Hey Reader,
The world's most profound structural mismatch creates the greatest investment opportunity of our generation
Most sophisticated investors I know think it's madness. When I tell them that roughly 77% of my net worth is concentrated in emerging & frontier market assets, they usually respond with some version of "that seems quite risky..." or "shouldn't you have at least the majority of your portfolio in the US - everyone knows US stocks outperform everything...".
They're not entirely wrong about the volatility in the short term, but they're completely wrong about the opportunity relative to the US over the long term.
After more than fifteen years of watching European and US institutional investors systematically underprice and under-allocate the world's fastest-growing economies, I've reached a simple conclusion: the biggest risk in emerging market investing isn't the short-term volatility of some stock markets. Rather, it's missing out on what could be the most profound structural mismatch in global finance right now.
The great allocation mismatch
Emerging markets represent roughly half of the world's total GDP in PPP (purchasing power parity) terms, or about 40% in nominal GDP (up from only 25-35% around 2008). It's important to keep in mind that PPP is the metric that actually matters for domestic consumption capacity, as well as for geopolitical clout (since PPP GDP tells you how much military equipment you can produce per dollar of GDP - a central concept when comparing countries' relative standing today).
Yet globally, emerging market stock markets contribute only one-fourth (26%) of total global market capitalization. Hence, in terms of emerging market equity exposure, the world on average appears to be under-allocated by roughly 50% (=26%/48%-1).
Alternatively, you can arrive at a similar conclusion by looking at the world's key overallocation relative to economic output - the US stock market. The US contributes only about 15% of global GDP (PPP), while making up more than half of all the world's stock exposure (54%) - an overallocation by a factor of roughly 3.5x.
What's more important to remember is who actually holds the little emerging market equity exposure the world still has - well, naturally it's primarily savers and investors based in emerging markets themselves. The rest of the world has barely any exposure at all to the majority of the world's economic output. Read that again and let it sink in - most of the planet has no investment exposure whatsoever to the key economies and growth engines of this world.
If you dig into the allocations of the part of the world where I'm from - Europe - the situation is even more distorted. According to UBS data, European family offices (let's assume their client base is primarily European, with some noteworthy exceptions) allocate only 4% to emerging market equities (2024). For this subcategory of investors, we're looking at an under-allocation of -92% (=4%/48%-1). Think about it this way - imagine if the world was one single stock market and each country was a company. European family offices as a group have basically applied the following investment allocation criteria: "Under-weight the fastest growing half of all companies on the global stock exchange by at least 90%".
Think about that for a moment. The majority of the world's economic center of gravity has already shifted to developing economies, but capital allocation remains stubbornly anchored to 20th-century patterns. The Western world's wealthiest families have positioned themselves to capture less than 10% of their pro-rata exposure to global economic growth. Wow.
Let's assume you're around 40 years old today (like myself) - you have an investment horizon of 50-60 years (I typically assume I'll live past 100 because I eat a lot of macadamia nuts ;). Are you ready to ride with that type of 90%+ under-allocation to global growth for decades to come for the coming half a century? Do you think your children and grandchildren will thank you for betting the family fortune on the world's largest consensus trade (US equities)? Perhaps along the lines of:
"I know it looks crazy now, but it was very common at the time - we hadn't fully grasped that the economic power of these economies was actually much greater than what it was when we grew up."
Put on another set of glasses and the world's staggering under-allocation to emerging markets becomes perhaps even more clear through the famous “Buffett indicator” (the value of all stocks in a country relative to its GDP). Back in 2001, when Buffett coined the term, he called it "probably the best single measure of where valuations stand at any given moment", noting that fair value is around 100% and “70-80% indicate a good buying opportunity”. Any comments for the >200% level from Mr. Buffet? Well, for those levels he explicitly commented “200% or higher is playing with fire”.
The US Buffett indicator is now hitting well above 200% (because the entire planet has been piling into its equity markets for the past 15 years straight, while profit growth has been rather lackluster overall when you adjust for buybacks). Now, following the history’s best capital allocator’s deemed “best single valuation measure”, we look back up at the Buffet indicator chart above – we are now back at pre-school level: one chart is bang-on “a good buying opportunity” and the other one is well into “playing with fire”. What to do? (please also keep in mind that most of the Western world is currently allocated something like 10:1, “playing with fire”/”good buying opportunity”).
