Emerging market equities was out of favour for many years – a period during which investors only needed to focus on buying large cap US equities to do very well. The asset class has however come back in fashion, so the question is what changed – and if it’s still a good time to invest in EM equities or if now is too late.
Thomas Wilson: “From my perspective, what’s really changed is tech. We’re in a super cycle at the moment and that’s driven very substantial tech performance with tech now accounting for more than 40 per cent of the benchmark. Also, the bulk of tech in emerging markets is tech hardware, which is the picks and shovels of the AI theme. I’m sure we’ll come back to the question of concentration issues, but tech is what’s been driving earnings and strong performance in Taiwan and Korea. Regarding the question if now is a good time to invest, EM beta will be highly correlated to the performance of IT. On a top-down basis you have fundamental support for the AI thematic: our view is that you’ve seen model capability surprise positively and we’re seeing commercial use cases prove up. You’ve got inference demand lifting strongly and you’ve got compute deficits. That can reinforce investors’ willingness to finance the capex required. The issue is that valuations and expectations are relatively extended.”
Technology, and AI, is changing the index – is it also changing how you invest and how you make decisions?
Jeroen Hagens: “Well, we’ve been using AI for quite a long time. It’s driving the index, but it’s also driving investment decisions. I think the biggest change we’ve seen over the last years is indeed the usage of AI and machine learning and with that alternative data sources. If you compare the data sources that are available nowadays to five or ten years ago, it’s a completely different landscape.”
Maria Wendestam: “Would you say that being a quant manager in emerging markets is easier or more difficult compared to developed markets?
Jeroen Hagens: “If you look at the market composition in emerging markets, it’s way better for our quant models. There are big differences between markets, and you also have a lot of different underlying stocks to choose from, which is what you want for a quant model. Data quality is, of course, always a concern, but overall, it’s good. I would even say there’s a couple of data sources available in emerging markets that we don’t even have in global developed markets so there’s two sides to the coin.”
Per Hammarlund: “I wanted to get back to the first question about what has changed. I think we shouldn’t forget about Liberation Day, which I believe was a big catalyst for investors to diversify away from the US. Valuations in emerging markets at the time were also a contributing factor so there was a lot of things happening at the same time. But still, the need to look at markets outside the US has been a big driving force.”
Malin Hallén: “I agree with all that’s been said and we have also been looking at diversifying away from the US. I would like to highlight another factor and that’s a structurally weaker dollar. If you believe in that trend, it could be positive for emerging markets.”
Thomas Wilson: “That’s certainly our view. We thought that the dollar might have been stronger as a function of the Middle East conflict, so it feels skewed to depreciate, which would provide a tailwind for emerging market performance.”
Claus Born: “I agree that there are a lot of factors at play, but the key event is probably Liberation Day because it has opened the eyes of investors. Many concepts that investors had were challenged in the first months of the Trump administration. In late 2024, many investors expected a strong US market, and we didn’t have that in the first half of 2025. Another assumption was strong Trump, strong US dollar and this was also challenged already in the first half of the year – probably because many people just didn’t listen to Trump, he always wanted a weaker dollar. I think these challenges against very established beliefs increased the interest in alternatives to the US and here emerging markets stands out.”
One reason for why Nordic institutional investors have stayed away from emerging markets has been ESG concerns. Do you have a take on that Jonas?
Jonas Arsjö: “We have been invested in EM for over five years, and we’ve not backed down on our ESG or sustainability policies. We put the same requirement and have the same expectations on those managers as we do on the rest of the portfolio. I know it’s more difficult to find managers who can produce good financial returns as well as keeping up with specific ESG requirements, but it’s possible.”
Maria Wendestam: “It might be a challenge, but I also know portfolio managers within EM that have said that for many companies, having a solid ESG framework in place is a way to attract international capital.”
Thomas Wilson: “We run institutional mandates as well as funds and there are differing degrees when it comes to ESG and sustainability. You have a base level of incorporating sustainability with regard to valuation or operating risk, which people have always done. This is something we very much focus on, and it really matters. Then you have some clients who have a higher bar, and they are willing to accept reasonably significant limitations around the universe. I would say the conversation generally has softened somewhat, but I think everyone is still addressing sustainability in a very pragmatic way vis-a-vis integration.”
Jeroen Hagens: “Coming from one of the leaders in sustainability, we still see a lot of interest in our sustainable strategies. I would also highlight that you don’t have to only work with limitations, but you can also make it a proactive, positive choice. So, if we have two stocks that are equally attractive, we can select the more sustainable stock and that will tilt the portfolio to a way more sustainable profile – especially if you look at carbon. You don’t have to lose anything in terms of outperformance potential.”
