In our earlier post on Diversification and our deep dive into portfolio construction trade-offs, we showed that owning many assets does not automatically mean you are diversified.
More recently, we introduced factor investing at the MSCI ACWI level, focusing on the drivers that shape global equity returns beneath the surface.
This article builds on that foundation and adds another critical layer: region.
Specifically, we ask a simple but underappreciated question: how do the same equity factors behave in Emerging Markets compared with Developed Markets?
This piece was inspired by a recent discussion on what “real” diversification looks like inside an equity portfolio and why correlation matters, shared by Harald Berlinicke, CFA.
Developed vs Emerging Markets: What Is the Difference?
Developed Markets (DM) are economies with mature financial systems, deep capital markets, and relatively stable political and legal institutions. Examples include the United States, Canada, Western Europe, Japan, and Australia.
Emerging Markets (EM) are countries that are still developing economically and financially. They often offer higher long-term growth potential, but come with higher volatility, currency risk, and sensitivity to global capital flows.
Both groups are represented inside MSCI ACWI, but they respond very differently to global growth, inflation, interest rates, and liquidity conditions.
This is why, after analysing factors at the global ACWI level, it is essential to break the picture apart and study how those same factors behave region by region.
(Source: MSCI ACWI Index Factsheet)
How to Read the Charts
Each chart in this article shows 12-month rolling relative performance:
Emerging Markets factor return minus Developed Markets factor return.
When the line is above zero, the EM factor outperformed its DM counterpart over the prior year. When it is below zero, DM led.
Shaded regions highlight major macro periods, including the Eurozone debt crisis, the COVID-19 shock, the post-COVID liquidity surge, and the inflation-and-rate-hike regime that followed.
Momentum: Fast Upside, Fast Reversals
Momentum in Emerging Markets behaves like a higher-octane version of Momentum in Developed Markets.
During risk-on periods, global capital flows into EM can cause Momentum strategies to surge. But when conditions tighten, reversals tend to be sharp and unforgiving.
(Source: MSCI – Exploring Factor Investing in Emerging Markets)
Value: Cyclical and Currency-Sensitive
Value in Emerging Markets is deeply influenced by currency strength, global rates, and commodity cycles.
Periods of dollar strength and tightening often hurt EM Value more than DM Value, while reflationary and commodity-driven recoveries can produce powerful rebounds.
(Source: Quoniam – Factor Investing in Emerging Markets)
Quality: Stability Is Relative
Quality aims to identify companies with strong balance sheets and stable earnings. In Developed Markets, this often delivers defensive characteristics.
In Emerging Markets, Quality still improves fundamentals within the region, but country risk and external financing conditions can dominate outcomes.
(Source: MSCI Quality Index Methodology)
Minimum Volatility: Defensive, But Not the Same
Minimum Volatility behaves very differently across regions. In Developed Markets, it has historically delivered smoother drawdowns and defensive characteristics.
In Emerging Markets, lower liquidity, concentration, and currency shocks can limit how defensive Min Vol strategies truly are.
(Source: MSCI Minimum Volatility Index)
What This Means for Investors
Emerging and Developed Markets are not interchangeable, and neither are the factors inside them.
The same factor can feel defensive in one region and highly cyclical in another. True diversification considers both what you own and where you own it.
This regional lens complements our earlier global ACWI factor analysis and highlights why diversification is about drivers, not just tickers.
All charts are based on MSCI factor indexes using monthly data and are shown for educational purposes only.
Disclaimer:
The content on this blog (“Zorroh”) is for educational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Investing involves risk.