Key facts
- Emerging market equity funds have gained 9.3% year-to-date.
- Latin America and emerging Europe equity funds are up around 24% year-to-date.
- US-focused equity funds have returned 0.17% year-to-date.
- Global equity funds are up 6.8% year-to-date.
- Dedicated EM equity funds attracted $10.6 billion in inflows in the first five months of the year.
- The MSCI Emerging Markets Index trades at a forward 12-month P/E of 11.96, below its 10-year average.
Emerging market equity funds are leading global performance this year, attracting significant investor inflows as they offer attractive valuations compared to overvalued US assets. Funds tracking equities in Latin America and emerging Europe have each gained around 24% so far this year, while broader emerging market equity funds are up 9.3%. This performance marks a notable reversal after years of lagging developed markets, which were previously buoyed by US tech stocks.
Investors have been reducing their exposure to US assets due to concerns over potential recession, fiscal instability, and unpredictable trade policies. According to LSEG Lipper data, dedicated EM equity funds saw a 43% increase in inflows in the first five months of the year compared to the same period last year, reaching $10.6 billion.
Malcolm Dorson, emerging markets senior portfolio manager at GlobalX, noted that emerging market equities are significantly under-owned by US investors, with an allocation of only 3-5% compared to their roughly 25% share of global market capitalization. He described this as a "dangerously short a deeply discounted and fast-growing asset class."
Analysts also point to improving fundamentals in emerging markets. Latin American countries are largely insulated from US tariffs due to their trade deficits, while Asian economies are focusing on domestic consumption. J.P.Morgan recently upgraded emerging market stocks to "overweight" from "neutral," anticipating that most developing economies, excluding Brazil, will ease monetary policy, potentially boosting economic activity and equity market appeal.
Specific markets like China and Hong Kong have seen gains in tech stocks, attracting foreign investors interested in AI and other tech firms. Mexico and Brazil are also seen as resilient despite trade tensions. Alison Shimada, portfolio manager at Allspring Global Investments, highlighted opportunities in China's consumer economy and noted that while India may be overbought, pockets of opportunity exist in sectors like power companies and non-bank financials.
At the end of last month, the MSCI Emerging Markets Index traded at a forward 12-month price-to-earnings ratio of 11.96, slightly below its 10-year average of 12.1. In contrast, the MSCI USA and MSCI World indexes were trading at 20.5 and 18.1, respectively, significantly above their 10-year averages.