Claus Born: “From my experience, it’s twofold. Where we have established institutional investors, the focus on sustainability remains similar or the same – even if it doesn’t appear first in the discussions about a strategy. For retail investors, it has lost a lot of momentum. It’s not something that is talked about anymore and that’s not only for emerging markets, but for other equity strategies as well.”
Per Hammarlund: “We don’t want to compromise in our ESG requirements, but what we’re working towards and what I feel is the right way to go is to ensure that it remains an integral part of your allocation decision. It shouldn’t be an overlay or something that you add afterwards. That said, I agree that the focus has been reduced, but hopefully that means that it’s more part of a day-to-day operation rather than an added extra.”
Claus Born: “If I look at our investment process, it’s completely embedded today. I do think that the developments over the last couple of years, with the questions raised by investors about ESG, have resulted in managers incorporating it and seeing it as an integral part of the investment process.”
Jeroen Hagens: “It’s about financial materiality – does it have an actual impact.”
Historically, one of the reasons to invest in EM was to catch the convergence story with less developed markets reaching the same level as Europe and the US. Is that still the case or are you trying to catch something else today?
Maria Wendestam: “That’s still there, but it’s not the only reason to invest. I mean, why would emerging market countries make the same mistakes that we’ve done in developed markets? They can clearly find their own innovative growth so there’s more than just convergence.”
Thomas Wilson: “Providing a single answer on the outlook for emerging market is impossible because there’s such dispersion in levels of economic development and market drivers. At its very simplest level, you could say that 80 per cent of the beta is driven by four markets – China, India, Korea and Taiwan. Korea and Taiwan are relatively developed and they’re tech heavy. Then you have China, which has many different drivers, but at its heart offers a broad and diverse suite of idiosyncratic opportunities. India is more your traditional emerging market, as you might have thought of them 20 years ago, with the opportunity for structural growth off a low base. Beyond that, you have a very diverse suite of opportunities across different countries, including convergence stories. For us as investors, we have a broad suite that we can address and within that convergence is just one arrow in the quiver.”
As investors, what are you looking for from your EM allocation?
Per Hammarlund: “I don’t look for the convergence story. It might be valid for some specific companies, and it might be true for some sectors at specific points in time. What I’m concerned about, or what I’m afraid of, is if a country’s economy starts to grow fast and require investments to continue, there’s a risk that it will go through the same process that China did in terms of issuing more stock and earnings per share will fall.”
During the last couple of years, we’ve seen China going in the opposite direction where earnings per share is growing due to buybacks and dividends.
Per Hammarlund: “Absolutely and I know for sure that there are opportunities to be found. Today I would be more willing to look at opportunities in China, despite their track record of diluting shares.”
Thomas Wilson: “I think we need to remember that we buy stocks, we don’t buy economies. Having a tailwind from economic growth is nice, but we also need to have idiosyncratic drivers of earnings and return. That’s what we as active investors will be looking for.”
Does that mean that you’re focusing on individual companies rather than countries or regions?
Thomas Wilson: “As emerging market investors, you absolutely need to understand the macro backdrop, with regard to both opportunity and risk. For example, economic cycles are a source of opportunities. You need to think about what the yield curve potentially is going to do and what’s the currency going to do. You need to understand politics and how that impacts policy and how that might impact market flows. You might need to take account of geopolitical risk. There are many different things that you need to consider from a top-down perspective, more so than I feel you might do in a developed market setting.”
Claus Born: “This is probably the characteristic that most clearly distinguishes how investors look at global equity versus emerging markets equity. If you look at the typical teams analysing stocks in global markets, it’s on a sector basis. In emerging markets, it’s often on a regional basis, on a country basis and then maybe subdivided by sectors. So, it’s very important that you know the environment in which you are operating. Often the decision making is less transparent, it can be faster in many emerging markets. You have to be aware of this and also see the risk and opportunities that lie in these different political environments.”
Jonas Arsjö: “I agree with that. For us it’s about finding the stock-specific investments. We want active managers. We like when they’re driven by stock selection, but I think in emerging markets, the top-down analysis is more relevant because different countries are exposed to different economic drivers and so on. At the end of the day, we believe it’s through the individual stocks you make the return, but you must keep a good eye on the top-down analysis.”
Jeroen Hagens: “I might have an interesting take on this because we take out the country risk completely and rank stocks within countries. This might be a difference between the quant approach and the fundamental approach of course, but to us risk management is super important in emerging markets. You don’t want to have a big blow up in your portfolio if you’re overweight to the wrong country.”
