As questions about the waning of US exceptionalism take hold, institutional investors are increasingly looking to diversify their equity holdings. Emerging markets could provide an alternative and it is not just China and India that offer opportunities, FSSA Investment Managers says.
Last year, the United States economy faced a bright outlook.
The outlook for growth was positive, labour figures were robust and inflation was coming down. The US Federal Reserve was on a path to cut interest rates, supporting the economy from a monetary standpoint. And the Magnificent Seven were absolutely dominating stock markets around the world with their stellar outperformance versus the rest of the US equity market.
But as newly elected US President Donald Trump unleashed a global tariff war in early 2025, the economy started to slow and consumer confidence plummeted. Politically, the US has been increasingly isolating itself from its previously strong ties to Europe and Australia.
Taking all this into account, many market observers have raised the question whether we are witnessing a more fundamental shift where Pax Americana is crumbling and US exceptionalism is waning.
When asked if he agrees with these observers, Rasmus Nemmoe, Portfolio Manager with FSSA Investment Managers, is cautious in his answer.
One should always sort of be careful about saying this time is different... But having said that, I do think markets typically move on marginal change and given everything that's going on it's quite hard to see a status quo being extrapolated
“I’m always a bit careful about saying it’s the end of exceptionalism, it’s the end of an era. One should always sort of be careful about saying this time is different. And I do think the US has structurally a lot of things going for it,” Nemmoe says in an interview with [i3] Insights.
“But having said that, I do think markets typically move on marginal change and given everything that’s going on it’s quite hard to see a status quo being extrapolated.
“So where is the marginal dollar going to go? Probably not the US, given valuations are high, given the US dollar is quite overvalued and given everything that’s happening on the political side with tariffs.”
He says there are several indicators that show the US stock market is expensive, for example, the so-called Buffett Indicator, which measures the ratio of the total US stock market capitalisation to gross domestic product (GDP).
At the end of March, this indicator stood at 200 per cent. This means the US stock market’s valuation is twice that of the country’s GDP, which represents a standard deviation of 1.8 above historic averages.
“If you compare that to emerging markets (EM), they are typically somewhat below 100 per cent. China is closer to 80 per cent. Latin American countries, most Asian countries, with India and Taiwan being the exceptions, are closer to the 50 per cent mark. So there are just a lot of things that point to the US being quite stretched,” Nemmoe says.
“Long-term investors are looking perhaps for an alternative. I’m not saying that they’re going to sell everything they own in the US overnight, but probably just for the marginal dollar they will seek alternatives.
“I think emerging markets are increasingly playing a role. Yes, emerging markets have been de-rated over the last 10 to 15 years and there have been some good reasons for that. Particularly with the rise of China, the commodity bull market lifted a lot of boats and valuations became quite extreme.
“But I also think it’s fair to say that the underperformance has probably gone a bit too far.
“Emerging markets have historically been quite a good diversifier. You can argue that a lot of it is to some extent tied to the development of the US dollar. But within emerging markets, there is a broad collection of very diverse countries.”
Diversifying Beyond China and India – The Case for Poland
Much of the attention in EM investing is on China and India and for good reason. China’s share of the MSCI EM Index is about 24 per cent, while that of India is about 20 per cent. Together these two countries make up almost half of the EM universe.
That also means there is another half of the universe that receives relatively little attention, but not only has plenty of interesting companies in it, but also offers significant diversification benefits.
To illustrate the point that EM don’t just centre around China and India, Nemmoe gives the example of Poland, a country he is both invested in and has visited recently during a research trip.
When the Berlin Wall was demolished on 9 November 1989 and with it the Iron Curtain that had separated Western and Eastern Europe for almost half a century, Poland’s GDP per capita was 13 times lower than that of neighbouring Germany.
But since that historic moment, Poland’s economy has been catching up rapidly. In 1990, Poland’s GDP per capita stood at a mere US$1731 a year, while in 2023 this figure had risen to US$22,057. According to the Organisation for Economic Co-operation and Development, the country’s GDP per capita has doubled in the last 20 years alone.
“It’s a country that has gone through significant changes over the last 30 years. For a country which is probably about half the [population] size of Germany, I do think that you have a lot of entrepreneurship going on,” Nemmoe says.
In many ways, it's one of those success stories on par with South Korea or Taiwan. It's only a matter of time before Poland will not be classified as an emerging market any longer
“In many ways, it’s one of those success stories on par with South Korea or Taiwan. It’s only a matter of time before Poland will not be classified as an emerging market any longer.”
