Eric Marais

The market’s view that emerging markets are still defined by the vulnerabilities of the past is increasingly at odds with the breadth of long-term value opportunities available across the asset class today, according to global contrarian investment manager Orbis Investments.

Orbis says the valuation gap between developed and emerging market equities suggests investors may still be pricing the sector for a level of pessimism that may no longer reflect the realities of the opportunity set.

“Viewing emerging markets through a narrow set of outdated risk assumptions means investors are potentially missing the opportunities presented by a more selective, bottom-up view of the sector,” says Orbis’ Head of Clients – Australia, .

Orbis’ recent white paper ‘Emerging Markets: The Map is Not the Terrain’ shows EM equities trading at around 16 times earnings on a cyclically adjusted basis, versus about 38 times for U.S. equities. That equates to a discount of roughly 60% and close to the widest on record.

“The truth is the old map of emerging markets no longer reflects the evolution seen in some policy frameworks, market institutions and shareholder outcomes across important parts of the opportunity set. These are all changing in ways the market still underappreciates,” Mr Marais said.

Here are five key updates to old assumptions about investing in emerging markets:

1. Emerging markets reward a more nuanced view of risk

Orbis’ close study of emerging-market equities has observed the asset class to be no more volatile than their developed-market peers.

In fact, emerging market volatility has steadily declined relative to developed markets over the past decade, and in recent years EM equity volatility has moved much closer to that of developed market peers.

“In recent years, EM equity volatility has more closely resembled developed-market volatility than many investors might assume. Volatility is not, in itself, a reason to dismiss an asset class. The more important question is whether investors are being compensated for the risks they are taking. In emerging markets today, we think many risks are better understood – and more fully priced – than many investors assume,” Mr Marais said.

2. Emerging markets can play a bigger role in diversification

Orbis argues emerging markets are also a diversification opportunity. Since the inception of the MSCI Emerging Markets Index in 1988 to the end of 2025, EM equities have shown a correlation of 0.72 with developed markets and 0.66 with U.S. equities meaning they have historically moved differently enough from developed and U.S. markets to offer investors a meaningful source of diversification.

“Investors are more aware of concentration risk in U.S. equities, but in every bout of volatility capital still tends to rush back to the same crowded exposures,” Marais said. “That is one reason emerging markets remain underused as a source of differentiated equity exposure.”

3. Selectivity matters more than passive exposure

Orbis says passive exposure can be especially blunt in emerging markets: investors get some excellent businesses, but also many deserving laggards.

“Benchmark inclusion can bring flows, but it does not remove the need for judgement,” Marais said. “In emerging markets, the biggest opportunities are often found where reform, governance improvement and capital discipline are converging – and those are not always captured well by passive exposure.”

4. Emerging-market currencies are more resilient than assumed

After a decade of U.S. dollar strength, many investors still approach EM currency exposure with caution. Orbis argues this is becoming a less reliable shorthand: many EM currencies now sit below long-term measures of fair value, while external balances and monetary frameworks in some EMs have improved.

“The old assumption was that currency weakness in emerging markets automatically meant deeper fragility,” Marais said. “That is no longer a safe shortcut. In many cases, currencies now behave more as shock absorbers than crisis triggers.”

5. Shareholder outcomes are an important measure of economic growth

A key market assumption for many investors is that strong profit growth necessitates solid earnings-per-share growth. But this translation is not always straightforward in emerging markets, as evidenced by the Chinese sharemarket. Over the 20 years to the end of 2025, listed Chinese companies grew net profits by about 15% per annum, but earnings per share grew by only about 5% per annum.

“For equity investors, growth only matters if shareholders actually receive it,” Marais said. “That is why governance, minority-shareholder protections and capital allocation are not side issues in emerging markets but are completely central to the investment case.”

EM trade: more nuanced than investors assume

Orbis says emerging markets are often still viewed as a single risk trade, rather than as a broad and increasingly differentiated opportunity set. Across parts of the emerging markets universe, policy frameworks are stronger, market institutions are more developed, and the gap between high-quality and low-quality opportunities has widened.

Orbis’ philosophy of investing in emerging markets is to focus on buying quality businesses at a meaningful discount to true long-term value, and patiently holding those positions for the long term, or until the market recognises that value.

“The investment terrain in emerging markets is a fundamentally different story now than it has been in the past,” Marais said. “Investors with a differentiated investment approach will be better placed to make the best of the mispricing opportunities that emerge. We believe those opportunities are among some of the most attractive long-term opportunities.

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Eric Marais

Orbis Investments is challenging investors to test their assumptions and re-examine market ‘certainties’ in its new report, Six Courageous Questions for 2026.

In the report, the contrarian global equity manager with A$72billion in assets under management explores some of the powerful narratives shaping markets – from US concentration and the economics of AI to the vulnerability of the US dollar. These questions help investors test where conviction still holds – and where it needs rethinking.

Eric Marais, Head of Investment Specialists, Orbis Investments, said, “Change has accelerated, and it’s reshaping the investment landscape. In this environment, success will require the courage to test assumptions, act when opportunities arise, and the discipline to be selective.”

The key takeaways from the report are that investors should aim for genuine diversification, be valuation-disciplined, and rebalance their portfolios for resilience.

