Emerging markets may finally be ready to take the spotlight. Years of underperformance and low valuations have created room for a rebound, just as US equities appear fully priced. With Chinese tech leading a quiet rally and capital flows poised to broaden, investors are taking a fresh look at opportunities beyond Wall Street.
US tech stocks had strong momentum, with the Nasdaq peaking last November, but Chinese tech is now taking the lead. Investors in emerging markets are preparing for capital flows to broaden towards these regions, supported by their low valuations.
“After years of growth, particularly in the US technology sector, the valuations of US equities have become increasingly stretched,” said Paulo Salazar, head of emerging markets equities at Candriam. “This creates an opportunity for a reallocation of capital towards emerging markets.”
“The worst of the headwinds seems to be behind us, but the road ahead remains uncertain.”
Edward Evans, Ashmore
Edward Evans, a senior equity portfolio manager at Ashmore, a fund manager specialising in emerging markets, noted that current valuations in the US leave little room for error.
“In the US, all expectations must be met because there is no margin for disappointment,” he said. “Meanwhile, the risk-reward profile in emerging markets is far more attractive, as a significant equity risk premium is already priced into stocks.”
Emerging markets trade at a 50 percent discount compared to the S&P500, with a price-to-earnings ratio of 11, versus 22 in the US. According to emerging market investors, it is these markets that could, unexpectedly, take over the mantle from “US exceptionalism”.
Low investor positioning
According to Sammy Suzuki, head of emerging markets at Alliance Bernstein, investors are underweight in emerging market equities. The average allocation in a portfolio has historically been around 8.4 percent, whereas it currently stands at approximately 5.3 percent. A return to the historical allocation average would result in an inflow of 900 billion dollars into emerging markets, significantly impacting the performance of this asset class.
Disappointing returns and the aforementioned attractiveness of the US have made the asset class less popular among investors.
“China, a heavyweight, suffered from a severe housing crisis, which soured overall market sentiment towards emerging economies,” said Ashmore’s Evans. “The worst of the headwinds seems to be behind us, but the road ahead remains uncertain.”
Disappointing emerging markets performance
Improved market sentiment in China
Sentiment shifted in January when DeepSeek caused volatility in Nvidia, bringing China—the key determinant for emerging market sentiment—back into the spotlight.
“President Xi Jinping underscored the importance of the private sector and, with a handshake with Jack Ma (Alibaba) in February, effectively ended the tech crackdown,” said Evans. “This gave the Hang Seng Tech Index a boost, pushing it into a bull market and outperforming major global indices.”
He sees plenty of interesting companies to invest in within China. “The quiet rally in Chinese tech, with DeepSeek as an example of efficiency gains, demonstrates how rapidly Chinese companies continue to innovate.”
Another reason why China may be attractive to investors is that the country appears to have suffered limited damage from the trade war.
“Globalisation is shifting towards ‘slowbalisation’,” said Alessia Berardi, head of emerging macro strategy at the Amundi Investment Institute, in a report on emerging markets. “Although tariffs and restrictions have been increasing for years, this has primarily led to shifts in trade routes rather than complete deglobalisation.”
However, the situation could worsen if trade policies become more aggressive. China is responding by strengthening trade with neighbouring Asian countries, mitigating some of the impact of Western trade barriers.
More emerging markets follow
The investors we spoke to see fewer short-term opportunities in markets such as India and Mexico, despite strong structural fundamentals. Both countries have undergone corrections this year.
“In India, we continue to see interesting companies that could become attractive at a later stage,” said Berardi. “Meanwhile, in Mexico, the nearshoring trend remains intact. Although the market is currently volatile due to Trump’s tariffs, President Sheinbaum will have to carefully navigate the relationship with the US.”
In South Africa, the economy remains under pressure due to energy crises, political uncertainty, and high unemployment. However, according to Evans, there is some hope.
“A new political coalition could bring stability, paving the way for structural reforms and economic recovery,” he said.