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A screen displays the S&P Index after the closing bell on the floor at the New York Stock Exchange (NYSE) | Photo Credit: JEENAH MOON
While the most widely tracked gauge of developing-nation stocks, the MSCI Emerging Markets Index, is beating the S&P 500 for the first time since 2017, returns for sub-indexes in Latin America and Eastern Europe are as much as four times higher.
That’s because the benchmark global indexes are dominated by companies in Asia, the region most impacted by President Donald Trump’s tariff threats that has also been the biggest laggard in an otherwise extraordinary year for the asset class.
Out of 167 emerging-market equity funds with a global mandate, just four have returned more than 20 per cent so far this year, and overall the benchmark is up just over 14 per cent. Meanwhile, MSCI’s sub-index for Latin America is up 25 per cent, while the Eastern Europe sub-index is up 45 per cent. That compares with an advance of less than 5 per cent on the S&P 500.
Looking for better-than-benchmark gains in emerging markets via regional or country-specific funds — or funds excluding China — has been a popular theme on Wall Street over the last few years as strategists looked for novel ways to overcome years of EM underperformance versus the US stock market. This year it’s paying off big, with regional funds such as Barings’ East European fund and Schroders’ Latin America fund topping the rankings, boosted by a weaker dollar and stronger currencies in those regions.
“We are in a different world and there are ways to easily disaggregate global exposure,” said Dina Ting, head of global index portfolio management at Franklin Templeton. “Now you can see it in numbers that this application does pay, especially in the face of per-country tariffs” from the US.
While differences in regional gains are expected and the Asia sub-index’s return at 12 per cent this year has also beaten the US, the performance gap with other regions has been eye-popping, with the best year-to-date gains for emerging European stocks since at least 1996 and the biggest gains in Latin America since 2009.
But investors in the global indexes have hardly any exposure at all to those regions.
Asian companies account for about 80 per cent of the MSCI global emerging-market index, with China alone accounting for more than 25 per cent. By comparison, Latin American heavyweights Brazil and Mexico together are only about 6 per cent, while the country with the biggest weighting in the entire Europe, Middle East and Africa region is South Africa, at less than 3 per cent.
That leaves investors in the EM benchmark with only about 1.5 per cent of their portfolio invested in Eastern European companies, missing out on rallies in Slovenia, Poland, Hungary and the Czech Republic, all of which surged by about 40 per cent to as much as 55 per cent in dollar terms since the start of the year.
The global EM benchmark is concentrated in others ways, too. One company, Taiwan Semiconductor Manufacturing Co., has a 10 per cent weight by itself, while adding just a few others — Tencent Holdings, Alibaba Group and Samsung Electronics, brings it to 20per cent. By comparison, the top individual stock in the developed market index, Nvidia Corp., has a weighting of less than 5 per .
On Monday, the MSCI EM Eastern Europe Index was up 0.8 per cent, gaining for the third day, while the global benchmark index was down 0.5 per cent as TSMC stock fell 2.5 per cent in dollar terms.
For investors wary of tariff tensions, the exaggerated exposure of benchmark emerging-market indexes to the export-oriented economies and companies of Asia is increasingly a concern.
“The China-US split is going to get worse,” said Teeja Boye, a portfolio manager at Sands Capital Management. “We do see efforts on both the US and Chinese sides to stabilize the situation, but from the view point of investors, the next 12 to 18 months will be a time for diversification.”
In contrast, Eastern European markets have benefited from a surge in broader European markets as investors moved away from the US due to a weaker dollar, ballooning US debt, and policy uncertainty that’s also spurred pledges of massive military spending from the European Union.
After losses in 2024, Latin American markets also rose as Mexico neared a trade deal with the US and monetary policy in Brazil boosted equity returns.
“Many emerging markets are moving a lot more on country-specific reasons this year,” said Anna Mulholland, head of research and management for EM Equities at Pictet Asset Management, which manages $3.5 billion in emerging-market equities.
“We have seen how Brazil is leading the gains in anticipation that the central bank has finished hiking rates, while global emerging markets’ performance has been curtailed by global concerns like the Middle East conflict and China’s challenge in stimulating consumption.”
After their first-half rally, Latin American stocks have reduced their valuation discount relative to other emerging markets to 25 per cent from 33 per cent, while in Eastern Europe the ratio came down to 27 per cent from 38 per cent, a sign that gains could be petering out for the rest of the year.
Meanwhile, new rally leaders are emerging in other regions. Investors are paying a higher premium for stocks in markets including Israel and South Korea, where higher government expenditure and technology opportunities are driving momentum.
The Tel Aviv benchmark now trades at nearly the same valuation as broader emerging markets, erasing a discount of as much as 55 per cent two years ago.
The discount on South Korea’s main index is now 18 per cent lower, rebounding from a 31 per cent gap amid a political crisis at the end of last year.
Whichever markets lead returns in the next six months, regional discrepancies are likely to persist as tariffs, technological progress and geopolitical conflict upend global trading relations, and that argues for a more discerning approach to investing in emerging markets than following global benchmarks.
“One needs to actually reconsider one’s whole understanding of the emerging-market asset class because it’s a moniker which was coined in the 1980s and it’s been emerging for a very, very long time now,” said Robert Holmes, a partner and portfolio manager at North of South Capital.
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©2025 Bloomberg L.P.
Published on June 30, 2025
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