How asset managers are rethinking emerging market country selection

The old way of emerging market country selection is losing relevance.

As artificial intelligence reshapes global supply chains and earnings growth concentrates in technology-heavy sectors, institutional investors and the managers who serve them are overhauling how they evaluate the EM opportunity set, shifting from geography-first frameworks toward sector composition and thematic investing.

According to Faiza Babar, senior investment consultant at People Corporation, most investment managers continue to approach the environment with a macro lens, pointing to fundamentals like growth, inflation, overall political stability, and currency outlook.

“It's a top-down approach rather than a bottom up, which means that they don't typically look at specific companies and then invest that way. They look at what's happening in the region. They look at the overall fiscal discipline and political stability. They then evaluate what market accessibility, or corporate governance would like what, what the earnings prospects are,” she explained, adding managers would then also consider structural themes such as digitalization, AI adoption, supply chain reshoring, demographics and energy transition.

“While index weights do matter, active managers do tend to deviate significantly from those benchmark weights whenever they see attractive risk adjusted opportunities,” Babar added.

A look inside the country selection process

According to Raghav Mehta, vice president, ETF strategist at Global X, the first step in that process is identifying where structural earnings growth sits, not headline GDP growth, but corporate-level metrics like earnings revisions, return on equity and free cash flow generation.

Additionally, EM earnings are forecast to grow roughly 20 per cent in 2026, according to RBC Global Asset Management, making the asset class one of the fastest-growing globally for a second straight year, with technology, mining and domestic demand doing the heavy lifting.

“Why does this matter? Portfolio managers ultimately invest in companies, not economies or countries,” said Mehta. “Countries capable of producing sustainable earnings growth typically receive larger allocations.”

The second step is typically sector composition. Mehta said asset managers are increasingly evaluating which industries dominate a country's equity market rather than simply its geography.

For example, he noted how China's strength lies in AI software, internet platforms and robotics; South Korea's in semiconductors and AI hardware; Taiwan's in chip fabrication. AI exposure, he argued, has become a primary screening criterion, and the selection framework has shifted from a country-centric model toward one that blends sector analysis with thematic investing.

According to Jean-Benoit Leblanc, portfolio manager at Desjardins, the investment firm runs a top-down process that starts with country selection, moves to sectors and industries, and ends at the stock level - producing a portfolio of 150 to 170 names, far broader than the 30 to 50 typical of bottom-up managers. The rationale is rooted in how much performance varies across EM countries from year to year.

The quarterly assessment process at Desjardins focuses on three variables: the earnings and market outlook relative to consensus, valuation against a country's own history and the broader market, and positioning - whether investors are already crowded into a given trade. When everyone is bullish on a market, Leblanc said, the remaining upside is likely limited.

The framework also allows for sector discrimination within a single country. In India, for example, the team might favour financials on the back of strong GDP growth while avoiding IT services if the business model faces structural pressure. And rather than concentrating in a single stock to capture a sector call, Desjardins spreads the bet.

"What we tend to do is we will buy 3, 4, 5 banks in a sector like India for example, instead of buying one and try to have the right one," he said.

Leblanc said the Desjardins framework pulls in a wide range of variables beyond headline macroeconomic data.

"At the end of the day, it's obviously the earnings and the outlook for your stock. But there's much more in there. You have all the politics, the monetary policy, you have the ESG," he said.

“The takeaway is institutional investors should no longer select emerging markets based solely on geography or countries. They are increasingly allocating towards countries that sit at the intersection of innovation when it comes to AI, semiconductors, digitization and long-term earnings growth,” said Mehta. “Because of that, these investors have shifted away from just applying a simple country centric framework towards a sector oriented and a thematic investing or a team centric approach. Or you could say a combination of the two approaches, sector plus thematics.”

AI and return concentration complicate EM country picks

While Babar acknowledged country selection still matters because political, regulatory and currency risks vary widely across markets, the rise of AI and the concentration of returns in specific sectors have also notably complicated the picture.

"Previously investors would look at countries, but now it's more about sectors because there are certain emerging markets sectors that seem to be doing well," she said, emphasizing Taiwan as a case in point. She underscored how TSMC, a major Taiwanese company, is riding the global AI wave, meaning its growth trajectory depends less on domestic conditions than on what is happening in the technology sector worldwide.

"For institutional investors there should be a balance of country analysis and also sector insights and then recognizing that some companies are increasingly global businesses rather than purely local exposures," she said.

Where borders play in EM selection

Mehta said borders still serve a purpose in portfolio construction as countries offer exposure to distinct monetary cycles, fiscal policies, currency regimes and regulatory frameworks, making them a natural screening tool. But he also argued their explanatory power has diminished sharply over the past decade as returns have become driven by cross-border ecosystems rather than national economies.

"The more important question today is not where is a company located, as in which borders does it reside within, but what global supply chain does that company participate in," he said.

Mehta pointed to a single AI data centre as an example, noting it requires Taiwanese chip fabrication, Korean memory chips and Chinese electronic components, with US hyperscalers deploying the infrastructure.

Mehta said the concentration of EM earnings growth within Asian technology stocks - across China, South Korea and Taiwan - means sector leadership now accounts for a larger share of market returns than geography.

"The global value chain is what matters, which is what professional investors are increasingly analyzing rather than political maps," he said.

Why emerging markets should be viewed ‘more holistically’

Babar breaks the EM selection process among most institutional investors into two buckets: sector-level analysis and country-level policy assessment. Governance frameworks, regulatory environments and currency risks all shape how individual sectors perform within a given market.

But she cautioned against treating those local factors in isolation, arguing that global forces, particularly in technology, can be just as decisive for sector returns as domestic policy.

"It's important for investors to view emerging markets more holistically and not just zoom in on specific government initiative. Because yes, government initiatives would impact the overall sector, but certain sectors are also driven by what's happening globally," she said. "I just feel that EM investing cannot be looked at in isolation. There are a lot of key things that need to be considered when investing in the sector."