The Emerging Markets Mavericks Are Targeting Regional Funds for Big Returns

In a standout year for emerging markets, investors who zeroed in on regional indexes rather than global benchmarks dominated by Asia have seen the most impressive gains. While the MSCI Emerging Markets Index — the most commonly tracked benchmark for developing-nation equities — is finally outpacing the S&P 500 for the first time since 2017, that headline performance masks stark regional disparities. Sub-indexes tracking stocks in Latin America and Eastern Europe are posting returns up to four times greater than the broader global index.

‍

The key reason behind this divergence is the MSCI benchmark's heavy exposure to Asian companies, particularly those in China, which have suffered from the economic fallout of U.S. tariff threats. As a result, despite what has been a broadly favorable year for emerging-market assets, investors in global EM indexes have missed out on substantial gains delivered by companies in regions less exposed to trade tensions and with stronger currency tailwinds.

‍

Out of 167 globally focused emerging-market equity funds, only four have achieved gains of more than 20% so far this year. In contrast, the MSCI Latin America Index is up by 25%, and the Eastern Europe sub-index has surged an impressive 45%. Meanwhile, the S&P 500 is lagging behind, with a return of less than 5%. The discrepancy illustrates the benefits of seeking alpha through regional or single-country funds — particularly those that avoid China — a strategy that has gained popularity as Wall Street looks to outperform after years of EM underperformance relative to U.S. equities.

‍

Funds such as Barings’ East European fund and Schroders’ Latin America fund are among this year’s top performers, helped by strengthening regional currencies and a weakening dollar. According to Dina Ting of Franklin Templeton, the ability to fine-tune emerging-market exposure by country or region is proving valuable, especially when national-level tariffs affect specific economies.

‍

Though it’s not unusual to see differences in regional performance, the sheer magnitude of the gap this year is striking. Asia’s sub-index has returned 12% — which still beats the S&P 500 — but it pales in comparison to the explosive growth in Eastern Europe and Latin America. Eastern Europe, in fact, is enjoying its strongest year-to-date returns since at least 1996, while Latin America is having its best showing since 2009.

‍

The reason most global EM investors have missed out? The MSCI Emerging Markets Index is skewed overwhelmingly toward Asia. Roughly 80% of the benchmark is allocated to Asian companies, with China alone representing more than 25%. In contrast, Brazil and Mexico — the two largest Latin American markets — make up just 6% combined. South Africa, the largest single country weight in the Europe, Middle East, and Africa (EMEA) grouping, contributes less than 3%.

‍

Eastern Europe is even more underrepresented, accounting for only about 1.5% of the benchmark. That means global EM investors have largely missed massive dollar-based gains of 40% to 55% in markets like Slovenia, Poland, Hungary, and the Czech Republic.

‍

Another issue is concentration within the index itself. Taiwan Semiconductor Manufacturing Co. alone comprises 10% of the benchmark. Add Tencent, Alibaba, and Samsung Electronics, and nearly one-fifth of the index is concentrated in just four companies. By contrast, Nvidia — the top stock in developed-market indexes — represents less than 5%.

‍

For investors wary of geopolitical tensions, especially those involving the U.S. and China, such concentrated exposure to export-reliant Asian firms is a growing concern. According to Teeja Boye at Sands Capital Management, the trade rift between China and the U.S. is likely to intensify, prompting a renewed focus on diversification over the next 12 to 18 months.

‍

Eastern European equities, on the other hand, have benefited from renewed interest in European markets. A weaker dollar, rising U.S. debt, and growing policy uncertainty have pushed investors to look elsewhere, especially as the EU ramps up military spending. Latin American equities have also bounced back after 2024’s declines, buoyed by Mexico’s progress on a U.S. trade deal and supportive monetary policy in Brazil.

‍

Anna Mulholland of Pictet Asset Management notes that this year’s EM rally has been driven more by country-specific developments than global trends. Brazil’s market, for example, has rallied on expectations that its central bank is done raising rates, while other emerging markets remain weighed down by global challenges, including the Middle East conflict and China’s weak consumer spending.

‍

As a result of their recent surge, Latin American equities have narrowed their valuation discount relative to other EM stocks — from 33% at the beginning of the year to 25%. Eastern European stocks have seen a similar compression, with their discount shrinking to 27% from 38%. These tighter valuations may indicate limited upside from here.

‍

Still, new momentum is building in other corners of the emerging world. Countries like Israel and South Korea are gaining investor favor, fueled by increased government spending and expanding technology sectors. Israel’s Tel Aviv index now trades at near-parity with the broader EM universe, having erased a 55% valuation gap seen two years ago. South Korea’s discount has also narrowed, from 31% at the end of last year to just 18% now, despite recent political turmoil.

‍

As the global landscape continues to be reshaped by tariffs, technological advancement, and geopolitical conflicts, emerging-market performance is likely to remain highly uneven. That reality calls for a more targeted approach than simply tracking global EM benchmarks. As Robert Holmes of North of South Capital puts it, “It’s time to rethink what we mean by the term ‘emerging markets’ — it’s a label that’s been around since the 1980s, and the world has changed a lot since then.”

‍