Are We Still In the Early Innings of a Massive Emerging Market Rotation?
The most hated is now the most bought
After a decade defined by U.S. dominance, emerging markets are quietly regaining momentum. A softer dollar, rising global manufacturing activity and improving earnings forecasts are combining with still-discounted valuations to draw capital back to EM equities.
Still early innings
UBS says we are still in the early innings for EM performance relative to DM.
UBS: "Our high conviction regional long continue to be emerging markets."
Source: UBS
Some macro tailwinds
Love dollar weakness
GEM is clearly the best-performing region if the dollar weakens.
Source: UBS
Accelerating global growth
EM normally outperform when global PMIs are rising.
Source: UBS
Revised higher
2026/27 MSCI EM EPS has been revised higher since the start of the year...
Source: FactSet
Fiscal flexibility
EM have more fiscal flexibility than DM.
Source: IMF
Winner from Gen AI
"EM has one of the best enablers of AI (the memory companies and TSMC) and so far the enablers have accounted for half of EM returns. Also EM has one of the best use cases for AI as manufacturing will likely be less disrupted than services. AI should benefit capital intensive and employee intensive industries (ie manufacturing), and EM is overweight manufacturing."
Source: UBS
Valuation & Flow % Positioning
Below average
Emerging markets still look cheap relative to developed markets on most measures. PE of EM to DM is still below average.
Source: UBS
Wide discount
While headline index valuation has increased over the past year, most EM pockets are still trading at a wide discount to US equities and other DM key regions globally.
Source: FactSet
Inflows
GEM funds marked the fastest annual pace of buying over the past two decades.
Source: EPFR
Not crowded
EM are not crowded relative to the US.
Chart shows EM relative to US on crowding data.
Source: UBS
A lot of buying
EM was the most $ net bought region last week. EM has now been net bought in 3 of the last 4 weeks and is the second most $ net bought region YTD (behind DM Asia), while North America and Europe are both net sold YTD.
GS prime: "The Prime book is now over-weight EM regions vs. the MSCI World Index by +11.0%, which is hovering 5-year highs."
