Aubrey CM: The key to emerging market returns

June 11, 2026

 
If you look at emerging market index returns over the past fifteen years, the picture is modest. But that headline number disguises a significant opportunity for investors prepared to do the work. A substantial proportion of excess returns in emerging markets has historically come from stock selection rather than country allocation or sector positioning.

A universe that keeps growing

The emerging markets index is not a static collection of companies or countries, and the comparison between 2016 and today illustrates that well. A decade ago, China was the largest component by some distance. Taiwan has recently overtaken it, driven primarily by the rise of Taiwan Semiconductor, which now accounts for over 13% of the index. Russia has fallen out entirely. Saudi Arabia and the UAE have come in. India’s weighting has grown from under 9% to over 13%. This evolution reflects not only changes in index composition but also the increasing depth and maturity of capital markets across emerging economies. As more companies list and governance standards improve, the opportunity set for active investors continues to broaden.

But the more important point is the number of investable companies. In China ten years ago, there were just over 100 index constituents. Today there are more than 500. In India, the number has moved from 73 to 164. China and India each have populations of 1.4 billion people, and there are many businesses providing goods and services to those citizens every day.

The investable universe across Asia, Latin America and EMEA now runs into the thousands. This breadth creates both opportunity and complexity, reinforcing the importance of selective, bottom-up analysis focused on companies with strong cash generation, robust profitability and the ability to fund their own expansion.

The consumption engine

At the heart of emerging market growth is a straightforward dynamic. As access to education and employment improves, incomes rise and spending patterns evolve. This process has played out across developed markets over decades and is increasingly visible across emerging economies.

The comparison between China and India is instructive. Chinese income per capita is now approximately $ 5,000, while India remains below $ 3,000. India is roughly fifteen years behind China in terms of the data, yet consumers in both countries are adopting similar technologies. The widespread adoption of smartphones has been a key catalyst. Even in rural areas of India, low-cost handsets and some of the lowest data tariffs globally have accelerated digital inclusion.
 

Over time, shifts in consumption create a broad and diversified set of opportunities across multiple sectors and geographies.

 
The implications are significant. Prior to the election of Prime Minister Modi, only around 20 million Indians had a bank account. In the decade since, over 500 million people have opened one. This expansion of financial access creates meaningful opportunities across sectors.

Demand evolves as incomes rise. At lower levels, spending is focused on essentials such as food, clothing, housing and education. As disposable income increases, expenditure shifts towards travel, healthcare, financial services and technology.

A company such as TVS, the Indian scooter manufacturer, illustrates this dynamic. It is the market leader with over 30% share in the Indian scooter segment and is capitalised at over $ 20 billion. Its most popular model sells for approximately £ 600. Over half of Indian households own a two-wheeled vehicle, often representing the first form of personal transport.

In China, while the property market continues to weigh on sentiment, spending on travel and experiences remains resilient. H World, one of the leading domestic hotel chains, has benefited from this trend. More con- sumers are booking directly with hotel chains rather than through third-party platforms, supporting customer loyalty and repeat business.

This progression is not linear, and it varies by country and region. However, the underlying direction of travel is consistent. Over time, these shifts in consumption create a broad and diversified set of opportunities across multiple sectors and geographies.

Quality matters

Sustaining a 15% return on equity over time is challenging, and the emerging markets index as a whole has rarely achieved this over the past twenty years. Companies that consistently deliver such returns tend to exhibit strong business models, disciplined capital allocation and resilient competitive positions. In many cases, these characteristics are more important than shortterm macroeconomic factors. Companies with strong balance sheets and pricing power are often better positioned to navigate volatility, particularly in environments where currency movements or external shocks can be significant.

The ability to reinvest cash flows at attractive rates is a key driver of long-term compounding. Businesses with these characteristics are often established operators with experienced management teams that have navigated multiple economic cycles.

Many of these companies are domestically focused, serving large and growing local markets. In Brazil, Banco Itaú is one of the largest financial institutions in the country and has operated for over a century. Its early adoption of digital services and strong positioning among retail and small business customers has supported continued growth.

Catalysts and the current opportunity

Identifying a high-quality business is only part of the investment case. Timing and catalysts are also important in determining when that quality is reflected in market valuations.

In South Korea, recent political developments have supported corporate reform initiatives aimed at improving governance and increasing shareholder returns. The so-called Value-Up programme has encouraged a shift in corporate behaviour, complementing strong performance in the semiconductor sector, where companies such as SK Hynix have benefited from structural demand growth.

Emerging markets currently trade at a notable discount to developed markets, particularly in a long-term historical context. While there are reasons for this valuation gap, there are also grounds to believe that it may narrow over time.

The expanding opportunity set, combined with ongoing structural growth and evol- ving corporate behaviour, reinforces the case for active stock selection. Identifying high-quality businesses at attractive valuations remains central to generating longterm returns in emerging markets.

While short-term market movements are often driven by macroeconomic events, the long-term drivers of returns are more closely linked to company fundamentals. For investors willing to take a disciplined, bottom-up approach, emerging markets continue to offer a compelling and differentiated source of opportunity.
 

SUMMARY Emerging market indices understate the opportunity available to active investors. Stock selection is a key driver of long-term returns. The investable universe has expanded significantly in scale and diversity. Rising incomes continue to drive structural consumption growth. High-quality companies with strong returns and reinvestment potential remain central to performance.

  

Read the full article in Financial Investigator magazine