Good, Better… Emerging Markets

In 2024, we wrote an article entitled The Good, the Bad and the Emerging Markets in which we discussed the recent divergence between America, other developed markets and emerging markets. In the 3 years prior, the S&P 500 had returned 38%, developed markets 11% and emerging markets negative 17% – a massive spread of 55 percentage points. Back then emerging markets looked very ugly indeed. In fact, nothing outside of America looked great at the time – at least in the rearview mirror.

But a lot can change in a year. In 2025, the S&P 500 returned 18% in USD – very good. But developed markets and emerging markets were far better, both returning 34% in USD. This is the first time since 2017 that either of these have meaningfully outperformed the S&P 500, and only the second time since the 2009 financial crisis. As you’d expect, 2025 was a good year for us. We’re well underweight the US and overweight the rest of the world, mainly because that’s where we see the best opportunities, but also in anticipation of a normalization between America’s asset prices and the rest of the world.

If you arrange the ~50 stocks that we hold across all portfolios by USD return in 2025, only 1 in the top half was American: Alphabet (i.e. Google, our largest holding), which returned 66%. (Incidentally, this was also the best performer of the Magnificent Seven in 2025.) But it was our international exposure which really delivered. Apart from Google, some of the main contributors to portfolio returns were South American banks (up between 65% and 96%), Mexican airports (up between 43% and 66%), NetEase (+58% / China), ASML (+55% / Europe), Roche (+52% / Switzerland) and Tokyo Electron (+46% / Japan). There were several other smaller positions which also delivered very high returns – all of them from emerging/developed markets outside of the US.

So where does this leave us? Was 2025 the big reversal we’ve been waiting for? Not even close. The performance gap between US stocks and emerging markets has barely begun to close. You can hardly see the gap narrowing on a long-term graph. If this is the beginning of a big reversal, it will likely take several years to play out as has been the case with past reversals. It won’t be a smooth convergence. There will be ups and downs along the way. In fact, we can’t even be sure that this divergence has peaked yet. Who knows what 2026 will bring? But there’s good reason to believe that the US can’t outperform the rest of the world forever, both from a sustainable return perspective and especially from a valuation perspective. At some point it’s likely that this gap will narrow again, and we’re well positioned to take advantage when it does. 2025 just gave us a taste of what is possible if this gap narrows meaningfully.

Here’s that graph of the S&P 500 / MSCI Emerging Markets performance gap again, updated for 2025: