With insights from our emerging markets-focused clients, Quill PR explores how the reported fading of American Exceptionalism is driving interest in emerging markets for diversification and where some investment managers are finding standout opportunities.
The End of American Exceptionalism
American exceptionalism is the idea that the U.S. is distinctive in its economy and financial markets compared to other nations. Because of its efficient capital markets, innovative technology sector, and the way U.S. stocks and bonds appeared to decouple from other global assets in recent decades, many investors saw the U.S. as a safe bet.
However, this changed when Donald Trump was re-elected to serve his second term as President of the U.S. The fear of potential tariffs, which was brought to life on Liberation Day, set the global markets on fire and caused the U.S. Stock Market to take a significant blow.
These events have marked, what many consider, the decline of ‘American exceptionalism’. Since then, many investors have renewed their focus to emerging markets, which trade at a significant discount to the S&P 500 index and represent less than a fifth of the market size of the S&P 500. To add to this, some investment managers have seen the weakening of the U.S. dollar in recent months to be a powerful tailwind for emerging market equities.
As Andrew Bailey, Governor of the Bank of England, said at Mansion House on 15 July: “To say that the state of the global economy and the impact of tariff announcements is in the news and significant is an understatement. The shifts we have witnessed – and continue to witness – mark a generational change in the system of trade amongst nations.”
What Are Emerging Markets and Why Do They Matter?
Emerging markets are described as economies in transition from developing to developed. Some notable emerging market economies include India, Mexico, Russia, Saudi Arabia, and Brazil. Even China is sometimes considered an emerging market economy despite being the world’s second largest economy.
Although these countries, and many other emerging market economies, demonstrate flashes of developed-world sophistication, they still have lower income levels, less mature infrastructure, and are more prone to political and regulatory volatility than their developed counterparts. This leads to higher risk but also presents a significant upside for investors with a long-term perspective.
What makes emerging markets particularly interesting is their growth potential. It is fuelled by favourable demographics, abundant natural resources, and a growing wave of innovation thanks to the younger population present in emerging market economies.
In particular, innovation is evident in many sectors across emerging markets, but it is the technology space that stands out. Emerging markets have some of the most advanced semiconductor foundry in the world, such as the Taiwan Semiconductor Manufacturing Company (TSMC), which produce leading-edge AI server processors for Nvidia, Apple, and Broadcom. It is also worth noting that many of the assemblers of these AI servers are also companies that reside in emerging market regions, such as Taiwanese manufacturer Quanta Computer and China’s Huawei.
Because emerging markets have received less attention from global investors in recent years, they’re home to many good quality companies that trade at attractive valuations and offer opportunities that are harder to come by in developed economies. Within emerging market economies, there is a strong domestic focus, rather than a global exports focus, which provides a level of protection from macroeconomic events that the developed economies don’t have. This spreads the risk in an investor’s portfolio.
The Contending Regions of Emerging Markets
Eastern Europe
Adnan El-Araby, Co-Portfolio Manager of Barings Emerging EMEA Opportunities, comments: “Many people associate emerging markets (EM) primarily with Asia or Latin America. But there is also a swathe of compelling and fast-growing economies in EM CEEMEA. This reason is increasingly catching the eye of investors as its economic fundamentals steadily strengthen despite lingering political risks and fallout from the Ukraine conflict. Countries like Poland, Greece, and Turkey are defying expectations.
“Poland in particular stands out with a GDP per capita that now rivals Japan’s, and is propelled by rising incomes, the return of skilled diaspora bringing capital and expertise, and a strong export focus on the technology, media, and telecommunications sectors. Poland’s banking sector’s resurgence is driven by a “higher-for-longer” interest rate environment. With floating-rate loan books and strong deposit bases, banks are enjoying wider net interest margins and high returns on equity. A political shift in late 2023 unlocked substantial EU recovery funds, which are now flowing into infrastructure, green energy, and digital transformation—boosting domestic consumption and credit demand.
“Greek banks have emerged from years of restructuring as leaner, more profitable institutions, with rising interest income, improved fee generation, and significantly reduced non-performing loans. Greece’s return to investment-grade status and its potential reclassification as a developed market have reignited foreign investor interest. With the country regaining its investment-grade status, and its banking sector significantly improved, institutions are now profitable and well-capitalised. Tourism and real estate is also booming, underpinned by ambitious development projects.
“Additionally, Turkey, long viewed as a volatile market, is showing signs of stabilisation. After years of unorthodox monetary policy, the central bank has returned to more conventional approaches, and inflation is beginning to moderate. With these factors, we can see that there are genuine investment opportunities among Turkish stocks. The country’s export-driven industries, robust tourism sector, and well-capitalised banking system are drawing investor interest.”
Middle East
Alay Patel, Co-Portfolio Manager of Barings Emerging EMEA Opportunities, added: “The Middle East stands out in emerging markets with its robust outlook, underpinned by resilient economic fundamentals and relative immunity to U.S. trade tariffs. What has caught the eyes for many investors are the countries that boast of strong sovereign balance sheets, ongoing reforms, and a clear drive toward economic diversification.
“Saudi Arabia continues to lead the region’s transformation with its Vision 2030 agenda, rapidly advancing non-oil sectors through ambitious projects and tourism initiatives, although fiscal discipline remains crucial amid elevated spending and the need to manage oil price fluctuations.
