Emerging-market stocks are attracting attention, having surged by 15.2% this year through August 9, outperforming developed-market stocks. Yet investors who seek to increase exposure by buying a benchmark may miss out on some of the best opportunities.

In the MSCI Emerging Markets Index, about 78% of the market capitalization (excluding China) is in countries growing slower than average. For example, Korea and Taiwan (two fairly mature economies) together account for more than a quarter of the total benchmark. Yet India accounts for only 8% of the benchmark, even though it has a population of more than 1.2 billion, attractive demographic trends and a dynamic economy benefiting from numerous market-friendly reforms.

China’s benchmarks also pose concentration risks. The MSCI China Index is heavily skewed toward state-owned companies, which tend to have fairly poor corporate governance and suffer from heavy government intervention. State-owned enterprises also weigh heavily in the benchmarks of other countries like Brazil and Russia. In addition, attractive areas of investment with strong long-term growth prospects like healthcare or education together account for less than 4% of the MSCI Emerging Markets index.

After five tough years, it’s a great time to consider reallocating to emerging markets, in our view. But we believe that investing in an index is the wrong way to go. With an active and selective approach, equity investors can benefit from pockets of rapid growth across the developing world that should deliver strong returns as a rebound unfolds.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.

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