Emerging market equity funds have been dominating the global market performance this year, thanks to attractive valuations, years of under-positioning by investors, and a reprieve from economic pressures following U.S. President Donald Trump’s decision to pause tariffs.
According to data compiled by LSEG, funds tracking equities in Latin America and emerging Europe have seen gains of around 24% each so far this year, while broader emerging market equity funds have risen by 9.3%. Some standout performers include equity funds focused on Morocco, Colombia, Greece, Brazil, and Portugal, each returning more than 30% this year. In comparison, U.S.-focused equity funds have only seen a minimal return of 0.17%, with global equity funds up by 6.8%.
This shift in market performance marks a reversal after years of emerging markets lagging behind developed markets. The surge in emerging market investments comes as investors are selling off U.S. assets amid concerns of a possible recession, fiscal instability, and uncertainty surrounding Trump’s policies.
Dedicated EM equity funds have attracted $10.6 billion in inflows in the first five months of the year, a significant 43% increase over the same period last year. Malcolm Dorson, an emerging markets senior portfolio manager at GlobalX, attributes this influx to the fact that emerging market equities are severely under-owned by U.S. investors, with allocations ranging from just 3-5%, well below the 10.5% weighting in the MSCI Global Index.
Analysts also point to improving fundamentals in emerging markets, with Latin American countries being less impacted by tariffs due to their trade deficits with the U.S. Additionally, Asian economies are shifting towards domestic consumption, boosting their attractiveness to investors. J.P.Morgan recently upgraded its rating on emerging market stocks to “overweight” from “neutral,” citing expectations of monetary policy easing across developing economies.
Tech stocks have been a significant driver of gains in Chinese and Hong Kong equities, attracting foreign investors keen on investing in artificial intelligence and other tech firms. There are also opportunities in Mexico and Brazil, which have shown resilience amid trade tensions, according to Alison Shimada, a portfolio manager at Allspring Global Investments.
The MSCI Emerging Markets Index is currently trading at a forward 12-month price-to-earnings ratio (P/E) of 11.96, slightly below its 10-year average. In contrast, the MSCI USA and MSCI World indexes are trading well above their 10-year averages, indicating potentially overvalued markets.
Overall, emerging markets are presenting a compelling investment opportunity for investors seeking growth and diversification. With improving fundamentals, attractive valuations, and a shift in investor sentiment, emerging market equities are poised for continued outperformance in the global market landscape.
