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The end of US exceptionalism and the era of Emerging Markets

White Paper
21 March 2025

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For years, US exceptionalism has been driven by the dominance of its tech giants, an energy boom and aggressive government spending. But as these forces start to wane, Emerging Markets are stepping into the spotlight, bolstered by cyclical tailwinds, a peaking dollar, structural advantages, attractive valuations and diversification benefits. Indeed, the correlation of MSCI EM and MSCI China to the S&P500 is now just 0.26 and 0.1, respectively. Investors are rapidly recalibrating their strategies for this new reality. So, is this the dawn of a long-awaited EM renaissance? 

Crucially, any upcycle in EM equities will be completely different from the last one, which was driven by unbridled optimism over seemingly inexorable globalisation, free trade and a growing middle class.

By contrast, we are now in the midst of an economic decoupling, with major powers dividing the world into separate spheres of influence. As we cross the Rubicon into a more volatile, multi-polar world, investment opportunities are plentiful, but now more than ever it is crucial to understand the macroeconomic and geopolitical conditions in which companies operate.

The new investment environment will likely be characterised by increasing uncertainty, macro risk, and a divergence in performance between relative winners and losers. Successful investors will need a truly active and agile approach that fully integrates top-down and bottom-up analysis.

Cyclical tailwinds

  • US exceptionalism in recent times has had three key drivers: the stellar performance of its tech and energy sectors, and soaring government spending. All could be passing their peak. DeepSeek has called into question the dominance of US Big Tech, while lower oil and gas prices could see US shale producers scale back activity. More importantly, Trump is looking to rein in government spending, increase taxes on foreign goods, and reduce exorbitant interest costs by lowering inflation and bond yields. All this points to a deceleration in the US economy and headwinds for its equity markets.
  • Concurrently, other major economies are becoming more fiscally expansive. European nations plan to spur growth by borrowing to invest in defence and infrastructure, while China is ready to relax its debt breaks and boost government spending to the highest levels in decades. Beijing has promised to “vigorously boost consumption” and “expand domestic demand in all directions”. Importantly, there is far more fiscal and liquidity headroom in EM versus DM.
  • The upshot of these trends is likely to be a weaker dollar, something Trump is keen to orchestrate. These shifting sands are leading to a recalibration in markets, with investors scrambling to move capital into Europe and Emerging Markets at the expense of the US. In our view, EM equities are particularly well positioned for this new era, not least because a weak dollar exhibits extremely strong correlation with EM equity outperformance.

Dollar versus EM equity performance relative to DM

EM relative to DM and dollar

Source: Bloomberg | TT International

Structural advantages

  • Cyclical tailwinds blowing across the asset class come in addition to the many structural advantages for which Emerging Markets are famed, including generally attractive demographics, lower debt and rising wealth. Given these attributes, it is perhaps unsurprising that emerging economies now generate two-thirds of global growth.
  • They are home to many of the world’s most innovative companies, with leading positions in structural growth opportunities of breathtaking potential scale. To take just one example, consider humanoid robots, arguably the single biggest use-case for AI globally. Conservative estimates put the eventual number of humanoid robots at over 1 billion, with blue-sky optimists like Elon Musk claiming 5 billion. For context, the current number of passenger cars in operation globally is 1.7 billion. Today, next to no robots are made. This means a market growing from essentially zero to around 60% of the world’s passenger auto fleet in just 20 years.
  • As it has been with Electric Vehicles, China will initially be the leading manufacturer and adopter of robots, growing its national champions to vast scale by weaponising its continental-sized domestic market, before unleashing them to compete on the global stage. We have substantial exposure to leading companies in the Chinese humanoid robot and EV supply chains across our EM portfolios. 

Diversification benefits

  • EM equities also offer powerful diversification benefits. The correlation of the MSCI EM index to the S&P500 is just 0.26. This has been trending lower in recent years, with the correlation of MSCI China to the S&P500 now particularly notable at around 0.1. 

Correlation versus S&P500

EM and China correlation to S and P

Source: Bloomberg | TT International

  • Intuitively this makes sense as there is a very deliberate economic decoupling taking place. This has accelerated materially in the last 5 years, suggesting that correlations will remain low.  

