Back in 2024 we argued in favor of forming portfolio investment strategies focused on small open economies such as OASES (Oriental Republic of Uruguay, Austria, Switzerland, Emirates (UAE) and Singapore), given that their neutrality in international relations and superior economic policies may deliver lower geopolitical risks premia for sovereign and corporate assets in international markets[1]. We accordingly suggested that OASES/OASES+ economies could provide portfolio investors with a range of low-risk and low-volatility assets with safe haven characteristics that could be operationalized via dedicated OASES funds and strategies. Since then developments in the world economy appear to have strengthened the case for such strategies, in particular with the emergence of the Future of Investment and Trade (FIT) Partnership in 2025 launched by small open economies such as Switzerland and Singapore. Apart from the practical steps undertaken by small economies to create their own platforms, recent studies from the academia appear to provide further empirical support for the outperformance of small countries in global financial markets, with the results of such estimates showing the potential for small emerging markets to form a distinct asset class for international portfolio diversification.
One such study by World Bank economists published in 2026 examines whether small low- and middle-income countries offer excess returns and diversification benefits to global investors[2]. The study employs monthly equity price data covering the period of 2015–2025 on listed stocks from low- and middle-income countries whose populations fall below a given threshold; it then evaluates the risk-adjusted performance of small emerging markets on the basis of a two-factor asset-pricing model. The key result of this World Bank study is that “portfolios restricted to countries with fewer than 20 million people—or less than 100,000 square kilometers—earn positive and economically meaningful alphas alongside low covariances with global-market returns”[3]. In particular, the study documents “a small-state premium among low- and medium-income countries (LMICs) with populations below roughly 20 million people”, with that pattern not being replicated by high-income countries.
These results lead the authors to single out a “small emerging market asset class” that is predicated on small developing economies being partially segmented, with the exposure to undiversifiable country-specific risk being amplified by limited financial integration. With such drivers and risks commanding higher compensation and creating scope for excess returns vs high-income and developed market equity benchmarks, the World Bank study concludes that “small low- and middle-income countries thus form a distinct frontier for international portfolio diversification”[4].
The above conclusions delivered by World Bank economists are broadly in line with earlier research that pointed to superior stock returns in small countries compared to large economies. In one such study published in 2017, G. Fisher et al explore whether country size (determined by aggregate stock market capitalization) had an effect on individual stock returns. The results of their study suggest that stocks from small countries tend to exhibit higher average returns than stocks from large countries, with “the country size effect being largely independent of the firm size effect and other country quantitative factors such as book/market and momentum”[5]. The study evaluates the country size effect through the prism of the “home bias” factor, in which local investors bear country-specific and idiosyncratic risk that may not be readily diversified away domestically, resulting in a much higher expected return (risk premium) to hold these stocks. The mixed picture with respect to the role of the “home bias” factor in the study may be due difficulties in disentangling other factors such as political instability/geopolitical risk that are also significantly impacting equity performance.
In fact, the geopolitical risk factor could prove to be increasingly significant in impacting countries’ financial market performance amid mounting geopolitical risks as the largest economic heavyweights tend to experience greater market volatility and shocks emanating from their geopolitical proclivities. At the same time, smaller economies have increasingly embraced non-alignment or neutrality, including ASEAN members, with platforms such as FIT increasingly focusing on forging ties with such economies to build networks of resilient supply-chains.
The recent emergence of FIT as a key international platform led by small economies that are largely neutral, may further skew financial market performance in favor of small advanced and emerging markets. This platform created recently by small countries is likely drive their greater integration into world trade and capital markets – a process that could result in a compression of the equity risk premium through lower exposure to risk (via more resilient supply chains) and superior quality of economic policies. The FIT platform should thus enable OASES-type small economies to realize corporate gains via improved competitiveness and corporate margins.
Indeed, the key feature of the FIT platform is its potential to drive efficiency and improved performance at the micro-level of companies and sectors. In this respect, the FIT platform that brings together small developed and emerging economies may boost convergence and catch-up growth of small developing economies via technological inclusivity and the integration of companies into more resilient supply-chains. The improved corporate-level performance and the related financial market dynamics may in turn favor the equity segment to a greater degree compared to the EU-style convergence characterized by macro-level convergence criteria and the compression in bond yields of the economies of Southern and Eastern Europe. Recent World Bank research from 2025 points to the relatively stronger role of micro-factors such as corporate-level performance compared to sectoral and macro-level drivers of equity market dynamics across countries[6]. The same study uncovers significant heterogeneity in terms of sectoral performance, singling out high-growth sectors such as financial and high-tech as drivers of superior equity performance – these may be precisely the areas where economies such as Switzerland and Singapore within the FIT platform may drive positive spillover effects for catch-up growth and equity performance in FIT small emerging markets.
