Global Emerging Markets Equity Strategy Commentary

Emerging markets shrugged off concerns over the US-Iran conflict during the second quarter to focus on the AI picks and shovels earnings boom. The quarter caps a strong period for EM equities, nearly doubling since the beginning of 2025. Overweight positioning in companies which harnessed tailwinds from both AI hardware demand and corporate Value-Up reform led outperformance in South Korea. Taiwan exposure was a negative contributor, with our overweight in AI supply chain niches positive but offset by selling our position in Mediatek after a strong rally, which subsequently went on to more than double in a month. In China, strong relative performance came from the rotating out of consumer exposure and into technology and industrials names while remaining underweight a weak market overall. Defensive exposure in India was a negative as the market bounced. In Latin America, Argentinian shale oil producer Vista Energy was a detractor and overweight positioning in Brazil was negative. Banking exposure in the GCC underperformed as the oil price fell, offset by underweight positioning in Saudi Arabia, Kuwait and Qatar. We added to Saudi Arabia, UAE, China, India and Taiwan; trimmed Hong Kong, Malaysia, Philippines, Greece, Brazil and South Africa.

Performance in EM this year has been incredibly narrow with only 25% of stocks outperforming the benchmark with most of this coming from the AI capex beneficiaries in South Korea and Taiwan. Over the last 12 months the portfolio has generated significant alpha largely from strong stock selection across the tech supply chain, with an added boost from modest overweight positioning in these countries. Our holdings control bottlenecks across memory, advanced logic, packaging, networking, connectors and thermal cooling, capturing extraordinary cash flows as US hyperscalers race to expand compute. Portfolio activity in the region has been aimed at sweating the capital through stock picking and disciplined risk control helping to generate stronger risk-adjusted returns.

An underweight and stock selection in China was a positive. Current positioning reflects a view that authorities in Beijing are content pursuing exchange rate stability and investment in strategic industries over domestic reflation. Our response has been to tilt the portfolio away from companies being squeezed by weak domestic demand and towards companies leading efforts to bolster energy security, industrial upgrades, and technological sovereignty. Our consumer exposure in Tencent and Alibaba underperformed. Market doubts over the ROI from AI investment, concerns their LLM models lag behind AI-native disrupters like Deekseek and Zhipu, and the potential for agentic technology to disrupt traditional ecommerce and consumer apps are weighing on these stocks. However, we opted not to exit as we believe there are arguments for both companies being beneficiaries of AI deployment.

Defensive positioning in India was a detractor as the market rallied. Telecoms infrastructure provider Indus Towers was the worst performer as a period of favourable economics fades with a large volume of site renewals due over the next 12 months, exposing the company to greater competitive pressure from rivals. Foreign investors have abandoned Indian equities having been designated an “AI loser” due the disruption of its 5 million strong IT services sector. Since the end of 2024, India’s weighting in the MSCI EM benchmark has fallen from nearly 20% to 9% today, as Taiwan and South Korea have surged from a quarter to almost half the benchmark. On a price to earnings basis MSCI India trades one standard deviation above a 20-year average premium to MSCI EM of 1.5x. However, there are pockets of value and positive earnings revisions across financial services, banks, real estate, software, healthcare and retail staples.

In Latin America, contributions from stock selection and an overweight to Brazil were negative as concerns over government fiscal policy, inflation, high debt levels and a slowing economy weigh on sentiment. Portfolio companies sensitive to the rate environment such as residential developer Cyrela and Sao Paolo water utility SABESP underperformed. Despite the backdrop, the operating performance of our core holdings in Brazil has been robust. The market is among the cheapest in the world on a forward P/E of 8x, and domestic allocator positioning is at record lows. Argentinian shale oil producer Vista was the largest single detractor in the region as oil plunged on the news of a US-Iran deal to end their conflict. Underweight positioning in Mexico was a contributor as the market underperformed. Domestic demand is weak, remittance payments from the US have been falling, and corporates are delaying investment decisions due to uncertainty over the outcome of upcoming USMCA negotiations.

An underweight in South Africa was a positive contributor, while at the stock level outperformance by Firstrand was offset by a poor period for Goldfields. Firstand was boosted by country level credit upgrades from Fitch and Moodys, along with a positive reception to news that it may sell its UK operations. Miner Goldfields was sold as a combination of headwinds are building including a peaking stockbuilding cycle (gold is positively correlated with the cycle), the excess monetary environment becoming less favourable and extreme prior gains in the gold price. Exposure in Egypt was the largest beneficiary of conflict easing in the Middle East with the broader market rising over 20%.

Global monetary data suggests economic weakness ahead. Rather than fade the short term spike in inflation stemming from the US-Iran war which appears to be cooling as energy prices fall, central banks risk fighting the last war by keeping monetary policy tight with negative consequences for economic activity and equities. These traditional drivers of economic and market weakness appear partially offset by a frenzy of investment and activity as AI is rolled out across industries. The process of AI diffusion is in its very early stages, but we have already had a taste of its potential for creative destruction in areas like software coding. Just as railways, automobiles and the internet created new industrial ecosystems that were hard to envisage when these technologies were in their infancy, investors face the difficult task of imagining how AI will create new sources of demand and arenas for wealth creation. The portfolio today is focused on critical infrastructure providers where earnings and margins are surging and where new supply will be difficult to bring online. While these companies trade on reasonable valuations relative to their growth and profitability, we participate with healthy scepticism based on a view that transformative innovation is rarely a linear process.

The Composite rose 28.73% (28.48% Net) versus a 24.05% rise for the benchmark.