Thomas Wilson: “That’s an interesting approach because within our process we actively allocate to country. There’s significant dispersion between countries and for us about a third of our alpha generation is derived from country allocation over time. So, a different approach.”
Claus Born: “I would say that we have a similar approach where some two thirds of the alpha is created from stock selection and one third from country allocation.”
You mentioned earlier that 80 per cent of the benchmark is explained by four markets. How much can you deviate from that as a bottom-up stock picker?
Thomas Wilson: “It of course depends on what type of product you’re running. If you’re running a core product, you’re going to be closer to the reference benchmark.”
Political risk used to be one of the reasons for investors not allocating too much to emerging markets. Is it fair to say that this has changed and that the political risks are maybe greater in developed markets today?
Per Hammarlund: “For me, emerging markets have changed a lot over the last 20 years. There are some emerging markets that are more advanced now where political and regulatory risks are on par with developed market. Then you have some markets that are still defined by political risk with Turkey being one obvious example. We therefore need to distinguish between which emerging markets we are we talking about. As an investor, I want to have a clear grasp of the political risks, and I want to be in touch with someone on the ground. Having said that, political and regulatory risks are lower in some Asian economies now than they have been historically.”
Thomas Wilson: “I come from the UK where political risk is somewhat higher than it used to be. That said – these are still important questions in emerging markets. In Korea we had a new president coming in last year and there’s been a series of legislative actions which hopefully will materially improve governance in the Korean market. In Brazil, politics matters enormously to expectations of fiscal management and debt sustainability, and we’ve got elections in October. For specific markets, politics can matter very much.”
Claus Born: “I would say it matters, but it matters maybe less than many people think. And to your point – this is an area where we’re seeing convergence. So politically, many developed markets are now behaving more like emerging markets in the past. You have more political risk also in developed markets these days and you see the volatility of global equity markets and emerging markets also converging. The volatility that we have in emerging markets is not far away from developed markets anymore.”
As investors, how do you prefer to access emerging markets – with regional or global mandates?
Maria Wendestam: “We would use emerging markets in our core strategic allocation. On top of that we could have a satellite exposure, but that would probably be a single country.”
Malin Hallén: “We use ACWI as our benchmark, and emerging markets is part of that. However, it is worth noting that the emerging markets benchmark is currently quite heavily tilted towards tech and the AI value chain including semiconductors and memory. If the goal is to diversify away from that theme, you would likely need an active strategy that is prepared to look beyond the benchmark and for example invest in areas such as Latin America and emerging Europe. So, the first step is to consider what kind of emerging markets exposure you want.”
Jeroen Hagens: “Yes, the benchmark is really tech heavy today. Historically, defensive and low risk strategies have been doing well, but they have struggled over the last year. This is such a difficult decision.”
Per Hammarlund: “We also have ACWI as our benchmark and we have been overweight for quite some time. I agree with Malin that you want to first decide on what exposure you would like to have, rather than just go overweight or underweight the index. It is however also a question of capacity and how many people you have that can manage the asset class actively. Ideally, I would like us to be a little bit nimbler and be more selective. We’re not there yet, but we’re working towards it.”
Jonas Arsjö: “Coming back to the initial question about the reason for being in emerging markets. We started off having only global mandates, using ACWI as a benchmark, letting the managers have a discrete decision if they wanted to have an exposure to emerging markets. We did a study right before COVID, where we identified China and India to have good solid economic growth stories. So, in 2021 we added exposure to China and India, in specific country mandates. That worked well for some 3 – 4 years. More recently India has lost momentum, and China hasn’t performed on the level of Korea and Taiwan. We’re currently considering broadening our allocation to get exposure to more growth drivers.”
In trying to find topics where you don’t really agree, I’d like to hear your take on the importance of having people on the ground in emerging markets.
Claus Born: “I’m of course coming from a manager who has always been characterized by having a large footprint in emerging markets and I have been myself part of this footprint and have done research on the ground as well. I think it adds a different perspective when investing in companies. It adds a different perspective in terms of ESG also and it adds a different ability to engage with companies. You can obviously get a lot of information on the internet and AI has accelerated information gathering a lot and consequently the profile of what the research does is changing. You need to make a sense check and you need to understand the people behind it. I think that’s done better if you’re on the ground, if you speak the same language and if you know culturally how to behave in the society and with the people you deal with. I’ve been working out of Latin America for many years, and I’ve spoken to the same people in English and in Spanish and it’s a big difference if you talk to somebody in their native language. You can build a better relationship, and this helps in all further engagements.”
Jonas Arsjö: “I agree on most of that and we view it as a positive with a local presence even though it’s not a necessity. But I would say it’s probably more important in EM than in DM. It also depends on what kind of strategy you’re running.”
