The Next Hot Emerging Market: The U.S.

The investment visionary who coined the term "emerging markets" and helped launch the first funds to invest in developing countries thinks he has spotted what you might call the next great emerging market.

It is called "the United States."

Antoine van Agtmael is arguably the founding father of emerging-markets investing . He still is an evangelist for investing in parts of Africa, Asia, Latin America and other less-developed regions, where he thinks the future remains bright. But he believes the U.S. is at the beginning of an industrial revitalization that most analysts only have begun to recognize.

Over the past year, investors have pulled $22 billion from U.S. stock funds and added $339 billion to bond funds , according to Morningstar MORN -0.49% . If Mr. van Agtmael is right, that exodus is premature.

Mr. van Agtmael, now 68 years old, has been analyzing emerging markets since 1971. In the late 1970s he ran an investment bank in Bangkok as the local stock market boomed and then fizzled. That taught him the enormous potential—and explosive risk—of stocks in developing countries, highlighting the urgent need for diversification.

Later, at the International Finance Corp., an affiliate of the World Bank, Mr. van Agtmael helped create the first database of stock returns and pushed to launch a diversified fund to invest in what was then called the Third World.

After he came up with the catchier term "emerging markets," the first such portfolio was launched by Capital International in 1986 with $50 million. Today U.S. fund investors alone have more than $420 billion in emerging markets.

Mr. van Agtmael founded an investment firm, Emerging Markets Management, in 1987. It peaked at more than $20 billion in assets before he and his partners sold a 63% stake to Ashmore Group ASHM.LN +0.33% in 2011 for more than $126 million.

So when Mr. van Agtmael says he sees an underappreciated investment opportunity, he is worth listening to. When he visited China last year, one manufacturing executive after another complained to him about American competition, "something I had never heard in 40 years in Asia," he says.

Mr. van Agtmael points out that labor costs in China have been rising roughly 15% annually while stagnating in the U.S. Meanwhile, oceans of cheap oil and natural gas are flowing from American shale.

The U.S. is well ahead of China in cellphone infrastructure, he says; it also is advancing faster in three-dimensional printing and the use of robots in factories. At least 200 companies have relocated plants from offshore to U.S. locations, estimates Mr. van Agtmael.

"A decade ago, nine out of 10 companies would tell you they were thinking about building their next plant in China," he says. "Today it's more like three out of 10, and maybe five out of that 10, say they want to build in the U.S."

Some of these emerging advantages haven't shown up in higher profits for American companies—yet. "U.S. manufacturing is becoming more competitive than you would think, and China's less," Mr. van Agtmael says. "And the idea that manufacturing is old-fashioned is itself old-fashioned."

These ideas aren't a secret, of course. Stock-market bulls have been snorting over shale gas and 3-D printing for a couple of years now. Mr. van Agtmael outlined his message in Foreign Policy magazine last year and has recently been presenting it to sovereign-wealth funds, family offices and other investment audiences. Nonetheless, he thinks investors have underestimated the rate and importance of these changes.

"When I first started talking about emerging markets 30 years ago, people knew it made sense but they didn't quite believe it," he says. "This is the same kind of thing: They get the message on one level, but they haven't yet rationally absorbed it, and it hasn't changed their behavior yet."

Mr. van Agtmael, now a senior adviser at the consulting firm Garten Rothkopf in Washington, is writing a book about the resurgence of manufacturing in the U.S. and Northern Europe. But he still is bullish on many emerging markets, including Mexico, Peru and Colombia; Indonesia and South Korea; Turkey; and much of sub-Saharan Africa.

He thinks Americans should have up to 25% of their equity exposure in emerging-market stocks, well above the 6% average among fund investors.

Still, his most surprising message is that the U.S. is back.

"My belief is that markets are not efficient, but they are emotional," Mr. van Agtmael says. "They are driven by raw feelings. Why has everybody been surprised by how well the U.S. stock market has done lately? Because they're only beginning to realize the glass is half-full again instead of half-empty."