Part 1: Emerging markets – a short-term window too good to ignore

After years of US mega-cap dominance, a powerful rotation is underway. Emerging markets (EM) are back in favour – and a rare alignment of short-term catalysts are driving the shift.
 

1. Momentum is building

EM equities have returned over 20% year-to-date, comfortably outpacing developed markets and the S&P 500 (1). This surge reflects a rotation away from stretched US valuations after a long run led by a handful of tech giants into regions offering better value and growth.
 

2. Dollar weakness is a powerful tailwind

A softer US dollar is a major tailwind for EMs – reducing borrowing costs and boosting local demand – with many analysts expecting further declines. This currency dynamic often amplifies returns for international investors.
 

3. Growth forecasts are rising

Emerging economies are expected to outpace developed markets in 2025. According to the IMF, 19 of 24 EMs are forecast to grow faster than the US this year (2). From India to Brazil, strong domestic demand and industrial activity are creating a supportive backdrop for corporate earnings – and for equity market performance.
 

4. Valuations at historic lows

Despite recent gains, EMs still trade at a 45% discount to developed markets – the widest gap in over two decades. Historically, such deep value has preceded long stretches of outperformance.
 

Institutions are going overweight

As macro conditions shift and valuations remain attractive, institutional investors are rebalancing. Bank of America reports that fund managers are overweight EMs for the first time in more than two years. It has called EMs “the next bull market,” and the Financial Times reports institutional investors are “piling in.”(3)
 

But retail portfolios are lagging

While institutions are reallocating, many retail portfolios haven’t kept pace. EMs represent 40% of global GDP, yet many global equity indices allocate just 10%.(4) That’s a structural mismatch – and a tactical opportunity.

Emerging markets are outperforming, undervalued, and underowned. For investors underexposed to EMs, this short-term window offers a compelling entry point. In Part 2, we explore why it could also be the beginning of a longer-term shift – and a rare opportunity to invest in structural growth at a discount.