The relative strength between major regional equity markets — US, developed Europe, developed Asia, and emerging markets — describes which regions are currently attracting marginal global flows. The pattern shifts over multi-year cycles, and reading the current position of the rotation is one of the more useful quarterly disciplines for any global investor.
The trailing pattern
Over the past twelve months, US equities have outperformed developed European equities by roughly 8 percentage points in dollar terms. Developed Asia has been mixed, with Japan modestly positive and other developed Asian markets more variable. Emerging markets have underperformed developed markets, with the aggregate MSCI EM index down modestly in dollar terms over the trailing twelve months.
The pattern is broadly consistent with the multi-year US outperformance that has characterised the past decade-plus. But the composition of the recent US outperformance is somewhat different from earlier years — technology-heavy performance has been the primary driver in 2025-2026, whereas earlier US outperformance was more broadly distributed across sectors.
The valuation gap
Regional valuation gaps have widened materially over the past several years. The S&P 500 trades at a forward earnings multiple in the low 20s. STOXX Europe 600 trades in the mid-teens. Japan's TOPIX in the mid-teens. Emerging markets aggregate below 12.
These valuation gaps are not simply about growth expectations. Some of the gap reflects real differences in growth trajectories; some reflects composition differences (US index tilts more heavily toward high-multiple technology); some reflects the persistent premium the US has commanded from global capital allocators over the past decade.
Whether the gap is justified is a legitimate debate. The bull case for continued US premium rests on continued US growth outperformance, continued technology-sector leadership, and continued dollar strength. The bear case rests on regression toward historical valuation relationships and the specific vulnerabilities of a highly-valued US market to any interruption in the current growth pattern.
The currency dimension
Regional performance measured in dollar terms differs meaningfully from performance in local currency terms. The dollar has retraced modestly from its 2022 peaks but remains above longer-term averages. This has affected the dollar-translated returns of non-US markets.
Japanese equities are the clearest example. In yen terms, Japanese equities have delivered strong returns since 2023. In dollar terms, the yen weakness has offset a substantial share of those returns for dollar-based investors. Whether the yen weakness continues or reverses substantially affects the forward return prospects for non-hedged Japanese equity exposure.
For a US-based investor, the choice between hedged and unhedged foreign equity exposure has been consequential over recent years and remains so. The specific decision depends on views about the dollar's forward trajectory as much as about the underlying equity markets themselves.
Emerging markets specifically
Emerging market equity underperformance versus developed markets has been persistent for over a decade. The reasons combine multiple factors:
Structural factors. Dollar strength has been a persistent headwind. Chinese economic deceleration has affected the largest EM market. Various country-specific issues (India valuations elevated, Brazil political volatility, Mexican structural questions) have produced idiosyncratic weakness.
Composition factors. EM aggregate returns are dominated by China's weighting. Chinese equity underperformance versus the rest of EM has been substantial, and the aggregate EM number understates the diversity of underlying regional performance. Excluding China, EM aggregate performance has been considerably better than the top-line number suggests.
Flow factors. EM equity flows from developed-market investors have been consistently outflows for several years. When the marginal international flow has been out of EM rather than into it, the pattern has been self-reinforcing.
Whether EM is at an inflection point is a legitimate open question. Valuations are relatively attractive. Currency headwinds have partly abated. Some specific country stories (India's structural growth, various commodity-related economies) have positive underlying drivers. But the persistent underperformance has continued long enough that many global allocators have reduced their EM benchmark weights, which is itself a headwind to future flows.
The Japanese case
Japanese equities have been the clearest positive outlier among non-US developed markets over the past several years. The combination of the BoJ's move away from ZIRP, corporate governance reforms, and rebounding earnings has produced strong local-currency returns. For dollar-based investors, the yen weakness has offset much of the local return, but the underlying story remains one of the more interesting in global equity markets.
Whether the Japanese reflation continues depends on multiple factors: BoJ policy path, the pace of corporate governance improvements, and the broader global economic environment. The specific pattern of the past several years suggests durable structural change, but continuation is not guaranteed.
The synthesis
The current global equity rotation shows continued US dominance in dollar terms, with Japanese equities as the notable non-US bright spot, European and Chinese equities lagging, and emerging markets ex-China showing mixed but generally underwhelming performance.
The forward question is whether this pattern is at a genuine inflection point (compressed non-US valuations attracting flows) or whether the pattern persists (US outperformance continues as it has for a decade-plus). Both outcomes have historical precedent; neither is obviously more likely than the other.
For a globally-diversified portfolio, the current pattern implies specific considerations. Overweight to US at current valuations requires confidence in continued US premium. Overweight to Japan requires views on continued reflation and on the yen. Overweight to EM requires patience with a multi-year underperformance pattern that may or may not reverse in a specific window. None of these positions is obviously wrong; each has substantial evidence supporting different directions.
The rule to internalise
Global regional rotation is one of the largest sources of long-term equity return differentiation and one of the most-difficult patterns to time. Reading the current pattern is useful as description; using it to make specific tactical allocation decisions requires more confidence in the direction of change than is usually warranted. The most defensible approach for most globally-diversified investors is to acknowledge the current pattern, understand the specific drivers, and maintain diversified regional exposure that does not depend on any particular resolution of the current cycle for its coherence.
Educational content only. Not investment advice.