Emerging markets are the cheapest they’ve been in decades. Is this an opportunity or a warning?

Emerging markets (EM) equities are trading at less than half the valuation of their US counterparts, the widest gap in at least twenty years.  

This discount could well represent a compelling opportunity. Whether it does, or instead represents a warning worth heeding, depends on which emerging market you’re looking at and how you intend to gain access. 

EM Valuation Gap at an Extreme 

Emerging market equities are currently trading close to a valuation extreme.  

They have rarely looked this cheap next to global markets—as shown below. 

The valuation data confirms this. The MSCI Emerging Markets Index is currently valued at 10.4 times estimated forward earnings, while the MSCI World Index trades at 18.8 times.  

That’s a hefty 45% discount, and well beyond the average historical 25-35% gap typical of the past couple of decades. 

For investors who hold meaningful exposure to global equities through funds and ETFs, the size of this gap raises an important question: Is this the kind of opportunity that eventually corrects, or a discount that exists for good reason and simply persists? 

Why the Gap is So Wide 

Everything in the investment world is relative.  

The current record EM valuation discount is arguably less a story about emerging markets becoming cheaper and more a story about the US becoming more expensive.  

Case in point: US equities now represent a remarkable 72% of the MSCI World Index.  

MSCI World Index Weightings, end of July 2026 

We’ve all witnessed this year’s powerful rally in artificial intelligence stocks push US valuations to historically rich, concentrated levels, while Chinese and Hong Kong equities, which together make up more than a fifth of the EM benchmark by weight, have weighed on the broader EM index. 

The EM index has still risen 20% this year, but that gain has been narrowly driven by SK Hynix and Samsung Electronics in South Korea and TSMC in Taiwan, all driven by the same AI infrastructure wave that has powered US tech.  

Interestingly, since the Middle East conflict erupted in late February (to August 14^th), the broader EM index has managed a gain of 7%, against a 13% rise for the S&P 500.  

So, relative momentum hasn’t been with emerging markets in recent months. 

In 2025, by contrast, the MSCI EM Index returned 24%, well ahead of the S&P 500’s 16% gain, a reminder of how quickly relative performance can turn. 

One Number, Very Different Markets Underneath 

It’s important to understand that emerging markets are anything but a single, uniform trade. There’s a wide dispersion underneath the index that’s more relevant for investors than the average EM valuation. 

Check out the country weights in the MSCI EM Index below: 

MSCI EM Index Weightings, July 2026 

Importantly, the main economies making up the MSCI EM Index are very different in nature, and market valuations reflect that.  

Technology-heavy markets such as Taiwan, India and Hong Kong trade at around 20 times estimated earnings, not far off developed-market norms.  

In contrast, mainland Chinese stocks sit at 11 times forward earnings, while several major emerging markets remain in single digits: South Korea at 5 times, Brazil at 8 times, and South Africa at 9 times. 

Here’s a summary of the valuations of the most prominent EMs: 

This wide spread of valuations is at the heart of the EM story.  

In short, EM’s 10 times average forward p/e is being pulled down by pockets of genuinely distressed or deeply out-of-favour markets sitting alongside AI-driven markets that are not obviously cheap at all.  

Earnings upgrades have been the name of the game.  

At an aggregate level, EM earnings upgrades have been particularly strong in a global context. 

This is both bullish and bearish.  

It’s bullish because earnings upgrades of this magnitude should theoretically drive EM equities to outperform as markets recalibrate to value their higher present and future cash flows. 

But it’s also bearish in the context of a widening EM valuation discount, because it raises the question: Why aren’t EM strongly outperforming already? What will it take? 

Balancing the Opportunity Against the Risks 

A wide valuation gap is a signal worth paying attention to, rather than a guarantee of outperformance.  

Emerging markets have traded at persistent 25-35% discounts to global markets in recent decades, and cheap valuations have, at various points, remained cheap for years before any re-rating occurred.  

Currency risk adds a further layer, since unhedged exposure to emerging market currencies can amplify or offset equity returns in ways that are difficult to predict.  

Political and regulatory risk also tends to run higher across many emerging economies than in developed markets, and liquidity can be thinner during periods of stress. 

How Australian Investors Can Best Access EM 

The passive route into emerging markets is cheap, liquid and instantly available, but the cap-weighted index it delivers is an unusually blunt instrument.  

Buying an EM ETF means buying a portfolio in which TSMC alone accounts for 57% of the Taiwanese portion and Samsung plus SK Hynix make up roughly 60% of the Korean one. Both these dominant exposures clearly represent concentrated bets on the AI capex cycle continuing.  

With that said, the dispersion beneath the headline returns is the opportunity here. 

For example, over the year to end-July 2026, MSCI Korea returned 150% in USD while MSCI India fell 6.5%. 

Such pronounced country, sector and currency return drivers simply don’t exist in US large-cap, or even global, mandates.  

Add in thinner sell-side coverage, uneven disclosure, state ownership and governance dispersion, plus index-mechanics events that create forced flows, and there is more genuinely mispriced information in the emerging markets universe than in almost any other mainstream equity market.  

This explains why EM funds are one of the few categories in which the majority of active managers have historically beaten their benchmark (based on SPIVA data). This is a bright spot for active managers against a global picture in which 80-90% of equity funds have underperformed over the past 15 years.  

So, the structural case for active EM management is real. 

The burden is on investors’ active manager selection to capture it. 

A Global Opportunity Worth Being Aware Of 

At this point, buying emerging markets funds is one of the more compelling ways to diversify away from US equities. 

EMs are trading at around half the valuation of the S&P 500, the widest gap in at least two decades, driven by this year’s concentrated US AI rally and a relatively weak performance by Chinese equities. 

Of course, a sharp valuation discount of this nature isn’t a timing signal on its own. Currency, political and concentration risks all warrant consideration before adding exposure. 

The important takeaway is that amidst this broader EM valuation opportunity versus global markets is a compelling earnings-upgrade-driven investment case that provides ample opportunity for best-in-class EM funds to outperform in the coming years.  

Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.