In a previous article, we explored the Quantitative Strategies team’s robust lineup of alpha-seeking strategies and took a deep dive into the team’s proprietary approach to investing in equities and managing quantitative strategies. In this article, we explore various areas of the market where the Quantitative Strategies team is finding attractive opportunities, including emerging markets (EM) as a current source of investment ideas.

For years, U.S. large-cap equities have generated compelling relative returns. For instance, as of Apr. 30, 2025, the S&P 500’s annualized total return over the past 10 years has exceeded 12%.¹ (In recent years, the dominant “Magnificent Seven” mega-cap technology stocks have helped carry the market.)

Investors may wonder why they need to expand beyond U.S. large caps in their portfolio. The historically strong performance of U.S. large caps over the past decade has led to a general overvaluation of this asset class, as the CAPE Ratio (Cyclically Adjusted P/E Ratio) chart below illustrates. This large-cap overvaluation may portend weaker relative forward returns.

U.S. Stocks Face Challenging Road Ahead ²

The forward 10-year annualized real return of the S&P 500 Index and the Cyclically Adjusted P/E Ratio (CAPE Ratio) valuation measure of the S&P 500 Index for each date listed. Forward 10-year annualized real return is the actual return (adjusted for inflation) over the next 10 years from each point presented. The CAPE ratio is used to analyze the valuation levels of the index while considering the impact of different economic cycles on the constituent companies’ earnings. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. Indexes are unmanaged and are not subject to operating expenses or other fees. One cannot invest directly in an index. See the Important Disclosures for important definitions and disclosures.

Conversely, EM appear to be priced more attractively when compared to U.S. large caps, especially in the value segment of this market. Looking at the overall EM market relative to the U.S. market, valuations appear much more reasonable on both a Price/Book and Price/Earnings basis. We believe current EM fundamentals should provide a solid foundation for the category, as EM has had comparable earnings growth to the U.S. over the past three years, and analysts generally anticipate this trend to continue.³ Investing in EM not only provides the potential for attractive returns over time, but an allocation to EM offers diversification benefits that may enhance a portfolio’s risk-return profile and help mitigate the negative impact that market volatility may have on portfolio performance.

Emerging Markets vs USA (Price/Book)

Emerging Markets vs USA (Price/Earnings)

Price/Book and Price/Earnings ratios of the MSCI EM Index and MSCI USA index through 12/31/24. The Price/Book ratio is a financial metric that compares a company's market value to its book value, which is the value of all its assets minus its liabilities. The Price/Earnings ratio measures a company's share price relative to its earnings per share. These ratios helps assess the relative value of a company's stock. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. Indexes are unmanaged and are not subject to operating expenses or other fees. One cannot invest directly in an index.

Given that EM equities are generally less followed than their developed market counterparts (especially in the small-cap space), greater pricing inefficiencies may arise that could allow active managers to generate additional excess returns. While these mispricings are common in EM, the current set of opportunities in EM appear even larger than normal given the unusually wide valuation differential between value and growth stocks in EM (refer to the following chart). That differential was caused by almost a decade of EM growth stock valuations inflating relative to EM value stocks. Recent years have now seen that valuation advantage begin returning toward long-term averages, which has helped propel the outperformance of EM value stocks. But the Quantitative Strategies team still believes that the historically large valuation advantage of EM value stocks remains a potent catalyst for potential outperformance of both EM growth stocks and U.S. large caps in general.

Value/Growth in Emerging Markets vs USA (Price/Book)

Value/Growth in Emerging Markets in USA (Price/Earnings)

Price/Book and Price/Earning measures for MSCI EM Value, MSCI EM Growth and MSCI USA through 3/31/25. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. Indexes are unmanaged and are not subject to operating expenses or other fees. One cannot invest directly in an index. See the Important Disclosures for important definitions and disclosures.

While it’s true an investor can gain some exposure to EM through the S&P 500, since many companies held in this index derive revenue from a variety of overseas economies, investors currently pay a hefty premium to get that EM exposure from U.S. companies. In the team’s view, investing in the global economy directly through EM (and developed international markets) companies typically results in more attractive valuations that can help improve long-term return potential.

The Quantitative Strategies team at CI Segall Bryant & Hamill Asset Management has a distinct philosophy when investing in EM. Its systematic, diversified and risk-aware approach is based on the premise that a portfolio of companies with traditional value characteristics – when coupled with positive company momentum factors –has historically outperformed the market over the long term. The team’s systematic and objective methodology has an unemotional adherence to drivers of excess returns. A quantitative discipline helps the portfolio capitalize on the greed and fear that often permeate EM investing (and investing in general).

The team has also observed through equity research on international markets that stocks with low valuation ratios, especially those with solid company fundamentals, have historically produced superior returns relative to more expensive stocks. Since markets can be inefficient, a disciplined investment approach may uncover and capitalize on mispricings over the long term. The Quantitative Strategies team has a custom approach to risk management, focusing its risk allocation on where the largest potential rewards likely exist, while striving to limit bets that introduce excessive risk levels relative to the associated expected return.

In our opinion, the team’s approach to EM investing has led to many favorable results over various time periods.⁵

The Quantitative Strategies team also sees value in markets beyond EM. Given that U.S. stocks appear overvalued, and U.S. bonds seem positioned for weaker relative future returns as well, the team is constructive on the potential of developed markets international stocks (large and small cap). International stock valuations appear inexpensive relative to U.S. stocks; even compared to their own historical averages, international stock valuations are sitting between normal and cheap.

The team believes its non-U.S. strategies are structured to respond to evolving market conditions. These relatively inefficient asset classes have allowed the team to construct portfolios of compelling companies across the globe, and past excesses of growth stocks have led value stocks in these portfolios to appear even more attractively priced than usual. This relatively favorable positioning is a key reason why the team remains confident in the prospects for its strategies.