Are investors getting EM exposure or just China with some other EM risk in their equity benchmark?

Many equity investors will hold or benchmark their EM exposure with the MSCI emerging market equity index, but a close look will show that the index has changed radically through time. The top country exposure has switched several times through the decades, and we now have an index which is dominated by China. 

Given that China stocks have been hit hard from slower economic growth, geopolitical issues, changes in government regulation, and a growing real estate crisis starting with Evergrande, the EM benchmark has also been driven lower. In the last year, EEM has shown a decline but the EM index less China EMXC has gained 14 percent. 

A Goldman Sachs report shows the dominance of China in the MSCI index. China dominates in a way that has never been seen before and is the largest single country share in the history of the index. China is the second largest equity market globally and its weight in the MSCI EM index has doubled in the last five years. 

Not only is China a large weight in the index, but it has a low correlation with other EM stocks. The industry mix is different, and the drivers of return are different from other components of the EM equity index. This problem also exists for EM bond indices. 

China is an outlier from the rest of the EM market. It is an outlier with other developed markets, yet it cannot be ignored. Every investor must have a China opinion. Every investor must now think about EM investing with and without China.