Emerging Markets: A Core Component for Global Portfolios

When building globally diversified portfolios, it can be tempting to focus almost exclusively on developed markets. The US, Europe, Japan, and Australasia provide stability, liquidity, and familiarity. But when we step back and view the world through the lens of long-term growth and diversification, there is a compelling case for including some exposure to emerging markets (EMs).

Emerging markets represent more than half of global GDP, yet their combined equity market capitalisation makes up only around 15% of global markets (Morningstar, 2025). This imbalance highlights a structural opportunity: the economies that are projected to grow fastest in the coming decades are underrepresented in global equity indices.

According to IMF forecasts, EM economies are expected to grow at nearly twice the pace of developed economies, supported by rising consumer demand, industrialisation, urbanisation, and increasingly sophisticated capital markets. For long-term investors, being positioned for that growth can support both capital appreciation and portfolio diversification objectives.

Global equity allocations have become increasingly US-centric over the past decade. While the US has outperformed many regions, correlations across developed markets have also risen, making diversification harder to achieve.

Emerging markets, by contrast, show structural reasons for lower correlation with US equities:

• Their economies often follow different cycles (e.g. China’s domestic-driven growth story).

• Sector composition is distinct, with a greater representation of commodities, energy, and manufacturing compared to US tech dominance.

• Regional dynamics — from political events to currency moves — often drive EM performance independently of US trends.

As Morningstar notes, these differences mean EM diversification benefits are unlikely to be fleeting.

Despite stronger growth trajectories, EM equities have historically traded at a discount to developed markets. Today, that discount is as wide as it has been in decades. With improving credit quality, better corporate governance practices in many regions, and diminishing currency headwinds, EM valuations appear attractive for investors willing to accept higher volatility.

Of course, EM allocations come with distinct risks:

• Political and economic instability (e.g. debt defaults, regulatory shifts).

• Currency fluctuations, particularly given many EMs carry USD-denominated debt.

• Corporate governance challenges and the influence of state-owned enterprises.

Advisers need to balance these risks against the structural benefits EM exposure provides. Position sizing is key — EMs work best as a satellite allocation within a diversified equity portfolio, not as the core.

For New Zealand investors, accessing emerging markets directly can be costly and complex. Funds such as Kernel’s Emerging Markets Fund simplify this by offering broad exposure across diverse EM economies in a cost-efficient, transparent structure.

In the context of a globally diversified portfolio, Kernel’s fund can:

• Complement developed market allocations by reducing reliance on US equity cycles.

• Provide exposure to long-term growth regions like China, India, and Brazil.

• Capture broad EM exposure without the compliance and due diligence burden of direct investment.

By incorporating the Kernel Emerging Markets Fund within a broader allocation that includes developed market building blocks like Kernel’s S&P 500, Global ex-US, or Global 100 Funds, together with domestic equity exposures, advisers can improve portfolio efficiency by enhancing growth prospects, lowering concentration risk, and managing overall volatility.

While developed markets have dominated returns post-GFC, the next 10–20 years may look different. Emerging markets offer a compelling structural growth story, diversification benefits, and potential valuation upside.

The case isn’t for replacing developed markets, but rather ensuring clients are not underexposed to an area that could be a meaningful driver of global wealth creation in the decades ahead. Using vehicles like Kernel’s Emerging Markets Fund provides advisers with a practical, scalable way to deliver that exposure.