Emerging Markets Lead Global Risk Assets With AI And Brazil Focus

Key Quotes

"We think that MSCI EM can return another 15% into 2026. We actually put out something that is the official house view that EM equities over the next decade should be the strongest performing risk asset globally. So we're very excited about it. We think 2026 should be strong. We have attractive valuations. We like that we're getting exposure to a weaker dollar. We still feel like things are underweight from a positioning perspective. From a risk-reward perspective, I like that it's a globally diversified index. So we feel very good about it."

Stratford Dennis expresses a strong positive outlook for emerging market (EM) equities, projecting a 15% return for the MSCI EM index in 2026. Dennis highlights attractive valuations, the benefit of a weaker dollar, and the diversified nature of the EM index as key drivers for this optimism. He believes EM equities are positioned to be the top-performing global risk asset over the next decade.

"If you ask me, do I like China? I think the answer is yes, but. We do think China should perform well, kind of in line with global EM. But it is a but. The things that make me want to buy EM ex-China over China are that the rally in 2025 in Chinese equities was primarily driven by multiple expansion. I think if I were to look at EM ex-China valuations, they seem much more attractive. I also want exposure to that weaker dollar. I'll remind you and our listeners that EM ex-China gives you more dollar exposure. The China trade is much less exposure. And I want that exposure."

Stratford Dennis indicates a preference for emerging markets excluding China, despite acknowledging China's potential to perform in line with the broader EM index. Dennis points out that China's 2025 rally was largely due to multiple expansion, suggesting that EM ex-China valuations are more appealing. He also emphasizes the desire for greater exposure to a weaker dollar, which he states is more readily available in EM ex-China markets compared to China.

"We still like having AI exposure. But I think when we talk about AI exposure, we should think about EM AI versus AI in the US. Obviously, AI globally, but primarily in the US has had an historic run. I think we remain bullish as a firm on it. With that said, when you look at EM, EM or Chinese AI in particular, valuations look more attractive. They've underperformed their US counterparts over the past few years. So we still like it."

Stratford Dennis maintains a positive stance on Artificial Intelligence (AI) exposure, differentiating between US and emerging market (EM) AI. Dennis notes that while US AI has experienced a significant run, EM AI, particularly in China, presents more attractive valuations due to recent underperformance. He believes this makes EM AI a compelling investment opportunity.

"When you're talking about Latin American equities investing, you're really talking about Brazil and Mexico. On Brazil, I will admit that since I was on last, the election picture has gotten a bit murkier, and that was one of the components of why we liked it. With that being said, it still remains one of our top choices within emerging markets. You're going to get 250 basis points of cuts this year, which should benefit equities. What we saw over the past few years is that Brazil has some of the highest real rates in the world, and the vast majority of local money went into fixed income because of that. As you get these cuts, we should see a reversion of that move."

Stratford Dennis identifies Brazil and Mexico as the primary focus for Latin American equity investments, maintaining Brazil as a top choice despite political uncertainty. Dennis explains that anticipated interest rate cuts in Brazil, totaling 250 basis points, are expected to benefit equities by encouraging a shift of local investment from fixed income back into the stock market. He notes that high real rates previously favored fixed income, but rate cuts should reverse this trend.

"As we just talked about, emerging market AI related stocks have underperformed their US peers. We think that that is an attractive place to be. When you look at EM AI, you're going to get 30% earnings growth year over year, per our estimates, versus kind of 20% in the US. From a positioning perspective, it looks much cleaner than what we see in the US. So that's where I'd like to be, and we actually just released our EM AI custom basket that is going to give you global exposure, primarily in China, Taiwan, Korea, but has exposure to Semia and Latin America as well."

Stratford Dennis recommends emerging market (EM) AI stocks as an attractive investment, citing their underperformance relative to US peers and higher projected earnings growth. Dennis estimates EM AI could see 30% year-over-year earnings growth compared to 20% in the US, with a cleaner positioning. He mentions Goldman Sachs' release of an EM AI custom basket designed to offer global exposure, with a focus on China, Taiwan, and Korea, alongside exposure to South Korea and Latin America.

"The thing I'm thinking about most, even as an EM investor, is getting more clarity on the US labor market. Obviously, we're still kind of catching up on data post the shutdown. But really understanding, are we stabilizing? Is it weaker than expected? I think that we're going to get employment data later on in the week, and we'll get more clarity about that. We can start to think about what it means for the Fed into Q1 and Q2 of this year. That's kind of top of mind for me."

Stratford Dennis emphasizes the importance of monitoring the US labor market for insights into the Federal Reserve's future policy decisions. Dennis is looking for clarity on whether the labor market is stabilizing or showing signs of weakness, anticipating that upcoming employment data will provide crucial information. He believes this data will help inform expectations for the Fed's actions in the first and second quarters of the year.