Jeroen Hagens: “Would agree when it comes to sustainability, which is why we have our SI team based across the world. I don’t see the same need from a performance perspective, but we’re of course quants. We have a way around not speaking the same language. We use large language models and for example for the data sources we have available in China, we use both English language models as well as native language models in order to capture differences that can come via translations. A lot of the information gets lost in translation, but the English language model is far more powerful than the Chinese one. So, you get a strong model on a weaker data set and the other way around and then you have the overlap and that’s where the magic happens.”
Claus Born: “I didn’t really know about the differences in the models – that’s interesting.”
Jeroen Hagens: “Yes, it’s like what you said about understanding cultural differences – that applies to the models as well. In addition to analysing earnings call transcripts, we can also do audio data analysis – trying to understand if the person sounds happy or not, which is of course also culturally dependent. You therefore want to establish a baseline that’s unique to the given culture. The next level would be analysing body language, but then you would need video data.”
Thomas Wilson: “I agree with much of what Claus said, but we have more of a blend approach. Our Asian desk has a lot of analysts on the ground in Asia, and there are significant benefits, including language and cultural understanding – and having direct experience of products and services. I think it’s especially valuable to have mainland Chinese analysts in China. There are however also arguments for having people centred in a hub. It gives you context and you’re less siloed on your own market. If you’re in a hub, you can communicate more freely with analysts looking at similar stocks in different markets. So having that proximity is valuable, and not just because of communication, but also in terms of building internal relationships.”
Per Hammarlund: “I think you put it quite nicely Claus. My only comment is that I don’t think it’s all that different with developed markets. All the things that you said rings true to me for developed markets as well, and to some extent, I think we should move away from looking at EM equities as something all that different from DM equities.”
What are some of the key difficulties in managing emerging market equities – and are they the same as ten years ago?
Thomas Wilson: “That’s a very broad question. First, emerging markets is a very broad and diverse suite of opportunities so having the ability to have subject matter specialists on a relatively broad basis is extremely useful.”
Claus Born: “To some extent it’s still the same challenges because it’s a complex asset class. If I look back, the asset class has changed a lot. Today we’re talking a lot about the technology component in emerging markets, which was not a big part of the benchmark historically. The same applies to China, which was not that relevant some 25 years ago. Next year the asset class will celebrate its 40th birthday and composition and weightings have changed dramatically over this period, probably more dramatically than in developed markets – maybe apart from Japan.”
Thomas Wilson: “One of the things that has changed in the last five years is that markets are much more volatile. And I would say geopolitical risk is higher today. You can take a view on something from an idiosyncratic standpoint, and sometimes you get regulatory risk or geopolitical risk heading your way, which interrupts your thesis.”
Jeroen Hagens: “It’s almost like you guys are advocating for a systematic approach. I wouldn’t disagree with that. And I think you both highlighted risk, which is very important. I think because emerging markets are changing so much, you want to have a systematic strategy, but also the one that’s adaptable to different market conditions. Emerging markets investing is as much about not capturing the downside as about capturing the upside.”
Everyone is currently optimistic on EM and have been for a while now. What would you highlight as some of the key risks here?
Per Hammarlund: “For me, I see a lot of country and company specific risks and that’s not unusual. However, the one overarching risk for me would be this trend towards deglobalization and some kind of fragmentation. It would be a big change for EM if we move towards more restrictions on global investments and if we see increased restrictions on trade. I think it would hurt EM countries more than developed markets if we close off the flow of capital between countries from developed markets into emerging markets.”
Jeroen Hagens: “Missing out on a doubling again is also a risk. Being underweight EM can be a risk for allocators.”
Disregarding the fact that some markets are more important in a benchmark context – where are you currently seeing most opportunities?
Thomas Wilson: “That feeds into how we are allocated on a country basis today. So, we are overweight Taiwan and Korea and we’re moderately overweight China. Our China allocation is not really driven by any assumption of economic tailwind. It’s more driven by opportunity in market, so the ability to find good idiosyncratic opportunities. We are very moderately overweight Brazil, probably somewhat less so relative to consensus. We’re also overweight emerging Europe, which is economic convergence play on a medium-term horizon. It’s a relatively narrow market, but you can find opportunities and the valuation is still fine. And then on the other side of the fence, we’re underweight ASEAN, where we find that it’s just a dearth of opportunity from a bottom-up standpoint. We’re underweight India, where we’ve seen valuations reset, but we don’t see any near-term market-specific catalysts.”
Jeroen, I guess it’s not fair to ask where you’re overweight because you’re not?
