Emerging markets: From underdogs to outperformers

Last year, emerging markets (EM) outperformed the US for the first time since 2017. Some are hopeful that this is the start of a new period of outperformance, as seen in the first decade of the millennium. Back then, EM performance was fuelled by higher commodity prices and a weaker US dollar, with similar conditions apparent today. US equities rely on earnings growth and premium valuations, while international markets offer return potential through valuation re‑ratings and currency gains, with the gap narrowing in 2025. With valuations elevated, earnings need to grow to support higher multiples...