The Valuation Gap That's Too Wide to Ignore
Here's the number I keep coming back to: emerging market equities trade at approximately 12x forward earnings. The S&P 500 trades at approximately 21x. That's a 43% discount for economies that, in aggregate, are growing faster than the United States.
I've watched this valuation gap for years. Sometimes there's a good reason for it — political instability, currency crises, poor governance, capital controls. Those risks are real and I'll address them. But sometimes the gap gets so wide that the risk/reward tips decisively in favor of EM. I believe we're at or near that point right now.
The missing catalyst has always been the dollar. EM equities tend to underperform when the dollar is strong — dollar strength creates capital outflows from EM, increases the burden of dollar-denominated debt, and compresses commodity prices that many EM economies depend on. When the dollar peaks and turns down, all of that reverses. The dollar appears to be turning now: DXY at 99.2 as of late April, down from a 2022 peak of ~115.
I'm building positions. Let me walk through where, how, and why.
The Three Vehicles I'm Using
EEM — iShares MSCI Emerging Markets ETF
EEM is the broadest EM vehicle — it tracks large and mid-cap companies across 24 emerging market countries. The top allocations are China (~27%), India (~19%), Taiwan (~17%), South Korea (~12%), and Brazil (~5%).
This is the core position. When I want broad EM exposure and I'm not making a strong single-country call, EEM is the instrument. It's highly liquid, with billions in daily volume, and the expense ratio is 0.70% — not cheap but acceptable for the access.
My current EEM position represents about 5% of portfolio. My target is 8–9% over the next quarter as I build into this theme. I'm adding in tranches — 1–2% per month — rather than going in all at once, because EM can have sharp short-term reversals even within an uptrend.
One important note on EEM vs VWO: they're similar, but not identical. EEM includes South Korea (which some indices classify as developed); VWO excludes it. Performance tends to be similar, but VWO is cheaper at 0.08% expense ratio vs 0.70% for EEM. I hold both for different reasons — EEM for its liquidity when I want to trade tactically, VWO as a lower-cost long-term hold.
INDA — iShares MSCI India ETF
India is the single-country story I'm most excited about. GDP growth for the Indian economy is tracking around 6.8% for fiscal year 2026, making India one of the fastest-growing large economies in the world. The IMF has India as the world's fastest-growing major economy for the third consecutive year.
What's changed structurally? Manufacturing is reshoring from China into India — Apple now makes a significant portion of iPhones in India, and the broader "China+1" supply chain shift is accelerating. India's working-age population is growing while China's is contracting. Digital infrastructure investment — payments, logistics, e-commerce — is compounding at extraordinary rates.
INDA gives me pure India exposure without the China risk that comes bundled in EEM. The PE multiple on Indian equities is higher than the EM average — around 18–20x forward earnings — because the market is pricing in the growth premium. That's more expensive than broad EM but still below the S&P 500's 21x.
My INDA position is currently 3% of portfolio. Target is 5%. The risk I'm watching: the Indian rupee vs the dollar. INR/USD has been relatively stable, but a sharp dollar bounce could hurt the unhedged position. I'm comfortable accepting that currency risk given the underlying equity growth rate.
EWZ — iShares MSCI Brazil ETF
Brazil is the contrarian call in the group, and I'm building the smallest position here — currently 1.5% of portfolio, targeting 3%.
Why Brazil? Two words: real interest rates. Brazil's central bank rate is approximately 13.75%, against inflation that's running around 3–4%. That implies a real interest rate of roughly 10.5%. That's one of the highest real rates anywhere in the world.
High real rates have kept Brazilian equity valuations depressed and the currency under pressure. But here's the setup: Brazilian inflation has been declining. The Selic rate is near its peak. When Brazil starts cutting rates — which I expect to begin in the second half of 2026 — the multiple compression reverses. P/E multiples in Brazil are around 8–9x forward earnings. If rates fall and risk appetite improves, a re-rating to 12–13x would imply 40–50% upside on the multiple alone, before any earnings growth.
EWZ is heavily weighted toward energy (Petrobras), financials (Itaú Unibanco, Bradesco), and materials (Vale). These are all sectors that benefit from dollar weakness — commodity prices rise, dollar-denominated revenues look better in BRL, and EM financial institutions attract capital when risk appetite improves.
The risks in Brazil are real: political unpredictability under the current administration, fiscal policy questions, and the fact that Brazil has disappointed EM bulls multiple times before. I'm not betting the portfolio on this. It's a measured, asymmetric position.
The China Question
Astute readers will notice I haven't listed a China-specific ETF. That's intentional.
China represents about 27% of EEM, so I have indirect exposure there. But I'm not adding dedicated China ETFs like FXI or MCHI right now. Here's why: the Chinese stimulus story is real — the government has been pumping liquidity into the economy through rate cuts, infrastructure spending, and real estate support measures — but the structural headwinds are also real. Property sector debt overhang, demographic decline, and geopolitical risk around Taiwan create a risk profile I'm not willing to overweight.
If you're more bullish on China than I am, MCHI is the cleanest vehicle. I'm content to let my EEM allocation give me the China exposure while being underweight relative to the index.
How I'm Sizing and Entering
Total EM allocation in my portfolio: current 9.5%, target 15–17% over the next two to three months. The breakdown:
- EEM: 5% → 8–9%
- VWO: 3% → 4%
- INDA: 3% → 5%
- EWZ: 1.5% → 3%
I'm adding systematically on dips rather than chasing momentum. EM can be volatile — 5–10% swings in a week are not unusual. I'm comfortable with that volatility because the position sizes are sized for it.
Entry strategy: I buy on any 2–3% pullback in the index or individual ETF. I don't try to catch exact bottoms. Dollar-cost averaging into a structural thesis works better for me than trying to time entry precisely.
The Risks I'm Taking Seriously
Currency risk. All of these positions are unhedged. If DXY reverses and climbs back toward 105–110, my EM positions will take a double hit — both the underlying equity decline and the currency translation loss. I think this risk is low given the macro backdrop, but it's not zero.
Political risk. EM is inherently more politically volatile than developed markets. A currency crisis in Brazil, an escalation in Taiwan tensions, or a major policy reversal in India could all hit these positions hard. This is why I'm sizing these as satellite positions, not the core of the portfolio.
Liquidity risk. In a broad risk-off event — think March 2020 style — EM ETFs can see severe temporary dislocations. Spreads widen, prices can gap. I hold enough liquid US assets that I wouldn't be forced to sell EM at the worst time.
Valuation being a trap. EM has looked "cheap" many times before and stayed cheap. Value traps are real. The catalyst I'm counting on — dollar weakness — needs to persist for the thesis to play out. If the catalyst fails, the cheap valuation isn't enough.
Why Now?
I've been watching EM for the past 18 months, waiting for the right moment to size up meaningfully. What's different in May 2026 vs May 2025?
The dollar turn is the biggest factor. A year ago, DXY was still above 104. Now it's at 99 and trending lower. Dollar cycle turns of this magnitude historically produce 2–4 years of EM outperformance relative to US equities.
The earnings upgrade cycle in India is underway. India's corporate earnings have been revised upward for FY2027 over the past two quarters — analysts are chasing the numbers up, not down.
The Brazil rate cycle is near its inflection point. Peak real rates historically mark the beginning of strong equity performance in Brazil — the market starts pricing in the cuts before they happen.
At 12x forward earnings vs 21x for the S&P 500, I don't need a bull market in EM to make this work. I just need the gap to narrow. That doesn't require optimism — it just requires mean reversion.
I'm building these positions now, systematically, with eyes wide open on the risks.
— Ruslan Averin