China export partners (% of exports)

china exports to other countries

Source: Bloomberg | TT International

  • Paradoxically, this decoupling looks set to accelerate even further, partly due to a convergence in worldview between the Chinese and US administrations. Trump’s America appears to have shifted from a belief in a rules-based international order and being a global policeman to isolationism and the notion that ‘might is right’.
  • This opens the door to multiple major powers dividing the world into separate spheres of influence, avoiding fights with strategic adversaries unless core interests are directly threatened. With China the clear second superpower, it stands to reason that it will dance ever more to the beat of its own drum, as will those economies within its sphere of influence, most notably in emerging Asia. 

Attractive valuations

  • EM equities have begun to materially outperform those in the US. However, we see this as the beginning of a long period of outperformance. Recent moves must be set against a reality where the US remains extremely overextended, and EM has lagged for years. Many metrics highlight this imbalance, but two of the most powerful are the ratio of market cap to M2 money supply being near an all-time high in the US, and EM languishing at a c.45% discount to the US on a cyclically-adjusted PE basis. 

Ratio of market cap: M2 money supply

market cap relative to M2

Source: Bloomberg | TT International

MSCI EM/S&P500 cyclically-adjusted P/E (CAPE)

em to dm 45 discount

Source: Bloomberg | TT International

  • As investors begin to slash their exposure to the US at record pace, there is a wall of money looking for a new home. Given their relative sizes in global equity allocations, even a modest 2% shift from US to EM stocks would equate to a 13% inflow into the latter. This seems eminently plausible as dedicated EM allocations rose from 6% of total mutual funds in 2004 to 13% in 2010, before falling back to around 6% today, despite emerging economies’ share of global GDP increasing from 12% to 39% over the same period. 

The perfect fit

  • If EM equities are the right asset class for the coming era, what is the best approach to capture the opportunity? To answer this question, it is first vital to appreciate that this EM upcycle will likely be completely different to the last one, which was driven by unbridled optimism over seemingly inexorable globalisation, free trade and a growing middle class.
  • This was a world in which stockpickers could select investments based on structural trends that could be reliably predicted long into the future. But the world has changed, and so must investment processes. Trump is not a ‘conventional’ president, nor for that matter are a growing number of strongmen leaders across the planet.
  • As we cross the Rubicon into a more volatile, multi-polar world, now more than ever it is crucial to understand the macroeconomic and geopolitical conditions in which companies operate. The new investment environment will likely be characterised by increasing uncertainty, macro risk, and a divergence in performance between relative winners and losers. In short, it should suit truly active, agile investors such as TT that fully integrate top-down and bottom-up analysis. 

Important information: This information is issued by TT International Asset Management Ltd (“TT”), authorised and regulated in the United Kingdom by the Financial Conduct Authority. This information is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The circulation of this information is restricted to professional investors as defined in the legislation of the jurisdiction where this information is received.  No representation is made as to the accuracy or completeness of any information contained herein, and the recipient accepts all risk in relying on this information for any purpose whatsoever. Without prejudice to the foregoing, any views expressed herein are the opinions of TT as of the date on which this information has been prepared and are subject to change at any time without notice. TT does not undertake to update this information. Any forward-looking statements herein are inherently subject to material business, economic and competitive risks and uncertainties, many of which are beyond TT’s control and are subject to change. The information herein does not constitute an offer of shares or units in any fund, and it is not an offer to, or solicitation of, any potential clients or investors for the provision by TT of investment management, advisory or any other comparable or related services. No statement in this information is or should be construed as investment, legal, or tax advice, nor is any statement an offer to sell, or a solicitation of an offer to buy, any security or other instrument, or an offer to arrange any transaction, or to enter into legal relations. This information expresses no views as to the suitability of the investments described herein to the individual circumstances of any recipient. Any person considering any investment should consult the offering documentation if and when is made available. Investments carries with it a high degree of risk. Past performance is not necessarily indicative of future results and investors may not retrieve their original investment. 

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