“The United Arab Emirates is a regional powerhouse for economic diversification and global integration, with dynamic growth in real estate, tourism, logistics, and financial services. Dubai’s burgeoning population and Abu Dhabi’s rising influence in energy and technology further bolster the outlook, supported by a low fiscal break-even oil price. The UAE’s real estate sector has been a standout performer over the past year, reflecting a deliberate transformation of the country’s social and economic landscape. Structural reforms—such as the introduction of the Golden Visa and long-term residency programs—have made property ownership more accessible and attractive, encouraging investors, entrepreneurs, and skilled professionals to settle long-term. This has driven a surge in population growth, particularly in Dubai, which surpassed 3.9 million residents in early 2025. The financial sector has also benefited, supported by the real estate boom and the international expansion of UAE banks.
“Meanwhile, Qatar is entering a new phase of LNG[1]-driven expansion, maintaining one of the region’s strongest fiscal positions, and investing in smart infrastructure and diversified industry. Its growing economic ties with China and India strengthen Qatar’s prospects for long-term resilience.”
China
Edmund Harriss, Director, CIO and head of Asian & Emerging Market investments at Guinness Global Investors, commented: “Within China, we believe that there is a good underlying story for the nation in the long-term, which is why we are overweight in in our Asian and EM strategies. Many market participants are still sceptical, which means that Chinese stock valuations are still low.
“Therefore, we look for companies that have been growing earnings and cash flows over the last 8 to 10 years and continue to do so. We call these ‘quality’ companies, because if they have maintained profitability during difficult conditions since 2020, they are likely to continue to do so as China’s domestic economy picks up. They are available at low valuations which incorporate very little future growth. We find them in Consumer Staples and Consumer Discretionary; in household goods, video games, health care, and financial services.”
How protected are these regions/countries against US tariffs and other global macro events?
Alay Patel, Barings Emerging EMEA Opportunities, adds: “Protection from global macro risks like U.S. tariffs and geopolitical tensions varies across EMEA.
“Turkey has faced U.S. tariffs—particularly on metals—and continues to navigate regional tensions and currency volatility. While it’s working to diversify its economy and trade relationships, vulnerabilities remain. Poland, by contrast, benefits from EU membership, which offers collective protection through trade agreements. Its diversified industrial base and close ties to Germany’s manufacturing sector provide both insulation and exposure. Greece, though more economically fragile, also enjoys EU protections and is less reliant on U.S. exports, with its economy driven more by services, tourism, and intra-EU trade.
“In the Gulf, countries such as the UAE, Saudi Arabia, Kuwait, and Qatar are relatively insulated. Their vast sovereign wealth, strategic energy exports, and close ties with the U.S. offer informal protection from direct tariffs. However, they remain sensitive to oil price fluctuations and regional geopolitical dynamics.
“South Africa presents a mixed picture. It has been affected by U.S. tariffs, particularly in steel, and faces broader challenges tied to commodity dependence, domestic instability, and energy supply issues. While it maintains diverse trade relationships, it lacks the formal protections of larger economic blocs.”
Edmund Harriss, Guinness Global Investors, explains: “We observe from the initial tariff salvos that both the US and China can do significant harm to one another. Each holds negotiating cards that reflect both their scale and access to specialised products or commodities that the other needs.
“The impact of existing tariffs hurts some but by no means all businesses in China. We can see that in less specialised manufactured goods, conditions for Chinese companies exporting to the US have deteriorated, and businesses here are suffering. But over the long-term, we can see new industries, such as renewable energy equipment, EVs, batteries, industrial automation, semiconductors, cloud computing, advanced manufacturing, reach a scale that can provide growth to replace that of the defunct property sector.
“In the short term, we see the redirection of China’s export manufacturing, both of supply chains and market destinations play out; Chinese exports to the US are slowing but are more than offset by growth to the EU, Southeast Asia and Latin America. Chinese trade is growing; not to the US, but still growing overall.”
How do emerging market valuations compare to developed markets, and what does this mean for expected returns?
Alay Patel, Barings Emerging EMEA Opportunities, comments: “Emerging Markets are increasingly appealing to investors seeking higher growth and stronger diversification. These economies tend to have younger populations, expanding middle classes, and faster GDP growth than their developed counterparts. Their performance often diverges from developed markets, helping to reduce overall portfolio volatility. Additionally, exposure to different currencies, political systems, and economic cycles adds a layer of resilience against global shocks.
“Emerging market assets continue to trade at a significant discount to developed markets. The MSCI Emerging Markets Index is valued at around 13x forward earnings, compared to 22x for the S&P 500. The MSCI EMEA Index is even cheaper, at just 11x. While this valuation gap reflects the additional risks associated with emerging markets—such as political instability, regulatory opacity, and currency volatility—it also presents an opportunity for higher long-term returns. If reform momentum continues and institutional quality improves, capital flows could accelerate, narrowing the valuation gap and rewarding early investors willing to navigate short-term volatility.”
Edmund Harriss, Guinness Global Investors, adds: “In terms of valuations of China, we view the nation as a manufacturer with a scale that few can match, serving markets beyond that of the US. It has moved beyond low-cost manufacturing into specialised areas in which its unique research and development approach has translated into sector dominance such as 5G, EVs, battery technology, renewable energy, and – notably – DeepSeek. Jockeying over trade with the US creates meaningful disturbances in the short term, but we already see the response in terms of diversification of products and markets.
“Chinese stocks would be exposed if they were expensive, as uncertainty compresses valuations. But they are cheap, with valuations close to their ‘intrinsic’ levels – that is, the present value of existing cash flow generation. We are overweight China and believe that with the range of investment options, the underpinnings for sustainable growth over the next 5-10 years, and current valuations, this is a significant opportunity.”
[1] Liquefied Natural Gas
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