Undervalued small caps: Where to make money in emerging markets

Small-cap stocks in emerging markets continue to lag their large-cap peers. Global equity gains are being driven primarily by major tech companies, while the anticipated lift from the Fed’s rate cuts has yet to filter through to emerging-market small caps – historically, these companies, more sensitive to capital costs, react to falling funding costs with a delay.

A defining feature of this cycle is the valuation gap between large caps and small caps. Small caps trade at a 25-35% discount on key multiples such as price/book value and price/sales, and in some markets the discount exceeds 50% to large issuers, according to a Bloomberg Intelligence report seen by Oninvest. Still, only about 20% of companies screen as genuinely deeply undervalued.

Performance differs sharply by country. Small caps have outperformed in Brazil and Indonesia, while large issuers continue to lead in India, Taiwan, and much of Southeast Asia. In South Africa, higher gold prices have supported mainly large commodity producers.

To gauge small-cap performance in emerging markets, analyst Aldiyar Anuarbekov created an EM Small Caps Index for Oninvest with two versions: an equal-weight index and a capitalization-weight index. Of the 234 companies in the index, 141 have gained year to date, while the rest are in negative territory. Brazilian and Mexican stocks have delivered the strongest gains; many Indian stocks have declined.

Technology, health care, and telecommunications are the standout sectors. Financials have softened, and consumer staples remain among the laggards. In most sectors, small caps continue to trail large caps – the gap exceeds 20 percentage points in materials and nonfoods, Bloomberg Intelligence data shows.

The EW EM Small Caps Index is the clear outperformer. It has risen 14.8% year to date, beating the S&P 500 (up 12.5%) and the Russell 2000 (up 6.2%). The EM Small Caps Index is down 5.1%.

The divergence is even stronger on a five-year horizon. From 2020 to 2025, the EW index delivered an 11.9% CAGR, while the CW index returned only 2.2%.

The EW index benefited from sharp rallies in several individual names, which barely register in the CW index. The result underscores that with balanced exposure and the ability to capture gains in smaller companies, emerging-market small caps can generate returns comparable to – and at times better than – those of major indexes.

Anuarbekov picked the three most interesting stocks from his EM Small Caps Index:

Cogna Educação

Cogna Educação, a Brazilian small cap and one of the country’s largest education groups, has reported strong third-quarter results. Revenue rose almost 19% year over year to BRL1.523 billion ($271.3 million), while net profit reached BRL192 million ($34.2 million) versus a loss of BRL29 million ($5.2 million) a year earlier. Student enrollment increased, and the company successfully launched new courses. The management expects double-digit revenue growth and further deleveraging through 2026.

Cogna operates Brazil’s largest higher-education and educational-services network and is benefiting from rising household incomes and expanding demand for education. The stock has surged about 255% year to date. Analysts’ consensus rating is “overweight.” The strong third-quarter results, as well as the company’s lowest leverage level since 2018 (at 1.11 times EBITDA), suggest that Cogna has turned a corner. Investors should monitor upcoming earnings for continued momentum.

Moura Dubeux Engenharia

Moura Dubeux Engenharia, a Brazilian residential developer, is capitalizing on a construction boom in the country’s northeast. The stock has risen roughly 165% year to date as sales accelerate. Net sales reached BRL193 billion ($212.5 million) in the second quarter, up 142.5% versus a year earlier. Strong presales and low cancellations supported revenue growth and margin expansion.

The company reported third-quarter net income of BRL117.8 million ($21 million), compared with BRL89.2 million a year earlier. It raised its 2025 bottom-line guidance to at least BRL380 million ($67.7 million), from a previous estimate of BRL350 million ($62.4 million), which reflects confidence in robust demand.

The company’s focus on Brazil’s fast-growing northeast and the affordable-housing segment is paying off. More than 1,100 units were sold during the quarter, and a sizeable land bank supports future project launches. Investors are watching the potential boost from participation in government programs, such as Minha Casa Minha Vida (my house, my life), meant to improve housing in urban areas, which could unlock additional demand.

The stock has advanced almost 167% year to date. Its performance in 2025 shows how a targeted regional strategy and disciplined execution can turn a local developer into a market favorite.

Le Travenues Technology (Ixigo)

Le Travenues Technology (Ixigo), an Indian online travel platform for ticketing and hotels, went public in June 2024 and has continued to meet investor expectations amid a rebound in domestic travel.

In the second quarter of fiscal 2026, revenue rose 37% year over year to INR2.827 billion (about $339 million). Transaction volume increased 23% to INR43.474 billion (about $5.2 billion). Adjusted EBITDA grew 36% to INR284.76 million (about $34 million). Ixigo has integrated AI tools extensively – automated systems now handle more than 90% of customer interactions, which reduces operating costs and supports margins.

The stock has gained about 65% year to date. With a market capitalization of $1.4 billion and $155 million raised through a preferential allotment, the company is expanding in air travel, intercity buses, and online hotels – all key growth areas for 2026.

Conditions for companies in the EM Small Caps Index may improve gradually as the U.S. monetary cycle turns. Additional Fed easing could give emerging markets a second wind and revive capital inflows.

Most EM central banks have already lowered policy rates in 2024-2025, narrowing the differential versus the U.S. to multiyear lows. Policy rates in Mexico and the Philippines are now below the fed funds rate; only Brazil remains significantly higher. This creates room for further domestic easing as the dollar weakens, without triggering outsized outflows.

Emerging-market small caps are likely to continue narrowing the gap with large-cap peers as early as early 2026, supported by softer global financial conditions. A more durable phase of outperformance could follow in 2026 if capital inflows return to emerging markets and global sentiment shifts toward value and cyclical names.

Attractive valuations, local-market exposure, and an improving macro backdrop position emerging-market small caps as potential beneficiaries of the new market cycle. Investors should focus on companies with strong balance sheets and identifiable growth drivers.

This material does not constitute investment advice.