The big driver of the emerging market indices recently has been Korean memory chips and Taiwanese semiconductor foundries. These are undoubtedly impressive businesses, but they present a problem: they move in lockstep with U.S. technology giants. For those seeking genuine diversification, looking elsewhere in the emerging world may provide better portfolio diversification.

Tassos Stassopoulos, founder of Trinetra Investment Management, has spent over two decades focusing on a different opportunity—the emerging market consumer. Trinetra’s approach has always eschewed the tech-heavy markets of North Asia in favour of economies where domestic consumption drives growth: Indonesia, China, Brazil, Peru, and Chile. In fact they would probably go as far as saying these are outside of their mandate. 

While the emerging market consumer has been under pressure since COVID the diversification benefits are becoming quite tangible. While there are signs of life in Asia and South America in particular it appears that valuation support may be the most obvious differentiator, the opposite of what we are seeing amongst the largest global tech stocks. When the S&P 500 falls sharply, these consumer-focused emerging markets barely move. The correlation simply isn't there in the way that it was a decade or so ago when these emerging company stocks and country indices were seen as a lightning rod for global risk. This isn't because these economies are increasingly disconnected from global trade, especially when one focuses on the domestic consumer as Trinetra does as their growth drivers are fundamentally different. An Indonesian retailer selling Western brands such as Adidas and Starbucks to Jakarta's rising middle class has global connectivity but very little exposure to the AI investment cycle or US interest rate expectations.

Valuations that demand attention

The valuation opportunity is more striking. Consider a retail franchise business growing earnings at 20% annually, trading at just 8.5 times earnings. Or a dairy company expected to grow 33% this year on an 18 times multiple with a 3.5% dividend yield. A dominant microfinance bank trading at 1.7 times book value with a 9% yield. Such valuations provide a margin of safety that growth investors in developed markets can only dream of. When something trades cheaply enough, even disappointment doesn't necessarily mean losing money. Cheap simply gets cheaper, then recovers.

There are challenges but they are manageable

Emerging markets wouldn't offer such returns without challenges. Indonesia provided a reminder last week of what emerging market investing is about, with market turbulence evoking memories of the 1997 Asian financial crisis. MSCI has threatened to downgrade the country to frontier status over liquidity concerns, a move that could trigger billions in passive outflows.

Yet this pressure is catalysing reform. Regulators are proposing doubled free-float requirements and increased institutional allocation limits. The structural opportunity remains intact: 5% GDP growth, contained inflation, and a consumer economy largely insulated from US trade tensions.

China presents other complexities: demographic headwinds, property market concerns, geopolitical tensions. Yet Stassopoulos observes something often missed in macro commentary: Chinese consumers hold extraordinary savings. The consumption recovery is happening, just unevenly across categories. With that backdrop and in a country that vast there will be opportunities even if the headlines are far from promising and the economy faces headwinds. Without these risks, sentiment would be more buoyant and stocks more expensive. 

A Compelling Risk-Adjusted Proposition

For asset allocators facing compressed risk premiums in Western markets, the emerging market consumer offers something increasingly rare: genuine return potential with genuine diversification.

Having kicked the tires we agree that portfolio-level returns in the low-to-mid teens represent a reasonable base case, with upside if interest rates decline and inflation remains contained. The internal rate of return on well-constructed portfolios sits in the twenties, reflecting, in part, risk-free rates in markets like Brazil that themselves reach into double digits.

The path won't be smooth. It never is in emerging markets. But for investors willing to look beyond the semiconductor cycle and embrace the complexity, the emerging market consumer represents one of the most compelling risk-adjusted opportunities available today.