In a new research paper published by Man Group1, Mickael Nouvellon, Co-Head of Core Equity Strategies, Systematic, and Dawei Zhou, Portfolio Manager, Systematic, make the case that systematic EM equity strategies carry a structural gap, and that stock selection alone cannot close it.
"Stock selection is the primary driver of alpha in EM equities and the most fertile ground for systematic strategies," Nouvellon and Zhou write. But country-level returns operate under a different logic. "Country-level returns, however, are a different story. Macro forces tend to dominate: monetary policy cycles, terms of trade, external demand and financial conditions."
Country risk in EM is measurably larger than in developed markets. Man Group's risk decomposition shows a substantially higher country risk contribution in EM as a share of total portfolio risk, and cross-country return dispersion in EM consistently exceeds DM over time. The heterogeneity of economic structures, policy regimes, and external vulnerabilities creates a wide and enduring opportunity. The problem, as Nouvellon and Zhou show, is that most systematic equity strategies are not designed to capture it. "Country timing has traditionally been the domain of discretionary managers, whose macro narratives and on-the-ground conviction shape top-down positioning."
The Failure Mode of the Simple Approach
The natural remedy is a cross-sectional model blending relative valuation and 12-month price momentum into long/short country positions. Nouvellon and Zhou test it rigorously and find it wanting. Because both inputs are slow-moving, the resulting tilts barely rotate. South Korea illustrates the problem: its chronic valuation discount, driven by corporate governance concerns and a concentrated industrial structure, kept the fundamental model long Korea for most of two decades, regardless of macro conditions.
The numbers make the case. A gross Sharpe ratio under 0.5 over the 2008 to 2026 backtest, significant turnover, and more than 40% of cumulative gains concentrated in the past 12 months alone. The 2022 Russia drawdown further exposed the model's fragility. More fundamentally, the model recycles information already embedded in stock selection. Nouvellon and Zhou observe that "country tilts emerge as a by-product of bottom-up stock selection, rather than as a deliberate, risk-budgeted allocation decision," limiting any diversification benefit.
A Two-Lens Architecture
The macro-based model Nouvellon and Zhou develop approaches country allocation through two simultaneous lenses. A time series dimension evaluates each country against its own history. A cross-sectional dimension compares all countries relative to each other at the same point in time. Together, these form a blended signal retrained continuously on point-in-time macroeconomic data spanning financial conditions, labour markets, trade dynamics, and inflation.
The model is built for EM's nuances. It recognizes that rising oil prices affect net-importer South Korea very differently than net-exporter Saudi Arabia. It models how major economic blocs, US rates and Chinese industrial output among them, spill into individual EM economies through specific trade linkages. "Where discretionary managers have long relied on narrative and on-the-ground judgment, systematic managers can now bridge that gap with a repeatable, data-driven process, backing macro conviction with hard data."
The South Korea case study across 2021 to 2026 demonstrates what adaptive positioning produces. Where the fundamental model held a static multi-year long, the macro model rotated repeatedly: from sovereign credit concerns to trade stress and energy exposure in 2022, toward domestic momentum in early 2023, and then a significant positive move in early 2026 as semiconductor strength and softening oil prices lifted Korea's export position.
The Performance Gap
Over the 2008 to 2026 window, the macro timing model delivered a gross Sharpe ratio of 0.85, against the fundamental model's sub-0.5, with 28% lower turnover and a maximum drawdown of 4.6% versus 8.7%. Its daily returns correlate with the fundamental model at just 0.08, making it a genuinely uncorrelated source of alpha.
"This is not a replacement for stock selection but a complement to it," Nouvellon and Zhou argue: "a systematic overlay that transforms country risk from an unmanaged residual into a deliberate, data-driven source of alpha. As macro differentiation across EM continues to deepen, we believe the case for integrating this capability into institutional investment processes will only strengthen."
Five Key Takeaways for Advisors and Investors
- Country risk in EM is structurally elevated relative to DM, and most systematic equity strategies are not designed to manage it. The result is unintended macro exposure accumulating quietly in the portfolio.
- Valuation and momentum country signals underperform because both are slow-moving. Positions stay static for years, which is precisely when macro regime shifts make adaptive positioning most consequential.
- A macro-based country timing model combining time series and cross-sectional lenses more than doubles the Sharpe ratio of a fundamental approach, while lowering turnover and cutting maximum drawdown nearly in half.
- Because the macro model is built on economic data rather than price or valuation inputs, its returns are virtually uncorrelated to stock selection alpha, providing genuine diversification within a systematic EM framework.
- For advisors evaluating EM allocations, the relevant question is no longer only which securities a manager selects, but whether country risk is managed as a deliberate, separately budgeted source of return.
Footnote:
1 Nouvellon, Mickael, and Dawei Zhou. "Beyond Stock Selection: A Systematic Approach to EM Country Timing." Man Group Insights, 21 Oct. 2026, https://www.man.com/insights/beyond-stock-selection.
