Why emerging markets demand a contrarian, selective mindset

Emerging markets (EM) are an all-too-often misunderstood category within global equity investing.

For many investors, the label ‘emerging’ still conjures up fragile currencies, unstable governance and unfulfilled promise. A perception that has endured even as the reality across much of the emerging world has changed.

Emerging markets account for around 60 per cent of global GDP and 85 per cent of the world’s population. Yet they remain a marginal allocation in many sophisticated portfolios, defined less by their potential and more by their perceived challenges.

For advisers, the emerging markets question is no longer “in or out.” It is about selectivity: where are the compelling opportunities that others are missing because they are still working from outdated assumptions?

The contrarian case for emerging markets is straightforward. Many of the challenges investors still associate with the asset class are now more visible and better understood. In many cases, already reflected in depressed prices.

We believe investors may be underappreciating the extent to which EMs have evolved over the past decade, particularly when it comes to the strengthening of policy frameworks and market institutions. Corporate balance sheets have also improved, and capital markets are deeper and more sophisticated than they were a generation ago.

Yet investor behaviour has been slower to evolve. Emerging markets continue to be priced through an outdated lens. After a decade of underperformance, expectations remain very low. Historically, that has been one of the strongest drivers of the region’s long-term return potential.

Mispricing starts with perception

EMs still look contrarian in today’s market, not least because capital is still flowing the other way, generally favouring US exposure.

In March 2026, foreign investors pulled US$70.3 billion from emerging market assets, the biggest monthly outflow since the pandemic rout of March 2020. The move was widely viewed as a concentrated risk-off event, driven by rising geopolitical tensions rather than a uniform collapse in fundamentals. In other words, investors were not fleeing bad businesses. They were fleeing uncertainty and reaching for perceived ‘safe havens’ out of reflex.

The asset class is still too often judged through this old lens, despite offering scale and diversity, and the valuation gap is where this misperception becomes most visible.

US equities trade at roughly 35 times earnings, while emerging-market equities trade at around 16 times earnings – below their own long-term average and at a discount of about 54 per cent to the US.  In our view, starting valuations remain one of the most important drivers of long-term returns.

When an asset class of this scale is priced for such muted expectations, the question worth asking is whether investors are being compensated not just for genuine risks, but for stale assumptions as well.

An asset class that isn’t one asset

Another common issue is that investors often group diverse countries and businesses into a single, blunt trade. But this homogenised view belongs to the ‘old map’ of EMs, reflecting past crises rather than present conditions.

The problem is not just mispricing, it is oversimplification.

Emerging markets are a broad and increasingly diverse universe, spanning different regulatory regimes, governance standards, capital structures and growth drivers. The dispersion between strong and weak businesses within the asset class has rarely been wider.

And yet, much of the capital allocated to emerging markets flows through passive, benchmark‑driven exposure, leading investors to become concentrated in crowded parts of the index while lacking exposure to less fashionable, but potentially more attractive, opportunities.

Why selectivity matters more than ever

This is where a selective, bottom‑up approach becomes critical.

The true opportunity in EMs is about identifying individual businesses that are trading at a meaningful discount to their long‑term intrinsic value, often because sentiment has moved faster than fundamentals.

Investors in today’s market are quick to react to macro shocks by treating EMs as a single bucket. That creates a stronger case for active managers who can discern quality amid the clutter.

That requires looking past headlines and focusing on company‑specific drivers: balance sheet strength, management alignment, governance quality and the durability of earnings. Many of the most compelling businesses in EMs have limited direct exposure to the macro risks dominating headlines. Their fortunes are driven by idiosyncratic advantages and structural trends, not short-term capital flows.

Importantly, selectivity also means restraint. Not every emerging market, or every growth story, is attractive. In some cases, optimism is already priced in, leaving little margin for error. Demographics and economic growth are only part of the equation. What ultimately matters is whether value accrues to shareholders.

For investors prepared to move beyond legacy perceptions and beyond the simplicity of benchmark exposure – emerging markets remain a large, diverse and often underappreciated hunting ground for value. But they demand selectivity, discipline and a genuinely contrarian mindset.

Legal disclaimer: For advisers and wholesale investors only. Past performance is not a reliable indicator of future results. This is not financial advice and does not constitute a recommendation to buy, sell or hold any interests, shares or other securities, or to adopt any investment strategy. This represents Orbis’ view at a point in time and we may take the opposite view/position from that stated. This is because our view may change as facts or circumstances change.