The EM Outperformance Cycle Begins

Core Viewpoint - The article discusses the potential for emerging markets (EM) to outperform U.S. stocks in the coming years, highlighting the cyclical nature of market performance and current valuation disparities between U.S. and emerging market equities [1][6]. Market Performance Comparison - Since 2008, the S&P 500 has risen 592%, while the MSCI world index (excluding the U.S.) increased by 140%, and the MSCI emerging markets index only by 92% [1]. - Historically, from 2001 to 2010, emerging markets saw a 330% increase, contrasting with stagnant performance in the S&P 500 [3]. Valuation Insights - Current valuations indicate that U.S. stocks are expensive, with the S&P 500 trading at a P/E ratio of 29, while the Vanguard Emerging Markets ETF (VWO) has a P/E ratio of 16, and Brazil's EWZ ETF is even lower at 11 [6][7]. - The article suggests that emerging markets are at "bargain basement prices," and the last time valuations were this low, they outperformed U.S. stocks by approximately three times over the next decade [6]. Recent Performance Trends - Over the past year, emerging markets have begun to outperform U.S. markets, with VWO rising about 20% compared to a 13% increase in the S&P 500 [8]. Investment Options in Emerging Markets - The Vanguard Emerging Markets ETF (VWO) provides diversified exposure to 4,983 top EM stocks with a low expense ratio of 0.21% [9]. - For investors looking to avoid exposure to China, iShares offers a fund (EMXC) that excludes Chinese stocks [10]. Focus on Brazil - The EWZ ETF offers broad exposure to Brazil's largest companies, with attractive yields and significant exposure to natural resources [11]. - Specific investment opportunities in Brazil include Petrobras (PBR), Nubank (NU), and VALE, the largest iron ore miner [12][13]. Future Outlook - The expectation is for low returns in broad U.S. indices like the S&P 500 and Nasdaq 100, suggesting a shift towards emerging markets could be beneficial [15]. - With anticipated dollar weakness, emerging markets may present an excellent opportunity for wealth growth during potentially turbulent times [16].