Emerging-market stocks have not been this cheap compared with U.S. stocks in at least two decades.
The gap did not come out of nowhere. The U.S. AI rally pushed American stocks higher.
China and Hong Kong, which together make up over 20% of the emerging-market index, stayed weak.
That has created a lopsided year.
The MSCI emerging-market index is up 19% this year.
Most of that gain came from a small group of AI-linked names in South Korea and Taiwan.
Those names include SK Hynix, Samsung Electronics, and Taiwan Semiconductor.
After the Middle East conflict began in late February, the index has managed only 3%.
The S&P 500 gained 13% over the same stretch.
So the discount is growing even as emerging markets are, on average, making money.
The overall low number hides a big split. Some markets are much more expensive than others.
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Regional performance is just as uneven.
Asia leads the daily action. Latin America has been flat.
Emerging Europe, the Middle East, and Africa have posted modest gains.
James Athey manages money at Marlborough Investment Management. He thinks U.S. stocks look expensive and concentrated.
"Suffice it to say, the US index looks historically rich and concentrated," he said. "Buying MSCI EM is one way to diversify away from the US."
He still warns that AI distorts both markets. "You have the massively distorting effects of tech and AI-linked stocks in both the US and EM indices," Athey said.
He calls AI-based emerging-market stocks extremely volatile and binary. Binary means a coin flip: these stocks can shoot up or fall hard, with not much in between.
It's possible that a great trade still exists there, but it is also possible that it doesn't. Long term, he is skeptical.
That concern is why Athey avoids boom-and-bust tech stocks in Asia. Athey prefers Latin America, saying he sees more value there, with supportive economic, political, and macro conditions expected over the medium term.
That caution is spreading. Investors are shifting toward non-AI markets like Latin America as tech volatility climbs and retail traders in South Korea unwind their borrowed-money bets.
India is also getting a fresh look. Asset managers had backed away after its main Sensex index lost 13% this year in dollar terms, but now they see the country as a way to get growth without depending on AI.
China is on the watch list too. Supply shocks from the Iran war ended a stretch of falling factory-gate prices, and a real consumer recovery could bring in investors who want more diversification.
So what does this all mean for the money you have in the market?
The gap is real, but it is not a signal that one side is right and the other is wrong.
For your portfolio, the bigger lesson is that "emerging markets" is not one decision.
A broad index fund still tilts heavily toward the same AI-driven chip names that have fueled the U.S. rally, while a single-country bet on Brazil or Turkey is a completely different animal.
The cheap pockets could turn out to be bargains, or they could stay cheap for a long time.
The old, simple story about emerging markets being an easy "buy what's cheap" trade does not match the range of choices in front of you.
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