Global Emerging Markets Equity Strategy Commentary

Emerging market equities posted a positive return for the final quarter. Strong returns for the asset class this year have in large part been a re-rating story with the AI capex boom the biggest thematic driver of returns. This was reflected in our overweight and stock picking in Taiwan and South Korea leading contributions to performance for the quarter. Stocks in China and Hong Kong were a drag following a strong twelve month run. Absolute and relative returns in ASEAN continue to be lacklustre despite enjoying the tailwind of a weakening dollar. Latin American equities surged, with stock picking in Brazil and Argentina positive. Zero exposure in Saudi Arabia was a contributor as a weak oil price and domestic fiscal concerns weigh on the market. Polish equities rallied with our stocks and overweight positioning adding to relative returns. While our companies in South Africa kept pace with the market, our underweight continues to be a negative as precious metals stocks rally. Activity included adding to Brazil, India, Mexico, South Africa, South Korea and Taiwan, and reducing Hong Kong and China, Peru, Philippines and Thailand. It is worth also highlighting the increase in exposure to Materials across iron ore, gold and copper.

Stock picking and overweight positioning in South Korea was one of the largest contributors during the quarter. A combination of the market’s exposure to the AI capex boom, and potential for Value-Up corporate governance reforms to drive structurally higher shareholder returns saw the market double in 2025. Holding company SK Square was one of the top contributors and is a leader in efforts to improve corporate governance centering on narrowing the stock price discount to the net asset value of its portfolio holdings. It also benefits from the fact that the largest portfolio investment is in high bandwidth memory (HBM) leader SK Hynix. Demand for HBM, a key component in GPU stacks which power AI, is so great that meeting demand means DRAM giants Hynix and our other portfolio holding Samsung Electronics must limit commodity memory supply supporting pricing and margins. Stock picking in Taiwan was also positive as our AI supply chain holdings including chip cooling technology specialist Asia Vital Components and data centre designer and manufacturer Wiwynn rallied.

Stock picking in mainland China and Hong Kong was negative as the market cooled following a strong run earlier in the year. Audio streaming platform Tencent Music was a detractor, fading on a lack of near term catalysts. We recently met with management who are confident ARPU growth – the key driver of margin expansion and profitability in a saturated market – will be sustained through moving more content behind the paywall, investing in podcasting as well as fan based interaction and offline concerts. Contract biologics drug manufacturer Wuxi Bio fell -23.3% on a broader biotech sector de-rating reacting to geopolitical concerns over an update to the US Biosecure Act and its potential to prohibit the company from contracting with US pharma companies. Ultimately, the update was not as strict as feared and we expect the stock to re-rate on its growing pipeline of drug development project wins with an order backlog worth over US$20 billion, supporting a revenue CAGR of c.15% and gross margin expanding above 40%.

India was one of the biggest laggards in EM this year, having underperformed broader Asian equities by the largest margin in decades. Late last year we flagged our concerns that earnings beats looked to be topping, while a flurry of private equity-led IPOs was soaking up liquidity. We took portfolio exposure underweight but opted against dismantling the Indian portfolio on a view that the long term structural strengths of the market (improving institutional quality and domestic liquidity) remain intact. Some of our big winners from previous years such as private hospital operator Max Healthcare (-15.8% over 2025) and Pepsico bottler Varun Beverages (-30.2%) were sources of profit for investors funding trades in markets like South Korea and China. Intense and unseasonal rainfall in India hit sales growth for Varun. While expanding operations in South Africa are providing a sales and margin boost, we reduced the position through the second half of the year as it looks expensive on c.40x 2026 earnings against a soft domestic backdrop. Although Max also trades on rich multiples, its growth pipeline of brownfield and greenfield developments, fast growing and highly profitable international patient business, and low doctor attrition of c.1-1.5% remain compelling. The quarter saw a recovery in telecoms names which had struggled earlier in the year. Bharti Airtel is enjoying stronger pricing power in a three player market. Indus Towers is India’s largest tower infrastructure provider and is benefiting from the 5G-led data boom.

In Latin America, Brazil’s largest jewellery brand Vivara is a resilient domestic story, which outperformed as it continues to grow store count while sustaining high profitability through its suite of popular brands. The company continues to sustain strong earnings growth despite falling consumer demand for jewellery, meaning growth is coming from expanding market share. Argentinian shale oil company, Vista Energy posted a strong quarter leading us to exit as it hit what we believe to be a rich valuation given oil price weakness.
Elsewhere, contributions from stocks in Poland were positive, led by fast fashion retailer LPP where margins are rising after the company decided to moderate its store roll out plans. Stock picking in Egypt was positive as property developer TMG rallied on high recurring income streams from its projects and growth prospects through expansion in Saudi Arabia.
Emerging markets appear poised to break out of nearly two decades of sideways price action and over a decade of underperformance relative to developed markets. As argued in previous commentaries the shift is fuelled by the virtuous circle of a weaker dollar feeding a stronger monetary backdrop and reflation in EM, supporting corporate ROEs and profit margins. Price to earnings ratios can move higher as flows chase the story. As this new cycle matures we think it will pay to look beyond the AI basket into relatively neglected corners of our markets for companies that are well-geared to these trends.

The Composite rose 5.29% (5.07% Net) versus an 4.73% rise for the benchmark.