Jeroen Hagens: “Our strategy, as mentioned earlier, is to be neutral across the board. We think that there are limited options to choose from and there are a lot of individual decisions that you need to get right. Limited breadth is not in favour of quant model and thus for us it’s more a risk than an opportunity.”
Per Hammarlund: “We’re overweight in general, so that means that we’re overweight Taiwan, Korea and China and not so much India. I’m personally more positive on China – not because it’s China, but because there are individual companies and individual sectors that are interesting for a long-term investor. I’m careful when it comes to Taiwan and Korea. For now, it looks fine but I’m looking for alternatives. I’m not very excited about emerging Europe and I’ll give you one reason. I’ve been covering Poland for a long time and some ten years ago I visited Poland and spoke to the government and at the time they said that they would absorb the pension funds because that way they could reduce their debt and get interest rates down. What happened was that they killed the capital markets and it hasn’t recovered since. So yes, there are good companies in Poland and there’s a convergence story to some degree, but it has not been reflected in the stock market because of regulation and political decisions, and I fear similar developments elsewhere. When the EU deregulates and creates a better functioning capital market for the EU, maybe eastern Europe would follow and then I would be more positive.”
Jonas Arsjö: “I think Southeast Asia looks very interesting and there are a lot of things going on. I also appreciate that Latin America has received more attention lately because I think that’s an unloved part of EM. However, if I should pinpoint one market it would be India for the long run.”
Malin Hallén: “We have a slight overweight to emerging markets currently, mainly focused on Asia.”
Claus Born: “In our emerging markets strategy, we are currently slightly underweight in both India and China. We have an overweight in South Korea, which we have been carrying for a few years already – so this is not entirely driven by the AI boom and rally that we have seen recently, but also by the longer-term valuation opportunity in the South Korean market. We have another more significant overweight in the Brazilian market. We are slightly underweight in Taiwan, which has become a difficult market to allocate to because TSMC is now at 14 – 15 per cent in the index. If you are running a UCITS fund, you are limited to 10 per cent so it’s a market where you’re easily getting into an underweight situation because of regulatory rules. We also have an underweight in the Middle East and in Eastern Europe. For Latin America overall we are overweight.”
Are there any questions, themes or topics that you think we talk too little about when it comes to emerging market equities?
Malin Hallén: “I think some people were quite surprised that Asia and China managed last year so well despite the U.S. tariffs partly due to increased intra-regional trade. Is that something that you think has made the region more resilient and less exposed to external shocks going forward?”
Claus Born: “This has been a development for quite some years, especially as regards to China. They have worked to diversify their trade relations beyond the US ever since the first time Trump was elected president. At the time he introduced a first round of sanctions so they knew what could be coming and have been diversifying their trade relationships within Asia but also within emerging markets. I think one misconception that is still sometimes in the markets is that emerging markets are completely dependent on trade with the developed nations. This has changed over the last decades into more inter-emerging markets trade relationships that make them more resilient.”
Thomas Wilson: “Very neatly put. I think that developed markets as consumers of emerging market goods still matter. If you look at the share of Chinese exports into the US market that’s fallen away very markedly, though there may be transshipment via other countries. But broadly, if you think about reshoring opportunities, maybe the US can subsidize, cajole and extort other countries to build out plants in the US, but there’s still a huge gap from a competitiveness perspective. If you look at China specifically, their industrial policy has not necessarily been successful in terms of generating industrial profitability because you end up with excess capacity, but it’s been very successful in building out capability. You have powerful cost competitiveness and increasing product competitiveness or even product leadership in certain cases. I would expect them to continue to take global market share.”
Any other topics that we should think more about that we don’t?
Per Hammarlund: “One big theme lately has been that EMs are in much better shape when it comes to public finances and current account deficits than they used to be. I think that’s a reason to look favourably on emerging markets and it’s something that’s maybe not discussed enough.”
Claus Born: “It’s a fact that the average indebtedness of emerging markets has come down and the management of the debt has improved and there’s much less dependency on foreign currency. That’s why we haven’t seen any big debt crises in emerging markets with spillovers to the full asset class over the last 20 years.”
// Participants
Jonas Arsjö, Head of manager selection at SPK
Maria Wendestam, Chief investment analyst at Nordea
Malin Hallén, Senior portfolio manager, asset allocation at Swedbank Robur
Per Hammarlund, Investment strategist at AP4
Claus Born, Head of client portfolio management, EMEA & LatAm at Franklin Templeton
Thomas Wilson, head of emerging market equities at Schroders
Jeroen Hagens, client portfolio manager in quant investing at Robeco
