Emerging markets: one label, many different bets

Most investors position emerging markets as one universe. Kev Toohey, principal at Atchison, thinks that is the fundamental mistake.

“Treating these as a single asset class makes about as much sense as treating developed markets ex-US as a single trade,” he says. “That world has passed.” Toohey runs regime-based signals across 15 individual EM economies simultaneously.

Right now, those signals are telling very different stories. Brazil, Korea and Mexico are Overweight. China and Indonesia are Underweight. They all sit inside the same benchmark.

The benchmark is making decisions for you

The MSCI Emerging Markets (EM) benchmark carries roughly 24 per cent in China. For Toohey, that is not a neutral starting point. It is an implicit active bet.

“An investor who simply buys the benchmark is making an implicit active decision to be significantly overweight a market our analysis views as unfavourable,” he says. “The benchmark treats this as a market-cap allocation problem. We treat it as a regime problem.”

China currently sits in what Toohey’s model identifies as a stagflation quadrant: falling growth momentum, rising inflation.

That combination historically produces below-average equity returns, regardless of headline valuation. The valuation case is not trivial. Chinese equities screen cheap on most absolute measures and credit conditions are easing.

But the framework Toohey uses is unambiguous. “A value opportunity that is currently inside a policy-risk trap,” he says. Add a geopolitical risk index running 54 per cent above its 24-month average, ongoing US-China tech decoupling risk and property market overhang, and the discount looks fairly earned.

Korea is the opposite story

While China is the cautionary case, Korea is where Toohey’s model is most constructive.

The signal is driven by rising growth index momentum, falling inflation and a supportive rate backdrop. It is also, unambiguously, a semiconductor and AI supply chain story.

“The regime model captures this through economic momentum, not through the specific theme,” Toohey says. “We are comfortable with the exposure but would not add to it speculatively on AI narratives alone.” The strength of the regime signal gives conviction on Korea. The AI theme is a feature of the backdrop, not the thesis itself.

India: neither overweight nor underweight

India attracts the most debate, and Toohey is more measured than the market narrative tends to allow. His model has India at Neutral+, leaning cautious.

Growth momentum is positive, but inflation is running higher than 12 months ago and valuations have long priced in a growth premium that leaves limited margin for error.

“The India debate usually frames itself as high quality versus high price. We think that binary is too simple.”

The real question is whether the current regime, modestly positive growth, moderately elevated inflation and an easing rate cycle, justifies the premium.

His answer is partial, not overwhelming. “A neutral weight with a clear trigger to upgrade on valuation correction or a confirmed improvement in breadth of economic momentum is where we sit,” he says.

The sub-group structure is the real insight

What makes Toohey’s framework useful for client conversations is how it organises the internal diversity of EM, treating each sub-group’s risk-return profile on its own terms.

Brazil and Mexico are commodity-linked plays that benefit from pro-cyclicality. North Asian technology, Korea and Taiwan, is effectively a global semiconductor cycle trade. China is a domestic demand, policy optionality and geopolitical risk story.

India is a structural growth premium with demographics as the primary variable. “The risk-return properties of these sub-groups are meaningfully different,” Toohey says.

The macro backdrop supports the overall EM case, selectively applied. Yield curves have steepened globally. Policy rates are lower than 12 months ago in 12 of 15 markets in his model, and the USD has been on a loosening trajectory through the easing cycle, which historically provides a tailwind to EM assets.

But Toohey is clear: the attractive risk premium sits in selectively positioned EM, not in the broad beta trade. A passive EM position carries significant embedded China and stagflation risk that compresses the effective risk-adjusted case.

What advisers consistently under-explain

Toohey’s model runs unhedged for Australian investors in EM equities. The reasoning is structural. “The AUD is pro-cyclical,” he explains. “It tends to fall when global growth deteriorates and EM equities decline, which means the currency loss partially offsets the equity loss.” But the more important gap, he argues, is one of client education.

“Where advisers consistently under-explain: the difference between hedging the currency of the equity market you are investing in versus hedging the currency risk of the underlying assets themselves, which are often USD-denominated regardless of the listing country,” he says.

“An Indonesian equity fund priced in IDR still has substantial USD exposure at the underlying company level. That nuance rarely makes it into client conversations.” It is a small detail with real portfolio consequences, and it is the kind of thing Toohey’s regime-based approach is designed to surface.

The headline emerging markets number, he concludes, is a weighted average of very different economic environments. Understanding what sits behind it is the work.