Indexy a trhy
Emerging Markets: Great Opportunity and Great Risk in One Package
Key takeaways
- Emerging markets are economies with rapid growth but weaker institutional protection for investors — this brings higher potential and higher risk.
- China alone makes up over 25% of the MSCI Emerging Markets index — concentration on a single country with political risks is significant.
- Currency risk is critical: a weakening of local currencies against the euro or dollar will reduce returns even when the local market is growing.
- Emerging markets work best as a complement to developed markets, not as a substitute — a reasonable weighting is 10–20% of the equity portion of a portfolio.
Emerging markets are economies in a phase of rapid development with a growing middle class, but at the same time with weaker institutional protection for investors, higher political instability and more volatile currencies — which is why they offer higher potential but also higher risk than developed markets.
What emerging markets include
The MSCI Emerging Markets Index covers approximately 24 countries. The largest are China, India, Taiwan, South Korea (still in EM under MSCI), Brazil, and Saudi Arabia. The total comes to approximately 1,400 companies.
China alone accounts for over a quarter of the index. This is key information: buying an "emerging markets ETF" does not mean equal exposure to dozens of countries — it primarily means a bet on China.
Why they are attractive
- More rapidly growing economies than the developed world
- A growing consumer class in Asia and Africa
- Relatively low correlation with the US market (at least partially)
- Historically lower valuations than developed markets
Real risks that cannot be ignored
Political risk: China can change industry regulation overnight — the technology sector experienced this in 2020–2021 when the Chinese government cracked down hard on the biggest technology companies. The result was declines of tens of percent.
Currency risk: The Brazilian real, Indian rupee, or Chinese yuan can weaken significantly against the euro. Local stocks may rise, but the euro-denominated return will be lower or negative.
Liquidity and transparency: Smaller markets like Vietnam or Egypt have lower liquidity and weaker corporate reporting than the US or Europe.
How to invest in EM as a Czech investor
The best route is an Irish UCITS ETF on MSCI Emerging Markets or FTSE Emerging Markets. For China there are also specialised ETFs — these are covered in the article China in the portfolio. The three-year tax time test applies just as with other ETFs, as explained in the ETF tax overview for the Czech Republic.
FAQ
What are emerging markets?
Developing markets — economies in a phase of rapid growth such as China, India, or Brazil. Compared to developed markets they offer higher potential but also higher risk: political instability, weaker investor protection, currency volatility.
Why does China have such a large weight in the EM index?
Because it is the world's largest emerging economy with enormous market capitalisation. In MSCI EM it accounts for over 25% of the weight. Buying an EM ETF is therefore largely a bet on the performance of the Chinese market.
Is currency risk in emerging markets significant?
Yes. Local currencies (real, rupee, yuan) can weaken substantially against the euro. Even if the local market grows, currency loss can significantly reduce or entirely eliminate the euro-denominated return.
What percentage of a portfolio should go into emerging markets?
Financial literature most commonly cites 10–20% of the equity portion as a sensible complement to developed markets. It depends on your risk tolerance and investment horizon. This is not investment advice — it is simply the commonly cited range.