We have been consistently beating the drum since President Trump was elected that his policies were consistent with weakening the US dollar (Equities: Our Dollar, Our Problem?, Global Markets: A New BRIC in the Wall). This became only more pronounced on January 27 when Trump told reporters in Iowa, "No, I think it's great," when asked if he was worried about the currency's drop.
After years of US equity dominance, investors are recognizing that a fundamental shift may be underway in global markets. Multiple powerful forces are converging to create a compelling case for US investors to diversify into emerging market and international equities: these include a weakening dollar, rising resource nationalism that could benefit commodity-rich nations and a historic valuation gap that favors non-US markets.
The Dollar Tailwind
The US dollar has entered what appears to be a sustained period of weakness, declining approximately 9-11% against both developed and emerging market currency baskets over the past 13 months. For US investors, this currency shift could create an immediate tailwind for international investments.
When the dollar weakens, international assets become more valuable in dollar terms. With the dollar down over 10% against emerging market currencies, this could translate to meaningful performance enhancement before considering any underlying equity returns.
This weakness appears structural rather than cyclical. The US faces mounting fiscal challenges, with debt-to-GDP ratios at elevated levels and questions surrounding long-term fiscal sustainability, and Federal Reserve independence. The dollar could remain under pressure for the foreseeable future, potentially extending this favorable environment for international equity investors.
Resource Nationalism
A second major trend reshaping global markets is the rise of resource nationalism. Countries rich in critical minerals—materials essential for technology, clean energy and defense—are increasingly controlling their resources rather than simply exporting raw materials.
The Trump administration is convening officials from more than 50 countries for a summit on critical minerals, proposing price floors and seeking to create a trading bloc for these strategic materials. This shift recognizes a fundamental reality: emerging markets control the resources that power the modern economy.
Countries like Indonesia, Chile and several African nations have implemented policies restricting exports of unprocessed minerals, forcing value-added processing to occur domestically. China controls approximately 90% of global rare earth processing, while other emerging markets dominate supplies of lithium, copper, cobalt and other critical materials. As demand for these resources grows—driven by electric vehicles, renewable energy and advanced technologies—the countries that control them could benefit significantly.
A Historic Valuation Discrepancy
Perhaps most compelling is the valuation gap between US and emerging market equities. US stocks currently trade at nearly 22x forward earnings, while emerging markets trade at just 13x—a premium of approximately 68% that sits near 15-year highs.
This chart reveals a critical insight: emerging market valuations have remained relatively stable over the past 15 years, consistently trading in the 10-13x range. US valuations, by contrast, have expanded dramatically from the mid-teens to over 20x. The current gap could represent either an opportunity for mean reversion or a significant margin of safety for investors concerned about US market levels.
Over the past two years, this valuation advantage has already begun translating into performance. The MSCI Emerging Markets Index has outperformed the S&P 500 Index by more than 20%, demonstrating that the diversification opportunity is not theoretical—it's already delivering results for early movers.
Capital Flows Could Be Shifting
Institutional investors are taking notice of these trends. South Korea recently introduced Reshoring Investment Accounts, which offer tax incentives for repatriation into domestic equities, aimed at reversing retail outflows and supporting the Korean won.
This type of policy shift highlights an important dynamic: even marginal flows out of US markets could create outsized moves in smaller international markets. Emerging market equity markets, while growing, remain significantly smaller than US markets. If capital begins rotating away from the US—whether driven by policy incentives, valuation concerns or currency considerations—the impact on these smaller markets could be disproportionately positive. A modest reallocation by global investors could drive substantial performance in markets that have been starved of capital flows during the extended period of US outperformance.
For US investors, the case for international diversification has rarely been more compelling. A weakening dollar, favorable valuations and secular tailwinds create a convergence of factors that historically precede periods of international outperformance. While US equities may continue to deliver reasonable returns, the risk-reward profile increasingly favors adding emerging market and international exposure. Investors who remain exclusively allocated to US equities may be missing an opportunity to enhance returns while potentially reducing portfolio risk through diversification.
Important Disclosures & Definitions
Bloomberg Dollar Spot Index: tracks the performance of the US dollar against a basket of 10 leading global currencies from both developed and emerging markets, providing a broad measure of dollar strength.
Forward Price/Earnings (P/E) Ratio for Index: a valuation metric calculated by dividing the current total market value (or price) of all companies in an index by their total projected earnings per share (EPS) for the next 12 months. It acts as a forward-looking indicator to gauge if an index is over- or undervalued based on analyst consensus, rather than historical performance.
JPMorgan Emerging Markets Currency Index: a trade-weighted index that measures the performance of emerging market currencies against the US dollar, serving as a benchmark for EM currency performance.
MSCI Emerging Markets Index: captures large and mid-cap representation across 24 Emerging Markets countries. With approximately 1,500 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Price/Earnings (P/E) Ratio for Index: measures the valuation of a basket of stocks by dividing the aggregate market price of the index components by their total earnings per share (EPS). A higher P/E ratio generally suggests investors expect higher future growth or that the market is expensive. A lower P/E ratio might indicate an undervalued market.
S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
Tailwind: a certain situation or condition that may lead to higher profits, revenue or growth.
One may not invest directly in an index.
AAI001102 09/09/2026