In their May 2026 paper Emerging Markets 2.0: The Tipping Point Is Here1, the Allspring Total Emerging Markets Equity team presents a structured, data-grounded case that the structural tailwinds powering U.S. outperformance are fading — and that the conditions for a sustained EM cycle are assembling with unusual convergence across valuation, growth, technology, and geopolitics.
The Narrative Shift
The framing is deliberate. Shimada, Tse, and Gudger acknowledge that "the past decade has been one of 'exceptionalism' for U.S. equities as technological innovation has created a league of American superstar companies driving extraordinary equity gains." The same period, they note, "has been described as 'lost' in emerging markets, which have been driven downward by uncompetitive currencies, failure to perform, property crashes, and geopolitical conflicts."
That binary is now reversing. The MSCI Emerging Markets Index returned 46.68% over one year as of April 30, 2026 — outpacing the S&P 500's 31.05% by more than 15 percentage points. Allspring frames this not as a tactical blip but as the early signal of mean reversion across a longer arc: over 25 years, EM and the S&P 500 have returned 9.50% and 9.29% respectively — near parity.
Three Powerhouse Countries
The investment thesis is anchored on three country-level conviction calls: China, South Korea, and Brazil — each differentiated by structural driver rather than regional grouping.
On China, Allspring states the country "is expected to sustain 4–5% GDP growth over the next two to three years, supported by resilient exports, gradual consumption recovery, and a diminishing drag from the property sector as it moves toward stabilization." The team points to "rising investment in AI, advanced manufacturing, and renewable energy" as deepening China's industrial competitiveness, and notes that the country "maintains global leadership in electric vehicles and batteries, renewables, and robotics, supported by scale, vertically integrated supply chains, and improving technological capability."
South Korea's case is built on technology and governance reform. Allspring describes the country as "central, not peripheral, to the argument in favor of a strong semiconductor cycle," offering "differentiated access to future-oriented industrial sectors, including semiconductors, defense, power equipment and batteries, shipbuilding, and structural consumer growth via food and K-culture." Despite strong recent performance, the team notes that "valuations remain low given continued upward earnings revisions" and that the market trades "at less than 10 times price/earnings, well below EM peers."
Brazil rounds out the trio on commodity depth and demographic scale. Allspring describes it as "among the four nations with the largest potential for oil production growth over the next five years," while its "population of 203 million, with a median age of 35 and rising incomes, supports an increasingly attractive domestic market." A central bank rate-cut cycle beginning in 2026 and tax reform expected to yield results in 2027 add policy tailwinds to the structural story.
The Valuation Gap and the Dollar
The valuation argument is stark. As of April 30, 2026, the MSCI EM Index trades at 11.4x forward earnings versus 20.8x for the S&P 500 — a relative ratio of 0.55x, well below the 20-year median of 0.72x. Allspring states that "relative valuations versus the U.S. have been at historical lows — at discounts greater than 40%."
The earnings yield spread reinforces the case. EM's NTM earnings yield of 8.7% produces a spread of 4.3% over the U.S. 10-year Treasury — compared to 0.9% for developed markets and just 0.4% for the S&P 500. The risk compensation on offer in EM is, by this measure, structurally superior.
On the macro backdrop, Allspring is explicit about the U.S. risk profile: "tariff, immigration, and the Department of Government Efficiency policies under the Trump administration pose greater risks to the U.S. than to EM countries given their inflationary pressures and potential drag on economic growth." Combined with dollar weakness, the team concludes they "expect EM to outperform the U.S."
EM at the Centre of the AI Value Chain
One of the paper's most important structural arguments concerns AI. Allspring maps the global AI value chain to show that EM countries are not AI consumers waiting on the periphery — they are foundational suppliers. Taiwan and South Korea lead chip manufacturing through TSMC, Samsung, SK Hynix, and MediaTek. Data centre infrastructure in Taiwan and India runs through Delta Electronics, Bharti Airtel, and Reliance Industries. Power infrastructure for AI is sourced through South Korea, the UAE, and Brazil. Critical materials — copper, lithium, gold — flow from Mexico, Chile, and China.
Allspring states that EM countries "don't need the U.S. or DM to create their own new products or technology — as was shown by the unveiling of China's DeepSeek AI technology last year." Within EM, "fintech, health care, telecommunications, and medical equipment stand out as areas of rapid innovation where AI adoption is likely to be rapidly integrated and boost growth opportunities."
Active Management as a Structural Requirement
Allspring does not present EM as a passive opportunity. The volatility, political risk, currency exposure, and ESG complexity of these markets demand a specific investment posture. The team concludes that "active investment with a risk-adjusted, total return approach is the most effective way to invest in EM over the long term," balancing "top-down risk assessment with bottom-up fundamental analysis." Security selection centres on "shareholder yield (cash dividends, stock buybacks, spin-offs) as well as capital appreciation to identify quality companies."
This view is supported by MSCI research cited in the paper, which finds that "a company's profitability; investment quality; and, above all, dividend yield are all more important drivers of long-term compounding than a company's growth trajectory alone."
Key Takeaways for Advisors and Investors
Reallocation is already underway. Allspring sees "signs of a global reallocation in a new world order" as investors reduce U.S. concentration and seek diversified growth.
Valuation provides margin of safety. At a 40%+ discount to U.S. equities and a 4.3% earnings yield spread over Treasuries, EM offers compensation for its risk profile that DM cannot match at current prices.
AI exposure runs through EM. Advisors framing client portfolios around the AI infrastructure buildout should recognize that the supply chain — chips, power, materials — is predominantly an EM story.
Country selection matters as much as asset class exposure. China, South Korea, and Brazil each present distinct structural drivers; broad passive EM exposure conflates them.
Active, quality-oriented management is the appropriate vehicle. Allspring is direct: "disciplined, active stock selection is so important — it influences the countries, sectors, and companies we choose to invest in."
The team's closing statement is the most pointed: "We might even go so far as to say this is the decade in which many of the so-called EM countries will fully emerge."
Footnote:
1 Shimada, Alison, Elaine Tse, and James Gudger. "Emerging Markets 2.0: The Tipping Point Is Here." Allspring Global Investments, May 2026, allspringglobal.com.
