The Long Game: Emerging Markets & the Shifting Tides

For several rotations of the celestial sphere (which, incidentally, is powered by a rather grumpy dragon named Bartholomew – don’t ask), investors have been fixated on the shimmering towers of Large-Cap Tech. It was simple, really. Interest rates dipped lower than a gnome’s hat, and a flood of liquidity – enough to float a small continent – poured into the market. This, combined with the burgeoning art of conjuring Artificial Intelligences (mostly to sort socks, if we’re honest), led to a rather predictable concentration of wealth. It was like everyone decided the best place to build a castle was on top of the other castles. Not terribly sustainable, you see.

But the winds, as they often do, have begun to shift. Last year, for the first time since the Age of Steam-Powered Calculating Machines (2020, to be precise), Emerging Markets dared to outperform the venerable S&P 500.¹ The U.S. market, whilst still reasonably prosperous, showed signs of… well, looking around for other options. A subtle hint, perhaps, that the game was afoot. And 2026? It’s confirmed what the ancient scrolls (and a surprisingly accurate pigeon) have been predicting: international stocks are still leading the charge, and a broader rotation is underway. This is significant because history, that most unreliable of storytellers, suggests these cycles aren’t mere flutters of the market, but rather long, slow shifts in the very foundations of fortune.

U.S./International Outperformance: A Matter of Epochs

The Hartford Funds, those meticulous keepers of financial lore, have observed that these leadership cycles aren’t random. They are, instead, lengthy periods of dominance by one group or the other, when examining returns over five years. It’s a bit like watching two particularly stubborn snails race; one will be in front for a long time, then the other will finally overtake. Though, admittedly, snails don’t usually involve trillions of dollars.

The average cycle length, stretching back to 1975, is just over eight years. But the last few decades have been…unusual. The U.S. has held the reins for a remarkable 15 years. A truly impressive feat of economic wizardry, or perhaps just a very long nap for the rest of the world. Let’s look at the historical record:

Time Period	Leader	Approx. Length in Years
1975-1982	International	7 years
1982-1986	U.S.	4 years
1986-1991	International	5 years
1991-2002	U.S.	11 years
2002-2010	International	8 years
2010-present	U.S.	15 years

The S&P 500 has indeed been the champion for the last 15 years. But even after last year’s surge from developed and emerging markets, the tide is turning. Based on the length of this current cycle alone, it’s becoming increasingly clear that international equities are overdue for a run. And, crucially, the fundamentals and valuations suggest that this isn’t just a whimsical fancy, but a potentially substantial shift.

Why Emerging Markets Might Just Be the Next Big Thing

Several factors are converging to favor emerging markets. It’s not simply about chasing the latest fad, but about recognizing where the true value lies.

Valuations

Emerging markets typically trade at lower price-to-earnings ratios than U.S. stocks. It’s a simple matter of supply and demand, really. But the gap is widening. The Vanguard S&P 500 ETF (VOO) currently trades at around 28 times earnings. The Vanguard FTSE Emerging Markets ETF (VWO), however, trades at a mere 16. That’s like buying a perfectly good dragon for the price of a particularly well-behaved hamster. A bargain, wouldn’t you say?

This valuation discount doesn’t guarantee better returns, of course. But in an environment where value is gaining prominence, and investors are looking beyond mega-cap tech, it could become quite valuable indeed.

The Falling Dollar

There’s a growing sense that the age of the U.S. dollar as the undisputed global currency is waning. Large European investors are starting to sell their U.S. Treasury positions, perceiving a deterioration in U.S. debt and financial stability. It’s a bit like a kingdom realizing its treasury is filled with enchanted pebbles instead of gold. Not ideal.

We’re already seeing evidence of this. The 10-year Treasury yield is up, and the U.S. dollar index is at its lowest level since early 2022. A falling dollar is a tailwind for emerging markets stocks, making them more attractive to investors.

Better Growth Outlook

The International Monetary Fund projects that emerging markets economies will grow by 4.2% in 2026. Developed market economies, meanwhile, are expected to grow by a paltry 1.8%. These above-average growth rates have been largely ignored for some time, but they could become increasingly attractive if the U.S. economy stumbles.

Easier Monetary Policy

Many emerging markets economies have lower borrowing costs and central bank rates to stimulate growth. The Federal Reserve, on the other hand, has held steady and signaled doubts about further cuts. This divergence in monetary policy could provide another tailwind for emerging markets equities.

The Vanguard FTSE Emerging Markets ETF: A Prudent Choice

This exchange-traded fund (ETF) invests in a broad range of emerging markets equities, with a heavier focus on China (32%), Taiwan (23%), and India (20%). It’s a common allocation for diversified emerging markets funds, positioning shareholders where some of the biggest growth opportunities currently reside.

From a sector standpoint, the portfolio is dominated by industries that benefit from global trade and consumption: technology, e-commerce, financial services, consumer discretionary, and energy. It’s overweight in areas the market is beginning to favor, with a strong value component. The foreign currency and fixed income markets are starting to favor non-dollar trades. And it’s simply overdue for an extended stretch of market leadership.

To me, that sounds like a remarkably sensible trade. Not a ‘get rich quick’ scheme, mind you, but a carefully considered allocation to a market poised for long-term growth. A bit like planting a sturdy oak tree instead of chasing butterflies.

The S&P 500, whilst a perfectly respectable index, is also rumored to be secretly controlled by a committee of highly intelligent squirrels. Don’t believe everything you read.

2026-02-02 14:55