” Kumar says. “The recent experience of Indian equities demonstrates that strong local market performance does not always translate into equivalent returns once AUD movements are considered.”

For most EM currencies, hedging is either impractical or expensive enough to erode a significant portion of the return premium the asset class is supposed to deliver. That does not mean investors should ignore the risk. It means they need to price it in explicitly and build their return expectations accordingly.

“Where the hedging option remains expensive, investors need to add the FX risk premium to their required return,” Kumar says. “They also need to adopt an appropriate time horizon to ride out cyclical asset market and FX market cycles.”

That is a discipline many client conversations do not get to. The typical discussion around an EM allocation focuses on the equity thesis, the country weights and the manager track record.

Currency is treated as background noise rather than a variable that can, over certain cycles, dominate the return outcome. Kumar’s point is that it deserves its own line in the analysis.

Construction over narrative

Taken together, Kumar’s framework points advisers toward a more deliberate approach to emerging market diversification than the standard benchmark allocation provides.

The label emerging markets covers an extraordinary range of economic structures, growth drivers, policy regimes and currency dynamics. Treating them as a single bet, or accepting whatever the benchmark delivers, is a portfolio decision, even if it does not feel like one.

Investors genuinely seeking emerging market diversification need to look past the technology concentration at the index level and ask what exposure to domestic consumption growth, demographic-driven demand and financial sector development in markets outside North Asia actually looks like.

Getting there requires either active manager selection with a clear mandate, or a more deliberate blend of regional exposures than a single broad EM fund typically delivers.

On currency, the ask is simpler: acknowledge it, quantify the risk premium and set the holding period accordingly. It will not always be the dominant variable. But in cycles where it is, clients who were not prepared for it tend to draw the wrong conclusions about whether the asset class delivered at all.