In November, the fund returned +0.1% with positive performance from Brazil and South Africa, as gold and other commodities resumed their positive trajectory. Conversely, profit-taking in AI-linked equities from South Korea and Taiwan were the main areas of weakness.
One of the key themes this time last year was the apexing of US market exceptionalism, and as it turns out it was correct. EM has shown strong relative and absolute performance this year. In part this was driven by the policy preference towards a weaker US dollar which traditionally draws capital to local currencies, especially those offering attractive ‘carry’ but this gained momentum through the year from a mix of discounted valuations, superior macro fundamentals and the AI ‘pull-through’ into the Asian tech ecosystem.
More fundamentally, this currency tailwind was supported by improved underlying earnings which should grow by around 15% this year, only the second time we’ve seen such a result in a ‘normal’ year since 2011. With index returns of around 30% year to date, there’s been some multiple expansion but at 13.5x next year we’re in the middle of the historic range, and still at the wider end to the S&P at 35% discount. For an asset class that represents circa 40% of global GDP, it still only has an MSCI ACWI weighting of 11% (just off the lows of 10%) and a long way from the previous high of 14%.
The next phase of the broader EM rebalancing is more likely to be driven by EPS growth and yield compression. This year marks a post-Covid watershed as earnings have not been downgraded as the year progressed, whilst estimates for next year have been trending higher and are now a very respectable +18-20%. Most of this growth is skewed to Asia given the spending on semiconductors, memory and data infrastructure but also notable is the estimate for China at around +16% versus flat this year, which is largely attributable to a turf war amongst the e-commerce giants.
Despite the macro gloom, the broader Chinese market will likely grow around 10% this year from a revitalised private sector and the anti-involution campaign curbing destructive competition. The 15th Five-Year Plan explicitly prioritises a “notable increase” in the weight of domestic consumption in GDP, so with CPI now at the highest since February 2024 (+0.7% yoy) it could be the Chinese consumer that finally starts to surprise positively.
More broadly, whilst EM growth is being led by ‘new economy’ sectors of Technology and Communications, the picture is quite broad-based with all sectors showing double digit growth, with the only exception being Energy.
This unusually healthy bottom-up outlook does of course make one nervous. It’s the unexpected outcomes and risks one cannot see that have the highest impact on price. Last year when we knew there were going to be tariff tensions we could position accordingly. We suspect that the most likely risks yet again come from the credit markets which we suspect are miss-pricing risk, but this is a risk that will impact all asset classes and we draw comfort from the stronger sovereign and corporate balance sheets in the portfolio.
More specifically we are taking profits in the positions that have performed remarkably well this year and where expectations are becoming quite elevated. One of the areas we are now finding attractive is in consumer staples where valuations have de-rated quite significantly in a number of our countries, and where yields have also become a lot more attractive. But this is just one of the broader slate of interesting areas we see for 2026.
