Emerging bets

2025 continues to be a year marked with change. While the U.S. stock market took a hit in April with the tariffs imposed by the Trump administration, investors took a good look abroad and found out that Europe was cheap, and Emerging markets was even cheaper compared to the almighty AI-driven U.S. and the story continues to unfold. The chart below shows two stories with the same actors: on the right, the severe underpeformance of EM over the last 15 years vs Europe and the US. What has been called exceptionalism. On the right, the story YTD, with a very different message. Paraphrasing Buffet, the voting machine is morphing into the weighting machine, and EM are heavy. Investors are attracted by higher yields, lower levels of debt, and compelling valuations. Perhaps above all, is that there may be no strategic sellers left. The tradeoff is higher expected volatility, but with a bigger margin of safety. It’s also a simple way to play the dollar weakness which seems to be on the investment menu for the foreseeable future.

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