At the same time, by integrating these small markets into the global investment universe, FIT reduces capital segmentation, increases foreign ownership, and lowers the cost of equity. As noted in the above World Bank study (2026), “integration erodes the segmentation that underpins the small-state premium (the compensation for structural vulnerability), reducing the compensation investors require to hold local assets”[7]. Another recent study that employs machine-learning to identify drivers of equity market performance maintains that “consistent with the partial segmentation perspective, return predictability persists in small, illiquid, and unintegrated markets and weakens over time as the constraints on capital mobility diminish”[8]. This could be particularly relevant for the less integrated small emerging markets whose high-risk premium – the primary driver of their historical outperformance – may be undermined by their greater integration into world capital markets.
On the whole, however, since the FIT platform mostly includes small economies that possess relatively high levels of income and pursue high quality policies/governance, the “integration effects” are unlikely to play a dominant role in the impact of FIT on its members’ equity performance. While for the less liquid and integrated equity markets such as Uruguay or Costa Rica the dissipation of segmentation/integration effects may be more significant, these are likely to be contained and take time, while in the short- to medium-term the dominant factors are likely to be corporate performance and reduced volatility. Indeed, our earlier analysis of OASES markets revealed some of the highest levels of volatility in Latin American markets across EM equities[9] – a reduction in volatility would serve to increase the Sharpe ratio for equity performance of such small emerging markets.
Through a distinct positioning of small economies on the international arena, the FIT platform addresses a major structural shift, whereby geopolitical fragmentation results in a premium for neutral, small supply-chain hubs. With most of the members of the FIT platform being neutral, the dividends of lower geopolitical shocks and greater access to resilient supply chains is likely to outweigh the effects of lower market segmentation alluded to in the 2026 World Bank study. In this respect, if FIT were to opt for a FIT+ outreach to develop ties with low- and middle-income small countries (LMIC), the positive factors for financial market performance could extend beyond equities to include FX and fixed income segments. In this case, there could be scope to explore the possibility of forming FIT dedicated funds that track the performance of those small emerging market economies whose participation in the platform may be accompanied by a compression in sovereign/corporate yields or improved performance in the equity space – perhaps analogously to the New Europe and Convergence funds with respect to EU accession countries.
Overall, while there is a growing volume of empirical research that points to the superior performance of small markets in the equity space, more research is called for in exploring the drivers of this outperformance, most notably with respect to its link with geopolitical risk/supply chain resilience. The recent creation of investment platforms such as FIT provides a foundation for greater integration of FIT/OASES financial market instruments into investment fund strategies. As the FIT advances in building resilient supply chains and insulating its members from geopolitical/protectionist shocks, OASES/FIT indexes may increasingly serve as low-volatility/low geopolitical risk benchmarks in portfolio investment strategies in line with similar indexes and sub-indexes such as the MSCI World Minimum Volatility Index.
[1] https://brics-plus-analytics.org/oases-in-international-financial-markets-the-dividends-of-neutrality/
[2] Pedraza, Alvaro; Ratha, Dilip. 2026. Small Emerging Markets: A New Asset Class. Policy Research Working Paper; 11307. © World Bank. https://openknowledge.worldbank.org/entities/publication/bfa00454-8b52-4e91-b402-dcc15e6cb0b0
[3] Pedraza, Alvaro; Ratha, Dilip. 2026. Small Emerging Markets: A New Asset Class. Policy Research Working Paper; 11307. © World Bank. https://openknowledge.worldbank.org/entities/publication/bfa00454-8b52-4e91-b402-dcc15e6cb0b0
[4] Pedraza, Alvaro; Ratha, Dilip. 2026. Small Emerging Markets: A New Asset Class. Policy Research Working Paper; 11307. © World Bank. https://openknowledge.worldbank.org/entities/publication/bfa00454-8b52-4e91-b402-dcc15e6cb0b0
[5] Gregg S. Fisher, Ronnie Shah, Sheridan Titman. The Journal of Portfolio Management. Fall 2017, 44 ( 1) 127 – 141. DOI: 10.3905/jpm.2017.44.1.127; https://www.pm-research.com/content/iijpormgmt/44/1/127
[6] https://openknowledge.worldbank.org/entities/publication/308126f3-84ca-420c-a8fb-3c8707b817a8
[7] Pedraza, Alvaro; Ratha, Dilip. 2026. Small Emerging Markets: A New Asset Class. Policy Research Working Paper; 11307. © World Bank. https://openknowledge.worldbank.org/entities/publication/bfa00454-8b52-4e91-b402-dcc15e6cb0b0
[8] https://www.sciencedirect.com/science/article/pii/S1057521924005015
[9] https://brics-plus-analytics.org/oases-in-international-financial-markets-the-dividends-of-neutrality/
Yaroslav Lissovolik, Founder, BRICS+ Analytics
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