During the US stock market bull run that began in October 2022, the S&P 500 returned 67% before US President Donald Trump took office. Since then, the economic impact of trade wars and policy uncertainty has cast doubt on US market returns.
High valuations, tepid economic growth and inflation concerns in the US have prompted asset managers to look elsewhere for growth.
Furthermore, the market reaction to the launch of Chinese AI start-up DeepSeek triggered a pronounced shift in sentiment as investors reassessed the US tech exceptionalism thesis.
“Coming into the year, sentiment towards supposedly high-risk emerging markets, particularly China, was negative,” says Sean Neethling, head of investments at Morningstar Investment Management South Africa.
“The average fund manager was about 10% underweight China, even within dedicated emerging-markets funds, despite historically depressed prices on their subset of high-quality tech companies.”
While sentiment has shifted, Neethling says it would be incomplete to attribute the 15% year-to-date gain in the Hang Seng tech index to the DeepSeek effect, and the rotation out of US equities seen on a year-to-date basis.
“Strong fundamentals [are] supporting the investment case for Chinese equities, with wide-moat Chinese companies such as Tencent and Alibaba, while not pure tech businesses, trading at significant discounts to broader US tech peers.”
More broadly, Neethling expects emerging markets will continue generating healthy returns in 2025.
“Brazil and Mexico started the year strongly after experiencing significant drawdowns last year, while Korea allows a more differentiated entry point in the AI and, more specifically, the semiconductor supply chain.”
Varshan Maharaj, fund manager of the Allan Gray Frontier Markets Equity Fund, highlights frontier markets as an important contrarian investment with potential upside.
Global investors still have little focus on the frontier universe, which is precisely why these markets continue to pique our interest
— Varshan Maharaj
“Global investors still have little focus on the frontier universe, which is precisely why these markets continue to pique our interest.”
According to Maharaj, companies in frontier markets are now valued much lower than similar companies in developed countries. “This attribute makes them attractive for us as contrarian investors.”
Maharaj says that an inflow of bad news and poor sentiment in these markets led to low share prices in recent years, which subsequently delivered good returns for asset managers who bought at low valuations when others were fearful.
“We have seen this play out in numerous frontier markets in recent years, including Sri Lanka, Pakistan, Kazakhstan and Georgia.”
Investing according to this thesis, the Allan Gray Frontier Markets Fund returned 9.2% in dollars in the first quarter of 2025, while the MSCI frontier emerging markets index returned 6.8% in dollars.
Furthermore, its holdings continue to offer good value with high profitability and attractive valuations, with a weighted-average five-year return on equity of 27% and historical p:e of 10.3.
However, Maharaj still sees value in these markets, particularly in those that are now out of favour, with good businesses trading well below their fair value estimates.
The Philippines is a prime example. “This consumption-based economy benefits from key drivers, including the business process outsourcing [BPO] sector and remittances from overseas Filipino workers,” says Maharaj.
Among other factors, the possible impact of AI on BPO revenues and political uncertainty have led to waning investor interest and declining sentiment.
“This is evidenced by the low and declining value traded on the Philippine Stock Exchange and the low valuations that Philippine companies trade at, both in relation to their history and to our assessment of fair value.”
Over the long term, Maharaj believes many consumer-facing Philippine companies could benefit from the growing demand from its young, large population.
“Per capita consumption levels for many fast-moving consumer goods are still low when compared with other nations. This suggests a long runway for growth that one is not paying for at current valuations.”
Maharaj sees Vietnam as another interesting frontier market that has achieved impressive, sustained economic growth, driven by its export-focused economy.
“The US’s third-largest trade deficit is with Vietnam, and fears of trade wars have contributed to elevated foreign investor outflows from Vietnam and the derating of many stocks. We are using this sell-off to add to our existing holdings and identify new opportunities,” he says.
Maharaj says the possible upgrade of Vietnam to emerging-market status would likely attract more buying interest.
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