Market concentration, a shifting US dollar and deep valuation gaps are strengthening the case for an active value approach to emerging markets. Perpetual’s JAMES HOLT explains
While developed economies continue to grapple with sluggish growth, many emerging economies are benefitting from powerful structural trends that are reshaping the global investment landscape.
Emerging and developing economies are expected to grow by 3.9 per cent in 2026 and 4.2 per cent in 2027, compared with just 1.8 per cent and 1.7 per cent respectively for advanced economies, according to IMF World Economic forecasts.
The growth gap is underpinned by drivers including urbanisation, industrialisation and the expansion of a rising middle class across Asia, Latin America and Africa.
These trends are contributing to a multi-decade shift in global economic weight toward emerging markets, says James Holt, head investment specialist for Barrow Hanley in Australia.
Texas-based Barrow Hanley is a leader in global value investing. Barrow Hanley Emerging Markets Fund is distributed in Australia through Perpetual.
Despite the shift, emerging markets remain underrepresented in major global equity indices, says Holt.
“Emerging market stocks account for just 11.7 per cent of the MSCI ACWI, while developed market stocks represent 88.3 per cent of the index – a weighting that bears little resemblance to EM's contribution to global output.”
For investors, this strengthens the case for active risk management and selective exposure rather than relying solely on broad index allocations.
Multiple factors driving emerging markets
The mismatch between growth prospects and market valuations is one of the most interesting aspects of emerging markets today.
Consensus forecasts suggest emerging market earnings per share growth above that of the US and developed markets in general.
“Yet EM equities continue to trade at deep discounts on both earnings and book-value metrics,” notes Holt.
Across many of the world’s leading industries, emerging market companies offer exposure to similar structural growth themes as developed-market peers, but at a fraction of the price.
At the global supply-chain level, Taiwan and Korea are home to semiconductor leaders, while China is a global leader in EVs, batteries and clean technology. These are businesses that AI, electrification and automation supply chains cannot run without.
Alongside these exporters is a rising domestic engine of middle-class consumption, urbanisation and digital adoption. The valuation gaps are substantial: SK Hynix trades at around 4.3x forward earnings versus Nvidia at 18.9x, while JD.com trades at roughly 6.8x versus Amazon at 22.3x.
EM category leaders trade at discounts of about 35 to 77 per cent to their developed-market equivalents.
“Importantly, these are not speculative or early-stage businesses,” explains Holt.
“These are dominant, well-established franchises operating across some of the world's largest and fastest-growing economies.
“They are businesses with proven earnings power, strong competitive positions and valuations that have been largely overlooked by many global allocators.”
Why value works in emerging markets
The case for value investing is actually stronger in emerging markets than in developed ones.
Fama and French first identified a value premium in emerging market returns in 1998, and later studies put numbers on it: cheap stocks beat expensive ones by around 1.01 per cent a month in Asia, 1.92 per cent in Eastern Europe and 0.87 per cent in Latin America – well ahead of what the same research found in developed markets.
“The simple reason is that emerging markets are less picked over,” says Holt.
“Fewer analysts cover each company and there are more retail investors trading on sentiment. That means good businesses can stay mispriced for longer – and that’s exactly the environment a disciplined value investor wants.”
The research also shows that cheap is better when it comes with financial strength.
Studies across international markets find that value and profitability tend to move at different times, so combining them can smooth the ride.
S&P Global’s work on emerging market dividends adds a third leg: companies that pay dividends have historically outperformed both non-payers and the broader market, with less risk.
“Emerging market value works because cheap prices, solid earnings and reliable dividends compound together over time,” Holt says. “It rewards patience in markets that are structurally less efficient and more mispriced than developed peers.”
To hear more on where emerging markets fit in portfolios today, join Rand S. Wrighton, Jr, CFA, head of international equities at Barrow Hanley, for a live webinar and Q&A on Friday November 20 at 12pm (AEDT).
About James Holt and Barrow Hanley
James Holt is head investment specialist in Australia for global value investor Barrow Hanley.
Barrow Hanley is a US-based global value investor manager specialising in value investing, using fundamental research to identify quality companies trading below their intrinsic value.
The Barrow Hanley Emerging Markets Fund is a high-conviction portfolio of emerging-market companies selected for their attractive valuations, strong fundamentals and identifiable potential for improvement.
The fund is managed by Barrow Hanley and offered in Australia through Perpetual.
