The US MSCI continues to underperform in the global stock market derby as it did last year (chart). Does this mean that American exceptionalism, which was touted as recently as 2024, is kaput? Is this another sign of de-dollarization? We don't think so. America remains exceptional, and foreigners continue to invest in the US. However, there are plenty of exceptional companies overseas that have also attracted global investors.
But why did the US MSCI start to underperform in 2025? Perhaps, investors have been impressed with the resilience of the global economy in the face of Trump's Tariff Turmoil last year. Late last year, we also concluded that the outperformance of the All Country World ex-US MSCI might be sustainable for a while, as global investors sought to rebalance away from the US because it accounted for a whopping 65% of the All Country World MSCI's market capitalization.
So far, the star performers in the global MSCI derby have been South Korea, Brazil, Mexico, Taiwan, and Japan. All of them, except Japan, are included in the Emerging Markets MSCI. Japan's stock market rose by as much as 5.7% today after the LDP won a "supermajority" (two-thirds of the seats) in Sunday's House of Representatives election. This result effectively removes political gridlock, allowing the government to proceed with fiscal programs to stimulate the economy.
The ratios of the US MSCI to the Emerging Markets MSCI (in local currencies and in US dollars) have been on an upward trend since 2010 (chart). These ratios peaked at the start of 2025 and have been trending lower since then.
Since October 2022, the forward P/E of the Emerging Markets MSCI has increased from 15.0 to almost 20.0, as investors correctly anticipated a rebound in the index's forward earnings, which began in late 2023, back to its previous record high during the summer of 2011. The index is no longer cheap, but the prospects for forward earnings are quite good, in our opinion.
We have favored the EMXC ETF as the simplest way to stake out a position in emerging markets excluding China, which has been a flat market since 2008 with significant volatility (chart). It's been good for traders, but not for investors. The forward earnings of the China MSCI has been virtually flat since 2011.
On a ytd basis, EMXC is up 13.5%, while the EEM ETF (which includes China) is up 10.6% (chart).
The big-picture story is that emerging markets have rapidly growing middle-class populations that are aspiring to become more prosperous. Both industrial production and exports of emerging economies have increasingly exceeded those of the advanced economies (chart).
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