Investing in emerging markets is generally seen as involving a different set of challenges and risks when compared with their more mature counterparts.

In this context small cap emerging market firms add another layer of risk, given smaller businesses are more prone to failure. However, there are some interesting dynamics behind smaller companies in the developing world which are worth acknowledging too.

As a starting point it is useful to analyse the differences between the larger and smaller EM firms. To do this we’ve employed the relevant MSCI indices – MSCI Emerging Markets (dominated by larger businesses) and MSCI Emerging Markets Small Cap – and we can draw some conclusions based on both the sector and geographic breakdown.

As indicated by the charts, the small cap index has a greater skew towards technology – although only slightly. Perhaps more notable is the greater degree of diversification more widely across various sectors.

Only three industries in the main emerging markets index have double-digit weightings compared with five in its small cap counterpart.

This greater diversification is evident on a country basis too. China has the largest weighting at 43.2% in the main index while the small cap version has Taiwan with the biggest representation at a little over half that level.

In terms of performance, on a five-year view the Emerging Markets index has beaten Emerging Markets Small Cap index with respective net returns of 7.9% and 3.3% up to 31 October 2020.

This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here

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