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EM Stocks Extend Lead Over S&P 500 as Trump Rattles US Markets

April 22, 2025

(Bloomberg) -- US President Donald Trump’s policy shocks are tilting risk sentiment in favor of emerging-market equities, leading to their biggest outperformance in 16 years over US stocks as investors focus on local growth and earnings.

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The MSCI Emerging Markets Index has rebounded almost 8% from a low on April 9, while a selloff in the S&P 500 Index has deepened. This divergence has led to a 14% excess return for EM stocks relative to their US peers this year — the biggest outperformance since 2009.

Money managers are increasingly seeing Trump’s tariff flip-flops as well as other actions such as his criticism of Federal Reserve Chair Jerome Powell as greater risks for the US economy and related dollar assets. That’s making them prefer trades on the other side of the greenback — such as gold or emerging markets. Investors are accepting the unpredictability of Trump’s policies and the market volatility they bring, while returning to classical earnings-based investment themes.

“We obviously don’t know what will happen next,” said Sammy Suzuki, head of emerging-market equities at AllianceBernstein. “We should be thinking about both the possibility of intensification as well as thawing. Ultimately, investors should focus on fundamentals and valuation rather than making a direction call on the trade war or the economy.”

The biggest contributions to the EM index’s gains are coming from companies seen as resilient to the trade wars, and having their own earnings narratives. China’s domestic adoption of artificial intelligence has replaced Nividia’s emerging-market suppliers as the main AI segment to chase. Indian banks are riding on improving economic-growth numbers. South African gold miners are buoyed by the bullion rally, while Korean defense companies are jumping on wagers for increased spending by Europe.

All this is helping analysts step up earnings estimates for developing nations: the average profit forecast for the EM benchmark has risen 2.2% since Jan. 13, reaching the highest level since the US presidential election in November.

The MSCI EM index has performed better than the US benchmark in 15 of the past 20 weeks, with trade turbulence increasingly becoming a US-focused risk. This month alone, the EM index has beat the S&P 500 by almost 6% amid risks ranging from universal tariffs to the Powell saga.

“Much of the outperformance can be explained by attractive valuations across EM markets prompting a rotation out of crowded US positions,” said Aarthi Chandrasekaran, head of asset management at Shuaa Capital. Other reasons include “early signs of a recovery in fundamental activity across EM economies, notably in China — contrasting with softening macroeconomic data out of the US — and loss of credibility in the dollar and broader US markets.”

The average valuation of the MSCI EM Index traded 45% below that of the S&P 500 on April 9, compared with the 10-year average of 35%. This, coupled with rising earnings-per-share forecasts, helped investors return to emerging markets.

Bumpy Path

Some investors caution against predictions that US exceptionalism is ending. Much of the US underperformance has come from a selloff in US technology firms known as the Magnificent Seven as well as the weak dollar. Neither of them may be a long-term trend.

“As long as there is no alternative reserve currency to the US dollar, it is too early to call time on US exceptionalism, but we may be at the beginning of that process,” said Hasnain Malik, a strategist at Tellimer. “That would be good for the long-term performance of EM assets but the path along the way will be bumpy.”

All told, the market dynamics remains more of a US story than an EM story at this point. For it to last, investors are watching for an improvement in emerging-market growth dynamics, especially in China. History shows the catchup can take time.

“At first, it is developed markets that disappoint, not that EM outperforms,” said Charlie Robertson, the author of The Time-Travelling Economist, a book on what enables developing nations to escape poverty. “The decade-long outperformance of EM from the early 2000s was at first a US tech bubble deflating, and only later did it become an EM success story in its own right.”

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EM Stocks Extend Lead Over S&P 500 as Trump Rattles US Markets