Emerging Markets: A New Investing World

Summary

• Emerging market equities significantly outperformed U.S. & global stocks in 2025 & Q1 2026 after years of underperformance.
• The MSCI Emerging Markets Index rose 34% since the previous year, more than double the return of U.S. large cap stocks.
• U.S. stocks declined more than 4% in Q1 2026 while EM equities remained mostly flat.
• EM outperformance reflects improving earnings potential & represents an inflection point driven by secular shifts & specific catalysts.
• Key catalysts include a geopolitically driven world, AI, Indian productivity & growth potential, & Chinese investments in value-add industries.
• EM assets are supported by weakness in the U.S. dollar, which the text states has likely entered a bear market.
• The U.S. dollar peaked in 2022 & has since declined more than 10% due to shifts in U.S. foreign & trade policy & uncertainty regarding Federal Reserve independence.
• EM valuations as a percentage of U.S. equities have trended below averages for a decade & remain attractive compared to developed market peers.
• Active managers aim to identify secular growth themes early to capture return potential before market pricing reflects them.
• A shift toward security priorities has driven deglobalization, an industrial renaissance, & migration of wealth to owners of real assets & industrial pricing power.
• Emerging markets have higher exposure to impacted industries including manufacturing, energy, commodities, infrastructure, food/agribusiness, technology, & defense.
• EM leading companies are crucial elements of the AI value chain, with Taiwan & Korea serving as semiconductor manufacturing centers.
• Chinese models have generated significant AI results with a fraction of the capital deployed in the United States.
• EM companies have begun to outperform U.S. hyperscalers & the Magnificent 7 complex due to their increasing share of AI spend.
• India has implemented productivity-enhancing economic reforms that are accelerating economic formalization, raising tax collections, & attracting foreign direct investment.
• India offers exposure to digitization, localization, formalization, & rising market share concentrated in leading businesses & entrepreneurs.
• Multinational companies are seeking diversification from Chinese manufacturing & supply chains, creating opportunities for India's domestic growth & logistics infrastructure.
• China has shifted investment to value-add industries including AI, technology, semiconductors, humanoid robotics, automated driving, robotaxi development, & biotechnology.
• China is developing its own AI ecosystem independent of the United States, utilizing solutions that deliver strong results for significantly less capital.
• The Chinese economy offers exposure to more than a billion consumers & has aggressively followed a roadmap for energy development & production.
• Regions like Europe, Canada, & LATAM are beginning to explore deeper relationships with China as U.S. foreign policy evolves.
• EM equities are considered relatively inexpensive by long-term measures & are positioned for a sustained period of outperformance.