Another interesting thing to note is that EM and US had roughly the same Buffett indicator back around the Global Financial Crisis, in 2008. What happened since then? What made the US so attractive and at the same time killed EM equities’ overall performance over the past 15 years since the GFC? The quickest and easiest high-level (and simplified) explanation reads: a strong US Dollar. A strong USD sucks capital from other markets into the US. Furthermore, it increases emerging market debt service costs (as much of that debt is denominated in USD) and can also drive up imported inflation for some emerging markets (as import-dependent countries pay traditionally pay their imports in USD).
The key question going forward is: what if these two Buffet indicators start to mean revert? Which at the end of day is the logic behind Buffet’s ranges for “good buying opportunity” vs. “playing with fire”.
To add insult to injury, even if no additional capital would flow into the US stock market, this fundamental misallocation would still be accelerating as we speak. While developed economies struggle to produce 1-3% GDP growth rates and suffer from declining demographics (not to mention additional headaches as social unrest across Europe and the US as well as potential IMF bailouts in the UK and France, etc), emerging markets compound at growth rates that are 50-100% faster than the global average. In PPP terms, China is already a 30-40% bigger economy than the US (remember, this is the more relevant GDP metric when measuring the likelihood of military supremacy). Even in nominal terms, China's economy will likely surpass the US within this decade (some data indicates it already has even in nominal terms - it's just a question of how the IMF GDP data is measured and produced). India's economy is already larger than Japan's.
The great recency bias
Human memory is short, and we suffer from (among many others) an irrational over-belief that recent trends and patterns will continue - Kahneman describes this in his famous book "Thinking, Fast and Slow". Ever since the global financial crisis, emerging markets have struggled to outperform as an asset class (primarily due to the USD trending upward steadily throughout this period). This means that most financial analysts and other market participants will (on the margin) carry an irrational over-confidence that this trend will continue, as this has been the overarching trend for the better part of their respective careers. That being said, a career is a very short and irrelevant time unit when it comes to financial markets – in the long run, financial market returns follow economic growth.
The great reallocation
We're experiencing what seems to be a gradual, albeit fundamental, reshuffling of the previously American-led global order that has shaped markets and geopolitics for the better part of a century. Personally, I don't see this as either a doomsday scenario or anything near a collapse, but rather an American-driven strategic withdrawal marked by a shift toward nationalism, protectionism, and domestic consolidation.
The contours of what some have called "Fort America" are becoming more visible: troops pulled back from Europe, calls for allies to shoulder more of their own defense, supply chains repatriated in the name of resilience, and renewed interest in controlling the Panama Canal as well as aspirations of territorial acquisitions in the Arctic. These are not isolated steps; they reflect a broader intent to reorient America inward, trading its post-war position as global hegemon for a more insular one, focused on the preferences and demands of larger pools of low- and mid-income US voters.
Such repositioning has profound implications for the global financial system - chief among them is the long-term weakening of the USD. I wrote about this direction of travel already five years ago in this article online. For decades, the dollar's structural strength (underpinned by America's historically undisputed geopolitical dominance, its "exorbitant privilege" position in the global financial system, and the sheer gravitational pull of its consumption engine) has acted as both a global stabilizer, safe haven, and magnet for global capital flows.
As that dominance recedes and global trade relationships begin to rebalance (remember, the USD is structurally overvalued/supported by trade surplus countries repeatedly re-investing their USD-denominated surpluses back into US Treasuries and the US stock markets => balanced trade stops these flows), the era of persistent dollar strength may give way to a more multipolar currency landscape. While such a shift introduces volatility, it also unlocks opportunity - particularly in the emerging markets that have long suffered during periods of strong USD. A more subdued and long dollar bear market will reverse that dynamic.
For example, as mentioned in the linked 2020 article, updated through today: over the past 15-20 years (since the Great Financial Crisis), the USD (in the form of the USD index, DXY, or "the Dixie") has risen by more than 40%, up until the Liberation Day tariff announcements. This relentless 15-20 year rise in the USD hit frontier market equities particularly hard, while US stocks (the S&P 500 index) rallied forcefully. The differences are quite striking - frontier equities peaked around October 2008 (roughly when the USD bottomed). Since then, frontier market equities have gained only +136% over those 17 years (of which, 25%-points YTD 2025). During the same period, the S&P 500 rose by a whopping c. 600%.
