Emerging market equities are being mispriced by investors relying on outdated assumptions, according to Orbis Investments, which argues improving fundamentals and attractive valuations are being overlooked after more than a decade of underperformance.
The investment manager said sentiment towards emerging markets remains anchored to investors’ experience over the past 10 to 15 years, when developed markets significantly outperformed and emerging market equities were generally viewed as riskier assets.
Speaking to Investor Daily, Orbis Investments head of clients for Australia Eric Marais said investors continue to view emerging markets through a lens shaped by that period, despite conditions changing markedly.
“The premise of the white paper is that there’s a difference between the map and what the terrain actually looks like today,” Marais said.
“Our premise is that the map has largely been drawn from investors’ experience with emerging markets over the past 10 to 15 years, which has not been particularly positive.”
While the S&P 500 turned a US$100 investment into more than US$700 between 2010 and 2025, the MSCI Emerging Markets Index grew the same investment to about US$186 over the period, reinforcing investor preference for developed markets.
That prolonged underperformance has helped create one of the widest valuation gaps on record. Orbis’ white paper found emerging market equities were trading at around 16 times earnings on a cyclically adjusted basis at the end of 2025, compared with about 38 times for US equities.
Marais said investors are overlooking the importance of valuation when assessing future returns.
“When you look at where things stand today, India is valued similarly to the US, and both appear very expensive relative to their long-term history. In contrast, emerging markets overall offer much more appealing valuations.”
“The higher the price you pay, the lower your future returns are likely to be.”
Although India has become a favoured destination for global investors due to its strong economic growth and demographics, Marais argued many investors incorrectly assume economic expansion automatically translates into strong equity returns.
“The link between economic growth and equity market returns is much weaker than most people assume,” he said.
“There are many factors that influence how GDP growth translates into equity market returns, including corporate management and governance standards.”
That disconnect has contributed to what Orbis sees as significant pricing disparities across emerging markets. While India has attracted strong investor enthusiasm and trades at a substantial premium to other emerging markets, Marais said opportunities are increasingly being found in less favoured regions.
The firm remains selective, but sees value in parts of China despite continued negative sentiment towards the market.
One example is Chinese gaming company NetEase, which Marais said demonstrates how investors can manage governance concerns through careful stock selection rather than broad country-level exclusions.
“We’ve found quite a few interesting companies in China, whereas sentiment towards China overall remains quite negative,” he said.
The firm also believes investor caution towards emerging markets is increasingly out of step with current risk dynamics.
Its research found emerging market equity volatility has fallen steadily relative to developed markets over the past decade and now more closely resembles developed market volatility than many investors assume.
The white paper also highlighted the diversification benefits of the asset class, noting emerging market equities have historically exhibited a 0.72 correlation with developed markets and a 0.66 correlation with US equities.
“There’s a perception that emerging markets are a riskier place to invest than developed markets,” Marais said.
“In the paper, we highlight that volatility in emerging markets has declined, and today they are not significantly more volatile than developed markets.”
“Perhaps most importantly, when emerging market and developed market exposures are combined in a portfolio, overall risk declines rather than increases.”
Marais argued that many of the risks commonly associated with emerging markets are not unique to the asset class, pointing to rising fiscal deficits, geopolitical uncertainty and elevated valuations in the US.
While those risks also exist across emerging economies, he said investors are at least being compensated through lower valuations and more attractively priced currencies.
The improving risk-return profile could become increasingly difficult for investors to ignore if emerging markets continue their recent run of relative outperformance.
Marais noted emerging markets have outperformed the US over the past 12 to 18 months, while risk levels have also moderated.
“Stronger returns and lower risk can be a very powerful combination,” he said. “We are in the very early stages of that starting to occur.”
He also argued that some of the world’s most significant artificial intelligence beneficiaries are based in emerging markets, challenging another common misconception about the asset class.
“Many companies that are strongly exposed to the AI boom are domiciled and operate in emerging markets,” Marais said.
“That includes two of the three major memory producers, Samsung Electronics and SK Hynix, as well as Taiwan Semiconductor Manufacturing Company. The list extends well beyond those names.”
With investors increasingly concerned about concentration risk in developed market indices, particularly in the US, Marais believes emerging markets deserve a closer look.
“The investment terrain in emerging markets is a fundamentally different story now than it has been in the past,” he said.
“Investors with a differentiated investment approach will be better placed to make the best of the mispricing opportunities that emerge. We believe those opportunities are among some of the most attractive long-term opportunities in global equities today.”