The year of emerging markets

What’s happened this week?

Hello, it's Friday, the 10th of October. We are firmly into the final quarter of 2025 now. What I thought we'd do this week is reflect on the performance of emerging markets. You may have started to pick this up, but year to date they've done fairly well actually, having had more than a decade really in the doldrums. But as things stand to the end of September, in dollar terms, they're up nearly 30%, and in sterling terms they're up about 20% over the same period. So, they're amongst the best performing markets in the world year to date. They're outperforming a great many developed markets, which they have so perennially underperformed, and interestingly, they've in fact achieved a run of nine consecutive positive months as well. So there's been a lot of positivity, perhaps not necessarily overtly, but behind the scenes washing through, pushing emerging markets valuations up. That's all the more interesting when you think about global trade, you think about the sort of elements that tariffs, for example, may well impact, that despite that seemingly massive headwind from news flow around tariffs, emerging markets, generally exporters of stuff that will be impacted by tariffs, have actually fared well year to date.

What’s caused this?

There's a number of different justifications that are postulated as to why emerging markets have done well year to date. The weakening of the US dollar is often one such example. But you can't escape the fact that at the start of this year, on average, valuations in emerging markets were extremely cheap and arguably awaiting a flow of capital to re-inflate those valuations back towards normal sorts of levels. Actually, as it happens, even following the reasonably good performance of emerging markets year to date, they still don't look particularly expensive. But you really do have to have a country by country view to make those sorts of comments. It's quite interesting that there's an emerging market index at all. It's a really disparate group of stock markets in there. It is fairly biassed towards the ones you'd expect, the Chinas, for example, which account for about 30% of the index, Taiwan, South Korea, they're all pretty big and their performance year to date has certainly helped. Another area that did well in the last couple of years, really, India has actually been a bit of a laggard year to date. And so despite that substantial component not really doing its fair share of the heavy lifting, the index has still done pretty well. The composition of emerging markets has changed dramatically over the course of my career. Looking back sort of 20 years or so, you'd have had less weighting towards Asian economies and greater weightings to developing Europe, to Africa, and indeed to Latin America. And over the course of that period, the scale of Asian markets in that index has swollen and the others have reduced as a consequence. And so while it's an interesting cohort of different stock markets, there's a lot of different idiosyncratic risks in there and lots of scope for diversification to come through. As well as being very concentrated in some ways, there's also a very long left tail. You've got a number of stock markets, the likes of Peru, even Greece, which are less than one percent of the index and so it is a sort of broadly diversified index, despite that concentration of a handful of markets at the sort of top end.

So one of the interesting features of having such a disparate index is even over the course of the year to date period there's been significant different sort of leadership as the year's progressed. So quarter one, emerging Europe, quarter two, you have Korea really heading the way, and then in the third quarter of this year, China and actually South Africa really pulling the index on. So where we are today looking at all these different indices together, there is a sort of mixed bag in terms of opportunities, a mixed bag in terms of valuations, but the average across the index remains pretty attractive. Price earnings, for example, around about the sort of 14s, you've got a couple of bigger ones i higher multiples starting to make the US look about sort of the same level. So in the sort of low 20s into the mid 20s, but also there's a lot of markets in in the single digits. Indeed Egypt, which again is one of those sort of smaller sub 1% allocations, Egypt's price earnings ratio is something like 6. So you know there is a big range of valuations in there, and likewise on price to book, for example, there are some more expensive markets, but the average across the piece is about 2.2, which is by no means particularly challenging.

What’s the impact for investors?

There's a number of different impacts for investors. I mean, the first one, the obvious one, if you're overweight emerging market equities, as we are in the Liontrust Multi-Asset Team, you'll get a positive impetus from that outperformance year to date. Perhaps more fundamentally, though, if you take a step back, another point that it raises is it's a decent reminder that markets don't necessarily outperform in perpetuity, and they don't necessarily underperform in perpetuity. There's been a period, 10 years plus, where emerging markets really haven't captured markets' imagination, haven't really had the flows coming in that you might expect and as a result of that it's underperformed and valuations have compressed over that period. But this year to date period, you've seen a change in sentiment, change in flow, even if it's not been a sort of a really bombastic and overt change in investor views on these markets, the flows have taken pace almost behind the scenes and really pushed these markets up.

I remember having a trip to Shanghai to see potential investors over a decade ago, and we had an interesting meeting. The translator referring back to me questions from the audience, whenever they asked about emerging markets, he actually said to me 'emergency markets', which I thought is quite an apt description of these markets for the last sort of 10 years or so. They've really been kept in reserve, if you like, while people are getting excited over developed markets and most notably the US. But perhaps this year just demonstrates, reminds people of the opportunities that are outside of the US and at the right price at the right valuation, which certainly I think we can say we saw at the start of this year, and indeed in the years preceding that, it can be a very rewarding investment and indeed a good risk diversifier as well, because if you're buying stuff already in the left tail, there's less good news in the price of that distribution, and so you've got less scope for disappointment than you do if you're buying markets with lots of good news already in the price.

What have we done about it?

Well, we haven't done anything directly as a consequence of the performance of emerging markets year to date. We look to move into positions based on our tactical process, before they become popular and ride them as that popularity plays out. And clearly we've seen that come to the fore year to date. Perhaps what we can remind ourselves when looking at emerging markets is the importance of diversification. There are some significant differences between the performance of different regions. There's lots of different reasons why that might be the case. And so, having a broader exposure to that market rather than having sort of rifle shots in certain areas may give you a more diversified and a better risk-adjusted exposure to that region. And then the other thing it can sort of remind us as well, is the importance of active management where you can use it, rather than necessarily just taking the index return, having the opportunity to selectively allocate to businesses and indeed to indexes within that broader regional cohort that we believe over the long run will give you scope to outperform if you choose teams with the right philosophy, process, discipline and time horizon. An actively different approach to emerging markets, we believe will be rewarding in the long run.

That's it from me. Have a good weekend when you get there, and we'll see you next time.