The EM Outperformance Cycle Begins

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Since 2008, U.S. stocks have absolutely crushed the rest of the world.

The S&P 500 rose 592% over the 17 year period from July 2008 to July 2025. The MSCI world index (excluding the U.S.) was up 140%.

And the MSCI emerging markets index was up just 92%.

The chart below tells the story:

Source: Charlie Billelo

It’s been an incredible period of outperformance for American stocks. We’ve torched Europe, China, Japan, South America, everybody. You can’t even call it a competition. It was a massacre.

But these things are cyclical. From 2001 to 2010, emerging markets soared 330% while S&P 500 investors treaded water. It was basically a lost decade for American buy-and-holders.

The chart below shows the cycle. When this ratio is high, US stocks are cheap and emerging markets (abbreviated as EM) expensive. When it’s low (like today), American markets are expensive and EM cheap.

Source: Tavi Costa

As you can see, emerging markets today are at bargain basement prices. The last time they were this cheap vs American stocks, they outperformed by about 3x over the next decade.

I believe there’s a very good chance we see a repeat of the 2000s lost decade in American stocks. And that emerging markets are set to outperform going forward.

The S&P 500 and Nasdaq both trade at nosebleed valuations today. The S&P 500, the cheaper of the two, trades at a P/E ratio of 29 today.

Meanwhile the Vanguard Emerging Markets ETF (VWO) trades at an average P/E ratio of 16. And some countries are trading at even lower prices, like Brazil (EWZ) at an average P/E of 11.

The Brazil EWZ ETF offers a 5% trailing dividend yield, while the S&P 500 offers a pitiful 1%. The broad Vanguard VWO emerging ETF offers a 2.8% yield.

And over the past year, emerging markets have finally begun to outperform U.S. ones. VWO has risen about 20%, while the S&P 500 is up 13%. Brazil (EWZ) is also up around 20%. Emerging markets are finally threatening to catch fire.

This could be the beginning of a decade of outperformance for EM.

Emerging Investment Options

The easiest way to get diversified exposure to EM is through the Vanguard Emerging Markets ETF (VWO). You get exposure to 4,983 top EM stocks. The expense ratio is low at just 0.21%. VWO is a nice “set it and forget it” option.

However, we should note that VWO has about 30% exposure to China. This adds both risk and reward. Chinese stocks are cheap and offer high potential returns, but there are additional geopolitical risks to consider. There’s always a (small) chance that the U.S. could ban Americans from owning Chinese stocks. It would be an extreme measure, and I don’t see it happening, but it is possible.

Some people may want to avoid China for other reasons, which is fine too.

If you want to avoid China but still invest in EMs, iShares offers a fund that excludes Chinese stocks. The ticker on that one is EMXC.

We’ve already covered Brazil extensively, but let’s quickly review. The easiest way to get diverse exposure is through the EWZ ETF. It gives you broad exposure to the 44 largest companies in Brazil. Nice yields, and plenty of exposure to natural resources like iron ore and oil.

I also like Brazilian oil giant Petrobras (it trades under PBR and PBR.A, I prefer the latter because it’s cheaper). We also wrote a dedicated piece on Brazil’s hottest growth stock, Nubank (NU). And then there’s VALE, the largest iron ore miner in the country.

Today, the majority of my emerging markets exposure is in Brazil, with some Chinese stocks too. But I continue to look for other attractive opportunities, and will share anything promising. I have a smaller position in the broad Vanguard EM fund (VWO) as well, but may add to that one in the future.

Another country I’ll be keeping an eye on is Russia. Currently Americans can’t invest in Russia, and those of us who did own stocks in 2022 had them confiscated. Hopefully we get them back once that horrible war is over.

If the opportunity to invest in Russia ever opens back up, I’ll be tempted to increase my exposure. Russian stocks tend to trade at dirt cheap levels with high yields, and offer juicy exposure to natural resources.

A Hedge Worth Owning

I expect returns in broad U.S. indices like the S&P 500 and Nasdaq 100 to be low going forward. That’s typically what happens after such an extreme period of outperformance.

So if you’re only invested in American stocks, it’s probably time to start at least dipping a toe into the EM bucket.

Valuations are cheap, and with further dollar weakness expected over the coming years, emerging markets could prove to be an excellent way to grow wealth during what will undoubtedly be a chaotic period.

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