Emerging Market Equities: Returns, Risk, and the Long View

This post examines the historical performance of emerging market equities, as captured by the MSCI Emerging Markets Index, and compares it to developed market equities, represented by the MSCI World Index. The focus is on total returns and volatility across different horizons—one, five, ten, twenty, thirty, and close to forty years. The evidence reveals a story of similar long-run returns but a much rougher ride for emerging markets. We then turn to the question of whether investors can reasonably expect a higher return premium from EM going forward.

The Short Term: One Year

Over the most recent year, developed markets have outpaced emerging markets. As of mid-2024, the MSCI World Index delivered a total return of about 21 per cent, whilst the MSCI Emerging Markets Index returned 13 per cent (MSCI 2024a). The difference largely reflects the continued dominance of US technology companies within the developed index, as well as the relative weakness of China and other large emerging markets. Such short-term divergences are common and say little about longer-run expectations. Emerging markets can look deeply out of favour for years, only to reverse sharply.

The Medium Term: Five and Ten Years

Stretching the horizon to five and ten years paints a similarly challenging picture for emerging markets. Over the five years through mid-2024, the annualised return for MSCI World was around 12 per cent, compared with just 3.5 per cent for MSCI EM. On a ten-year view, the gap remained wide: developed markets returned close to 10 per cent per year, whilst emerging markets managed only about 3 per cent (MSCI 2024a). In cumulative terms, that meant an investor in developed markets nearly doubled their wealth, whereas the emerging market investor eked out only modest gains. The post-2010 decade has been particularly poor for EM, as US equities surged whilst many emerging markets grappled with structural slowdowns, governance challenges, and weaker commodity cycles (Anarkulova, Cederburg, and O’Doherty 2025).

The Long Term: Twenty Years and Beyond

The narrative shifts once we take a twenty-year perspective. From the early 2000s through 2021, emerging market equities actually outperformed, with annualised returns of nearly 10 per cent compared with about 8–9 per cent for developed markets (Dimensional Fund Advisors 2022). The 2000s were especially strong for EM, driven by globalisation, rising commodity demand, and rapid growth in economies such as China, Brazil, and India. Even with the setbacks of the 2010s, this earlier boom means that on a twenty-year basis, emerging markets still hold their own.

Looking even further back, since the inception of the MSCI EM index in 1988, annualised returns have been around 9–10 per cent, essentially matching or slightly exceeding the MSCI World (MSCI 2024b). In other words, despite repeated crises, currency devaluations, and political upheavals, a patient investor in EM over the past four decades has achieved broadly similar rewards to one in developed markets.

Figure 1. The historical performance of emerging market equities, as captured by the MSCI Emerging Markets Index compared to developed market equities, represented by the MSCI World Index. Over the past five and ten years, developed markets have clearly led, whilst over twenty years emerging markets have been stronger. Since 1988, both have delivered broadly similar annualised returns, though the path for EM has been much bumpier.

Volatility and Risk

The catch is volatility. Emerging market equities have consistently displayed standard deviations above 20 per cent, compared to 14–16 per cent for developed markets (Envestnet 2023). Drawdowns have been deeper and recoveries slower. During the global financial crisis, MSCI EM fell by about 65 per cent and took nearly ten years to reclaim its 2007 high, whilst developed markets were down 57 per cent but recovered within six years (Dimensional Fund Advisors 2022). These differences make the ride much harder for emerging market investors.

Risk-adjusted performance, however, has been similar in the very long run. Since 1988, both EM and DM have produced Sharpe ratios around 0.4 (MSCI 2024b). This means the extra return of EM has roughly compensated for the extra risk. But at the sub-period level the pattern has been uneven. The 2000s were a golden age for EM, with high risk-adjusted returns, whilst the 2010s were deeply disappointing.

Expected Returns: Should Emerging Markets Pay More?

The central argument for owning emerging markets has long been that investors should be compensated with higher expected returns for bearing greater risk. These risks include political instability, weaker institutions, less transparent corporate governance, and higher currency volatility. In theory, markets only clear if investors demand a premium to hold such exposures.

However, expected returns are not simply a function of economic growth. Whilst emerging economies may grow faster than developed ones, that does not automatically translate into higher equity returns. Much of that growth can accrue to new firms, state-owned enterprises, or consumers, rather than to the listed equity investor (Bekaert and Harvey 2003). What matters more are valuations, cash-flow growth, and discount rates.

At present, emerging markets do trade at lower valuation multiples than developed markets. Price-to-earnings ratios are typically several points lower, and dividend yields higher (MSCI 2024a). This valuation gap provides some basis for expecting somewhat higher future returns, at least relative to the United States, where multiples remain historically elevated. Long-term forecasts from research houses such as GMO and Research Affiliates, for instance, often project a higher equity risk premium for EM than for developed markets (Arnott, Kalesnik, and Wu 2021).

That said, higher expected returns do not guarantee realised outperformance. The last decade is a sobering example: despite lower starting valuations, emerging markets lagged badly behind developed equities. Risk premia can take years, even decades, to be delivered. Furthermore, many of the risks in emerging markets— geopolitical conflict, currency crises, capital flight—can create long stretches of disappointing results before any premium emerges.

In other words, it may be rational to expect a modest return premium from EM, but it is also rational to recognise that such a premium is highly uncertain in timing and size. For investors, the case for holding emerging markets is less about a guaranteed edge and more about broadening exposure to global sources of risk and return.

Implications for Investors

The lesson from this history is that emerging market equities are neither a guaranteed source of superior returns nor a permanently inferior asset class. They offer similar long-run performance to developed markets, but with much larger swings along the way. For investors with short horizons, that volatility can be punishing. For those with long horizons and a willingness to withstand drawdowns, emerging markets have been worth including.

In practice, this often means holding emerging markets as a diversifying slice of a global portfolio. The high-growth periods can boost returns when they arrive, whilst the rest of the portfolio tempers the volatility. Patience is essential. Emerging markets reward those who think in decades, not years.

References

Anarkulova, Aizhan, Scott Cederburg, and Michael S. O’Doherty. 2025. Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice. SSRN Electronic Journal. Posted November 1, 2023; revised July 10, 2025. https://ssrn.com/abstract=4590406

Arnott, Rob, Vitali Kalesnik, and Lillian Wu. 2021. ‘Forecasting Equity Returns: The Role of Valuations’. Financial Analysts Journal 77 (2): 67–87.

Bekaert, Geert, and Campbell R. Harvey. 2003. ‘Emerging Markets Finance’. Journal of Empirical Finance 10 (1–2): 3–55.

Dimensional Fund Advisors. 2022. The Evolution of Emerging Markets Investing. Austin, TX: DFA Research Note.

Envestnet. 2023. Emerging Markets: Risk and Return Characteristics. Chicago, IL: Envestnet Research.

MSCI. 2024a. MSCI Emerging Markets Index (USD) Fact Sheet, June 2024. New York: MSCI.

MSCI. 2024b. MSCI World Index (USD) Fact Sheet, June 2024. New York: MSCI.