The current US administration's agenda, focused on balancing global trade flows and increasing relative US export competitiveness, also implies untethering the USD from its structural overvaluation, historically underpinned by trade surplus countries recycling their surpluses into US treasuries and stocks. The USD then declines secularly in value, which makes perfect sense if you want to increase American export manufacturing competitiveness (to appease the American low and middle classes) - there's no more potent lever for this than devaluing your currency. Importantly, both JD Vance and Trump seem to agree on this point.
Nowhere is the already well-evolved secular decline in the USD's relative value more visible than in the price of gold, which also happens to be increasingly used by China and other large emerging markets to settle their net trade balances with each other (away from the USD). Since the beginning of 2024, gold is up roughly +77% in value - meaning the USD has already devalued by almost 50% versus gold in less than two years (!).
It's interesting to note in the 20+ year graph that the correlation between the gold price (in USD terms) and emerging market equities is strong. This correlation is underpinned by the fact that both assets benefit from structural USD weakness. This multi-decade correlation is fairly strong up until the beginning of 2024, when the gold price decouples and goes parabolic in the run-up to the Trump presidency.
We firmly believe that it's not "different this time" and that a secularly weak USD (strong gold) is still very bullish for emerging market equities over the long run. We're set to witness a secular catch-up of emerging market equities' performance toward that of gold's. The likely explanation for the temporary decoupling from early 2024 until Q1 2025 is that emerging market equities were temporarily held down by other interim uncertainties tied to the incoming president's protectionist agenda.
The question isn't whether this reallocation will happen. The question is whether you'll be properly positioned when it does. When pension funds, insurance companies, and family offices begin properly weighting their portfolios toward emerging market GDP share (and they typically move together as a herd, roughly at the same time), the capital flows will be enormous. The investors who positioned early - when valuations were still attractive and sentiment was still lukewarm - will capture the greatest benefit from this structural shift.
Why now matters
The structural mismatch between economic reality and capital allocation has never been wider. The US Dollar's lock on the global financial system and trade flows has already started to loosen significantly, and it's my firm conviction that this will continue as the leadership of all the world's greater powers seems aligned in this pursuit (including both the BRICS and the US). First it was gold’s turn and it has gone almost 2x in less than 2 years. What can emerging market equities do over the coming 5-10 years? Especially the markets that are less controversial to invest in from a Western geopolitical lens (e.g. China and recently also partly India).
Most importantly, even though inflows and allocations to European emerging market ETFs are at an all-time high this year, we're still early in the reallocation cycle. The 4% family office allocation to emerging markets represents the opportunity, not the obstacle. When that allocation doubles or triples over the next 5-10 years - as economic reality demands it must - the capital appreciation in this asset class will be extraordinary.
The investors who understand this structural opportunity - and who have the investment framework to capture it - will participate in what could be the greatest wealth creation story of the next decades. Everyone else will read about it in newspapers, wondering how they missed the most obvious investment theme of their generation.
Ultimately, it's every investor's task and duty to think for themselves - disregard the noise and consensus views out there. Sit down in an empty room, without a phone distracting you, and carefully look through the charts at the beginning of this letter. Consider carefully Mr. Buffet’s words. Ask yourself how you would want to explain your current portfolio allocation logic to your grandchildren. On my end, I know which logic I'm going with and I've allocated accordingly.
None of this is investment advice, it’s just the first part of my explanation as to why I chose to bet ~80% of what I own on emerging markets. Let’s revisit in a decade.
Christopher B. Beselin
Investing, compounding & exiting
Christopher B. Beselin - is the Chief Investment Officer at Endurance Capital. The views & opinions expressed in this newsletter is for informational and educational purposes only and should not be considered investment advice.
PS. If you're a qualified professional investor and you’re not sure where to begin structuring your emerging market investment exposure - feel free to schedule a 1-to-1 emerging market strategy call with Christopher B. Beselin via this link. DS.