• Regulatory and governance standards: Investors place a premium on the presence of strong legislative and corporate governance frameworks, comprehensive and transparent financial reporting, and the consistent protection of shareholder rights. Some emerging markets do not ‘tick’ all these requirements, leading to hesitation when investing in these markets.

 

• Cost of capital differences: The cost of equity in the US, driven by the risk-free rate (government bond/treasury yield) plus the product of the beta and the equity risk premium, is generally lower than the cost of equity in emerging markets. Companies in the US also benefit from lower interest rates (as government debt is generally cheaper, with a knock-on effect on lending rates to companies), as well as a large institutional lender base (increasing competitive tension in pricing of debt). The combination of a lower cost of equity and cheaper cost of debt leads to a reduced weighted average cost of capital (WACC), and consequently elevates the valuation of assets in the US relative to emerging markets.

 

Listed versus unlisted asset valuations

The valuation gap extends beyond public markets and into private assets, though the extent varies:

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• Listed assets: Publicly traded US companies benefit from liquidity, investor familiarity, institutional backing and robust capital flows, often leading to premiums in the valuation. By contrast, listed emerging market stocks frequently trade at discounts due to market inefficiencies, inaccurate pricing, lack of liquidity and lower investor confidence.

 

• Unlisted assets: While some private equity firms seek out emerging market opportunities, valuation discounts persist due to liquidity/exit risks, regulatory challenges, and lower deal competition compared to US markets. Exit risks and a smaller investor universe reduce competitive tension and bidding for assets, which would typically enhance valuations. Investor certainty on the ultimate sale of an asset, is a key consideration for investment, particularly for private equity investors.

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Will US returns and valuation multiples remain elevated?

Despite periodic corrections, valuations of companies in the US, particularly in technology and other growth sectors, have remained high due to strong earnings growth, capital market depth, positive market sentiment and investor confidence. Notwithstanding current global economic uncertainty, several factors suggest that elevated valuation multiples in the US are likely to persist for the foreseeable future:

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• Dominance of innovation: The US continues to be a leader in technological advancements, with companies able to capture global markets and justify high growth projections.

 

• Institutional capital and market depth: Large institutional investors, pension funds and endowments provide stable, long-term capital, which underpins high valuation multiples.

 

• Monetary and fiscal policies: Lower US bond/treasury yields and interest rates have historically supported equity markets, resulting in higher valuations compared to emerging markets.

 

• Global benchmarking effect: Many investors compare valuations against US-listed peers, leading to a natural premium for US stocks versus emerging market counterparts.

 

However, investing in assets in the US does not come without risk. Downside risks, including geopolitical tensions, higher than expected interest rates, and overvaluation concerns in certain high-growth sectors, could all lead to a retreat of valuations.

 

Is there opportunity in emerging markets?

The long-standing discount in emerging market valuations relative to the US presents both a challenge and an opportunity. Recently, at the end of March 2025, prior to the strongest market impacts of the current global economic uncertainty, the average price to earnings multiple of the S&P 500 index (widely regarded as the best single gauge of large-cap US equities) was 25.57 compared to the JSE’s ALSI index of 13.18¹. This indicates, on a very simplified basis (given different sector weightings), that US-based companies listed on the S&P 500 are, on average, almost twice as expensive as companies listed on the JSE. 

 

How can emerging markets lessen the valuations gap?

Lessening the discount to unlock the aforesaid opportunity does, however, depend on a few key objectives being achieved to ensure more mature capital markets (some country-specific, with others of a more global nature), including:

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• Structural reforms that

-  improve the enforcement of an emerging market’s rule of law, which will help foster policy certainty and a more predictable business environment. Numerous studies have demonstrated a strong correlation between the enforcement of the rule of law and a country’s economic development;

- place technology at the core of an emerging market’s economic development. Just as industrialisation once drove global growth, technology now serves as the primary engine of modern economic progress. Countries that align their institutions, infrastructure, and policies around technological advancement are more likely to attract investment, foster innovation, and achieve long-term competitiveness in the global economy; and 

- improve corporate governance and transparency.

 

• Introducing targeted tax incentives to stimulate increased investment flow.

 

• A more stable and predictable interest rate environment.

 

Obviously, this is caveated that, inter alia, no major local and/or global events occur which would result in investors seeking the safety of US assets.

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If such reforms are implemented and the local and global factors align, emerging market assets could see upward re-ratings, making them more attractive to global investors and thereby elevating multiples.

 

Conclusion

The valuation gap between the US and emerging markets reflects a complex interplay of risk, access to capital and investor perception. While US assets, particularly in tech, command substantial premiums, emerging markets may offer untapped intrinsic value for investors willing to navigate their inherent challenges. The path to closing this gap lies in improving governance, liquidity and investor confidence. These factors, if addressed, could unlock substantial revaluation upside potential and present investors with an opportunity to diversify and allocate capital more broadly beyond the US, thereby reducing their concentration risk. 

 

1   https://worldperatio.com       

 Moody and Craig are Corporate Financiers | PSG Capital