Nemmoe currently has only one Polish company in his portfolio, grocery store chain Dino Polska, but says there are a handful of other companies on his watchlist – a number that is quite unusual for a market of this size and considering the fact FSSA can only hold 45 companies in its EM portfolio.
The firm is close to investing in another of the Polish companies on the watchlist. The team has done extensive analysis of the business, but there is a final hurdle to overcome.
“We are waiting to meet the founder. Hopefully that will be a good meeting and then I think it’s something that could be investable for us,” Nemmoe says.
The opportunity Poland represents is relatively unique in the region as Nemmoe doesn’t see similar dynamics in other Eastern European countries.
“If you look at countries such as Slovenia or Romania, then there are good companies, but they are very, very small companies,” he says.
The proximity of the war in Ukraine is, of course, a key concern as there is always the danger it will spill over into other countries. But ironically, Poland seems to be a beneficiary of the conflict at the moment.
The stream of refugees from the conflict zone has spilled into Poland and they require food and shelter.
“They still need to buy groceries so they have benefited the likes of Dino Polska, probably because they have much more of a non-urban presence,” Nemmoe says.
“And hopefully there is a solution to the Ukraine situation and Ukraine gets rebuilt. I think Polish companies could play a significant role in this.”
Mexico is a Beneficiary of Nearshoring
Mexico provides another interesting investment destination, partly based on the phenomenon of nearshoring in the wake of the COVID-19 pandemic and the Ukraine war, which made companies painfully aware of the need to diversify their supply chain, while keeping essential manufacturing close to home.
“I think that COVID proved there are limits to globalisation and you probably do not want to put all your eggs in one basket,” Nemmoe says.
“I’m not necessarily speaking about China here, but if you are the US or Europe, there are probably things that you want to have produced closer to home. I think Mexico is a key beneficiary of this so-called sort of nearshoring.”
He also points out Mexico has a long-standing trade relationship with the US and is part of the US-Mexico-Canada Agreement (USMCA), a free trade agreement among the three countries that came into effect on 1 July 2020.
The USMCA is the successor to the North American Free Trade Agreement, a treaty that came into effect in 1994 and aimed to reduce trade barriers, including tariffs, among the three countries.
Mexico looks like this very sleepy pedestrian emerging market, growing 2-3 per cent [in GDP] every year. But then there are parts of the economy that are growing consistently at 6 or 7 per cent
“Mexico is very competitive from a labour perspective and that coupled with proximity to the US makes it basically an ideal nearshoring partner,” Nemmoe said.
“It has led to not just American businesses to set up shop in Mexico, but the country has attracted many foreign businesses that seek to take advantage of the USMCA.”
For example, Chinese companies are increasingly finding their way to the country. Last year, Chinese manufacturers of high-end car parts invested more than US$1 billion in a Coahuila state business park alongside car manufacturers Chrysler and Fiat.
“If you take a flight from Asia to Mexico, then it would be full of Chinese businessmen. And it is not just the Chinese, but Europeans too, so Mexico is developing as this very reliable nearshoring manufacturing hub for the US,” Nemmoe says.
Yet, Mexico is often in the news for the wrong reasons, with much attention on the drug cartels that terrorise large parts of the country’s south. Nemmoe acknowledges this and says Mexico is almost a tale of two countries.
“Mexico is basically a country of two halves, so half is what you often hear in the media and I would say is almost a failed state, particularly towards the south,” he says.
“But then you also have the other half of the country, which is basically centred around Mexico City. The northern states, which are much closer to the US and they’re probably one of the best success stories in emerging markets. That’s where all the FDI (foreign direct investment) into Mexico is entering.”
This foreign capital helps to formalise important parts of the local economy, such as the banking system. There are still large parts of the population that don’t have a bank account or social security number.
But foreign investment brings job opportunities and when people get job security, they are more likely to enter the banking system.
“Once you give them formal employment, they will spend money and then you can suddenly open a bank account. Then you can start to look at buying a car and with a car comes insurance. So we own an auto insurance company in Mexico called Qualitas [Insurance Company],” Nemmoe says.
Job security also means people spend more on groceries and want to shop in nicer environments where meat and dairy products are stored in refrigerators, and so Nemmoe has invested in the Mexican division of Walmart.
Although the country’s economy has plenty of lacklustre sectors, it is about finding the parts that are benefiting from drivers such as nearshoring and growing rapidly, he says.
“Mexico looks like this very sleepy pedestrian emerging market, growing 2 to 3 per cent [in GDP] every year. But then there are parts of the economy that are growing consistently at 6 or 7 per cent,” he says.
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