Fear, euphoria and the emerging-markets opportunity investors keep missing

The case for emerging-markets equities is familiar enough. The conversation usually runs through growth rates, demographics and the difficulty of picking the right countries at the right time.

What rarely enters it is value investing, the discipline of buying unloved businesses cheaply and waiting for sentiment to turn. For many investors, value and emerging markets sit at opposite ends of the spectrum.

Allison Fisch, president and portfolio manager at Pzena Investment Management, has spent considerable time testing that intuition against the evidence. Her conclusion is that several of the assumptions steering investors away from value in emerging markets rest on misconceptions a closer look at the data largely resolves.

A surprising fit

The first misconception is that value has no real place in emerging markets. “The value investing approach actually works extremely well in emerging markets,” Fisch says, “and I think that’s a little bit of a surprise to some people.”

When investors picture the asset class, she notes, “a lot of people immediately start thinking about growth, they start thinking about macro, picking the right countries.”

The research tells a different story. Studying which approaches have actually delivered in emerging markets, Fisch found two that stand out: a momentum-based approach and a valuation-based one. More striking still, “there’s even evidence that the value approach works better in emerging markets than in developed markets.”

For investors who file value under “developed-world strategy,” that is a reframe worth sitting with.

Why value works anywhere

To understand why, Fisch starts not with emerging markets but with human nature. “A value investing approach is effective because investors are emotional. They’re not rational,” she says.

The point is structural, not incidental. It is the predictable swing of sentiment, rather than any single market’s quirks, that creates the opportunity.

When the outlook darkens, that emotion has a clear direction. “In times where the direction of the economy and the profitability of businesses looks in question, investors get scared and they want to feel safe,” Fisch explains. “They sell everything that feels controversial, less well understood, where it seems a little bit risky, and valuation spreads widen out.” This, she says, is “the bad part of the value cycle,” the uncomfortable stretch where cheap assets get cheaper.

What makes the discipline pay is what happens next. As fear recedes and “it looks like maybe the world isn’t going to end,” profitability bottoms out and recovers, and “those spreads start tightening up very extremely, because that’s investors rushing back in.”

“Entire countries that were considered un-investable become too cheap to ignore.”

It is this “ebb and flow of fear and uncertainty into euphoria and excitement,” Fisch argues, that drives value returns in any market.

Why emerging markets amplify the effect

If value works on the swing of sentiment, then the wider the swing, the greater the opportunity. This is where emerging markets become the point rather than the problem.

“By their very nature, they’re more far-flung, they’re less well understood because of the diversity there,” Fisch says. Where a developed market might face a single dominant worry, an emerging-markets universe is “more likely to have multiple controversies and different controversies taking place in different places at the same time.”

The result is that the cycle of fear and excitement “becomes even more attenuated,” more pronounced, more frequent and more mispriced.

The very features investors cite as reasons for caution, unfamiliarity, distance and a constant drumbeat of country-specific controversy, are the conditions under which a valuation discipline does its best work.

None of this removes the need for judgment. A value approach in emerging markets still asks investors to hold their nerve through the widening phase, when controversy is loudest and the discomfort is real, before the spreads tighten.

But Fisch’s framing reorders the question. The obstacle is rarely the asset class itself. It is the assumption that growth and macro are the only sensible lenses, and that the volatility of sentiment is a risk to be avoided rather than the very thing a disciplined value investor is paid to exploit. “It works very, very well in emerging markets,” she says, “and perhaps even better than in the developed world.”