Emerging market stocks are once again at the center of investor interest, driven by growing disillusionment with US assets and a renewed search for growth abroad.
The shift comes as Moody’s recent downgrade of the US credit outlook and a spike in Treasury yields have shaken confidence in the strength of American financial markets.
Adding to the momentum, Bank of America declared emerging markets as “the next bull market” in a recent note to clients.
“Weaker US dollar, US bond yield top, China economic recovery… nothing will work better than emerging market stocks,” said Michael Hartnett, chief investment strategist at BofA Global Research.
On Monday, JPMorgan followed suit, upgrading its rating on emerging market equities from neutral to overweight, citing improving US-China relations and favourable valuations.
Performance gap between US and EM widens
The MSCI Emerging Markets Index, which tracks equities across 24 countries, has risen 8.55% year-to-date, sharply outpacing the US benchmark S&P 500’s modest 1% gain in the same period.
The divergence has become more pronounced since April 2, when former President Donald Trump unveiled a new wave of “reciprocal” tariffs.
While both US and global markets initially fell in the wake of the announcement, emerging market stocks staged a robust recovery.
Between April 9 and April 21, the MSCI Emerging Markets Index climbed 7%, while the S&P 500 declined by more than 5%.
Despite a mild rebound in US assets since, sentiment remains fragile.
The US 30-year Treasury yield surged past 5% on Monday, touching levels last seen in November 2023.
Meanwhile, US equities broke a six-day winning streak on Tuesday, as Moody’s downgrade reignited market concerns.
Why are EM equities poised to outperform?
The unfolding trend may signal the start of a broader rotation in global asset allocation.
Malcolm Dorson, head of the active investment team at Global X ETFs, believes emerging market equities are now in a unique position to outperform.
“After underperforming the S&P over the past decade, EM equities are uniquely positioned to outperform over the next cycle,” Dorson told CNBC.
He pointed to a confluence of factors including a softer US dollar, underweighted investor positioning, and strong growth prospects at discounted prices.
According to his data, US investors typically allocate only 3% to 5% of their portfolios to emerging markets, compared to the 10.5% weight of EM in the MSCI Global Index.
JPMorgan notes that EM stocks are trading at around 12 times forward earnings—significantly lower than their developed market counterparts.
India, Brazil, and Argentina attract spotlight
Among the emerging economies, India stands out as the strongest long-term growth story, underpinned by rising domestic demand.
Dorson also highlighted Argentina for its cheap valuations, and Brazil and Greece for recent sovereign credit upgrades that have improved their investment case.
“We could be at the start of a new rotation,” said Mohit Mirpuri, equity fund manager at SGMC Capital.
“After years of US outperformance, global investors are beginning to look elsewhere for diversification and long-term returns.”
Ola El-Shawarby, a portfolio manager at VanEck, added that previous EM rallies were often cut short by fleeting catalysts.
This time, she argues, the combination of undervaluation, improved fundamentals, and structural reforms could provide longer-lasting momentum.
“Emerging markets are firmly back in the conversation,” she said.
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