“For Orbis, that means looking at neglected areas of the market, such as opportunities in the healthcare sector, US companies left behind in the AI boom, and emerging markets,” said Marais.

“Success isn’t about having all the answers – it’s about asking the important questions. We would encourage investors to use these questions to test their assumptions and act with discipline and conviction in 2026.”

The six key questions are:

What if exceptionalism is now behind the US’s biggest stocks?

Investors are paying 34 times earnings for mega-cap technology companies, which represent the most crowded part of the market. Orbis views this combination of extreme concentration risk and valuation risk as dangerous, leaving little room for error if fundamentals fail to keep pace with expectations.

History suggests that when market leadership becomes this narrow, opportunity for investors often shifts elsewhere. Investors need to question whether the next chapter of US exceptionalism may be written not by the country’s biggest companies but by the rest of the market they have overshadowed.

Is the world’s safest currency the riskiest?

The US dollar’s haven status is under stress; its yield advantage may fade if the US Federal Reserve cuts rates too soon or fiscal pressures lead to financial repression. Rising debt, persistent deficits and a greater tolerance for inflation also point to a weaker long-term backdrop for the currency.

Investors should consider whether they may benefit from building a balanced portfolio of alternative currencies with compelling characteristics, such as the Australian dollar, Japanese yen, and Norwegian krone.

Are you swimming in the right water?

With US policy turning inward, other export-led economies must adapt. This is likely to lead to domestic investment and fiscal expansion in countries throughout Asia and Northern Europe.  These developments have significant implications for investors with portfolios heavily concentrated in US assets and will reshape the capital cycle. This potentially marks a new era for markets outside the US where

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Eric Marais

Passive and growth strategies have enjoyed remarkable success for many years, but investors have grown too complacent and are not positioned for a changing investment world, according to Orbis Investments.

The contrarian global equity manager with A$59b assets under management has released its “Five considerations for 2025”, informed by analysis of long-term data, which highlights the areas it believes investors should be carefully considering when planning for the year ahead and decade beyond.

Eric Marais, Investment Specialist at Orbis, said, “Throughout 2024, we have seen developments in global markets that amplify concentration, style, and return risks. Many investors continue to structure their portfolios around last year’s winners, but we believe investors should now consider what needs adjusting – most likely their portfolios and their expectations.”

The five considerations are:

1. Periods of great returns historically give way to periods of poor returns    

Investors should be reminded that “periods of great returns historically give way to periods of poor returns – and those returns are poorest when starting valuations are expensive,” said Marais. Placing this into context, in the 10 years leading up to 2021 passive world index investors enjoyed 11% real returns (returns after inflation), yet in the 10-years to 2008 investors lost 2% after inflation.

Given that the last decade delivered phenomenal stock market returns, investors should expect the next decade to be much more challenging.

2. Returns on passive global equity investments could be as low as zero for the next decade 

“While valuations are a poor predictor of short-term returns, they matter a great deal in the long run,” said Marais.
Orbis has reviewed historical valuations dating back to the 1970s, and across a dozen different metrics; the data shows that extreme valuations have been followed by poor subsequent returns. “Our research suggests that passive investors in global equities could expect a return as low as zero, after inflation, in the next decade if historical relationships hold,” Marais said.

3. Indexing is a momentum strategy by stealth  

History has shown that when bubbles burst, the most expensive assets fare badly. At these junctures, the world’s most valuable companies lose their leadership positions, and future leaders are likely to be quite different in the decade ahead. This is a unique problem for passive funds that hold shares in proportion to their market capitalisation. “That feature makes indexing a stealth momentum strategy – a huge benefit to passive investors through the persistent trending market of the last decade but a danger when the trend reverses,” said Marais.

4. Concentration risk is extreme  

“Static investment strategies do not lead to static exposure but increased concentrations in winning stocks,” Marais said. Today, market indices—and thus passive investors—are heavily skewed towards unusually expensive US growth stocks. The MSCI All Country World Index—the most diversified major global index—has 17 per cent invested in just the ‘Magnificent Seven’ companies, 25 per cent in technology sectors, and 64 per cent in a single country and currency (US). Each of these three areas is more richly valued than its opposite. “The US market trades at 27 times earnings versus 16 times for shares elsewhere, while tech shares are valued at a whopping 39 times earnings”, said Marais.

5. Active strategies don’t guarantee diversification  

Orbis notes that concentration issues are not confined to indices and passive strategies. Money tends to flow to the best-performing active-managed funds, which often share style characteristics with what has been driving the market. Today, the biggest active retail global equity funds in Australia are highly correlated to growth styles. Across the top 10 largest actively managed global equity funds, not a single fund has a Value style according to Morningstar’s Equity Style Box methodology. 66% of active assets are in Growth strategies and the remaining 34% is in Core. “Investors may hold active funds for diversification but depending on the underlying investments, they may be diversified in name only and are at risk when the dominant style falls from favour,” said Marais.

“Investors need to diversify across styles within equities. Markets in aggregate are expensive but not uniformly expensive and plenty of value remains available globally for active stock pickers. Holding undervalued assets can make a remarkable difference to investors’ returns in downcycles.”

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