Emerging Markets: Will the Rally Last?

Is it time to shift your investment focus away from Wall Street? For years, emerging markets (EMs) promised high returns, but their stock markets lagged. Now, some experts believe these markets are primed to shine, potentially leaving U.S. stocks in the dust.

Key Points

• Emerging market equities are trading at a 33% discount relative to domestic market stocks, based on 12-month forward price-to-earnings ratios.
• JPMorgan remains “long emerging markets versus developed markets,” favoring international stocks over U.S. equities.
• Hedge funder Rob Citrone is shorting U.S. stocks, citing better opportunities in global markets, particularly Mexico.
• India’s industrial real estate sector is rapidly evolving, with significant growth in Tier 2+ markets.

The Allure of Emerging Markets

Emerging markets were once seen as a goldmine for investors willing to take risks. The idea was simple: these middle-income countries would grow faster than developed nations, leading to higher investment returns. The International Monetary Fund (IMF) confirms that emerging and developing economies have generally outpaced advanced ones in output growth this century.

However, until recently, stock market performance didn’t match this growth. MSCI’s index of EM shares only regained its 2007 peak in 2021, before falling again by over 40%.

A Shift in Sentiment

Despite past struggles, the tide may be turning. JPMorgan strategists have stated they “prefer international over the U.S.,” remaining long on emerging markets versus developed markets. This suggests a growing confidence in the potential of these economies to deliver strong returns.

Echoing this sentiment, hedge fund manager Rob Citrone is actively shorting U.S. stocks. He believes the U.S. market will underperform and sees better opportunities in global markets, particularly in Mexico. He noted that gains in the U.S. market fell around 30% short of the gains in emerging markets in the last year.

India’s Industrial Real Estate Boom

One area showcasing the dynamism of emerging markets is India’s industrial real estate sector. The sector has transformed from fragmented regional operations to a professionally managed asset class. Total stock in the top 8 Tier 1 and emerging 14 Tier 2+ markets reached 610 million sqft in 2025, with net absorption of 67 million sqft.

While Tier 1 cities still dominate, the real growth is happening in the emerging Tier 2+ markets. This expansion signifies the development of a robust logistics foundation crucial for sustained economic growth.

Frequently Asked Questions

Why are emerging markets considered attractive investments?

Emerging markets offer potentially higher growth rates compared to developed economies. For example, the IMF has reported that emerging and developing economies have generally outpaced advanced ones in output growth this century, suggesting greater potential for investment returns.

What are the risks associated with investing in emerging markets?

Emerging markets can be more volatile than developed markets. The MSCI’s index of EM shares only regained its 2007 peak in 2021, before falling again by over 40%, so these markets carry risk.

Are emerging market equities currently undervalued?

Yes, some analysts believe they are. Emerging-market equities are trading at a 33% discount relative to domestic market stocks, based on 12-month forward price-to-earnings ratios.

What is driving growth in India’s industrial real estate sector?

Growth is driven by the warehousing sector in particular. The storage/warehousing segment remains dominant at 74% of absorption, driven by 3PL/logistics operations and e-commerce growth, supported by rising consumer demand and digital penetration across both urban and emerging markets.

What This Means For You

• Consider diversifying your portfolio with emerging market equities, given their relative undervaluation compared to U.S. stocks.
• Explore investment opportunities in specific emerging markets, such as Mexico, which Rob Citrone favors.
• Keep an eye on the growth of India’s industrial real estate sector, particularly in Tier 2+ markets, for potential investment opportunities.
• Be aware of the potential volatility associated with emerging markets, and adjust your risk tolerance accordingly. Remember that emerging markets saw MSCI’s index of EM shares only regain its 2007 peak in 2021, before falling again by over 40%.

Source: www.economist.com