The third quarter of 2025 was exceptionally strong for emerging markets as an asset class and for the strategy which delivered both robust absolute returns and meaningful outperformance in a strongly rising market.

The strategy returned 8.7%, compared to 6.6% for its benchmark, the MSCI Emerging Markets ex China Net Total Return Index, an outperformance of 2.1% (both figures in dollar terms).

Market review

The third quarter proved a broadly favourable period for global equity markets, with emerging markets finally participating meaningfully in the rally. That said, their performance came with notable volatility and sharp swings between countries and sectors.

In July, value style factors briefly re-emerged, producing a headwind for our growth-oriented holdings. During the month – and the summer – tariff policy remained the dominant macro theme. Brazil and South Africa were hit particularly hard, and even key partners such as Taiwan experienced friction from US policy announcements.

August marked a decisive turning point, delivering strong absolute and relative performance for the strategy. The key global driver in our view was the evolving outlook for the Federal Reserve and its interest rate decisions. At the Jackson Hole symposium, Chair Jerome Powell signalled that monetary policy was shifting toward easing as the labour market softened and the economy slowed. While acknowledging that tariffs posed an inflation risk, Powell also reaffirmed the Fed’s position, emphasising a renewed commitment to the 2% inflation target and a move away from the average inflation framework. This firm tone suggested that Powell would resist political interference – even as Stephen Miran’s arrival at the Fed in September promised to keep him on high alert.

Perhaps the biggest game-changer was India’s diplomatic recalibration. Facing new US tariffs and visa restrictions, India signalled a willingness to improve relations with China. We view this as an inflection point in the continuing evolution of our Multipolar World, a theme central to our long-term investment thesis.

AI sentiment and peak capex concerns

During August, we observed a brief correction in global AI sentiment as investors questioned the returns on the enormous capex budgets of hyperscalers. The debate intensified after an MIT report suggested that most organisations still lacked a clear strategy for realising productivity gains from AI.

Despite these questions, AI remained one of the dominant market themes throughout the quarter, continually fuelled by high-profile partnership announcements among leading AI firms. While some of these arrangements carry the hallmarks of vendor financing, market enthusiasm remained unabated.

September proved another month of strong absolute and relative performance for the strategy. The market narrative revolved around the return of the Goldilocks scenario: enough softness in the US economy to keep inflation under control and permit further rate cuts, yet no major imbalances to threaten growth. With AI capex still perceived as fully equity-funded and non-inflationary, investors saw a sustainable ‘not too hot, not too cold’ equilibrium.

Although we recognise aspects of this argument, we remain more cautious. Tariff-driven inflationary pressures could still surprise to the upside, while the absence of inflation might simply reflect underlying economic weakness. That said, we are not in the recession camp; we continue to see a range of plausible outcomes consistent with positive emerging market performance.

The AI theme remained a powerful driver of performance. From an emerging market perspective, the spillover to North Asian technology companies was particularly strong

September also brought the now-famous Oracle–OpenAI–NVIDIA partnership, quickly followed by an OpenAI–Advanced Micro Devices (AMD) collaboration. These moves further amplified AI enthusiasm, though we find parts of the narrative increasingly speculative. Given the high correlation between US and Taiwanese technology stocks, we modestly trimmed our tech exposure, even though fundamentals in Taiwan remain sound.

Across the quarter, peak AI capex debates gathered momentum, yet the AI theme remained a powerful driver of performance. From an emerging market perspective, the spillover to North Asian technology companies was particularly strong.

Regional highlights

South Korea and Taiwan

In South Korea, two key themes dominated during the quarter: the government’s Value-Up programme and the strength of the memory semiconductor cycle driven by AI demand.

South Korea has been one of the best-performing equity markets globally in 2025, and among major emerging economies it has led performance. The AI-driven memory upcycle has been particularly powerful, benefiting market leaders such as Samsung Electronics and SK Hynix. This strength has cascaded through the supply chain, with semiconductor equipment companies like Eugene Technology delivering exceptional returns.

Equally important has been progress on the government’s Value-Up initiative – after its victory in the May election, the new left-wing government committed strongly to it, which was a surprise – designed to address the country’s longstanding corporate governance discount. In- essence, this programme seeks to make South Korea more investable over the long term by improving transparency, accountability and capital efficiency across the corporate sector.

The initiative’s impact has been amplified by a major legislative breakthrough: the passage of the Commercial Act, which for the first time obliges management and boards to prioritise minority shareholder interests. This reform represents a fundamental change for South Korea’s ‘chaebol’ conglomerates, where governance practices have historically constrained valuations.

South Korea has been one of the best-performing equity markets globally in 2025, and among major emerging economies it has led performance

The fact that the new left-leaning government, elected in May, has fully embraced this agenda was a positive surprise. We view it as a milestone for the Korean equity market, and it has been one of the main reasons for our increased capital allocation to the country this year.

In Taiwan, the story has been dominated by AI and the broader technology cycle. Virtually every part of the semiconductor ecosystem has benefited, with TSMC remaining the undisputed leader in advanced chip manufacturing, particularly for GPUs and other AI-related components.

This demand has extended across the supply chain, lifting equipment, materials and component suppliers alike. While valuations in parts of the market have become stretched, earnings momentum remains strong. Our portfolio activity in Taiwan has largely focused on valuation optimisation – trimming into strength and rotating selectively to maintain exposure while managing risk.

ASEAN

In Indonesia, political missteps by the new president, Prabowo Subianto, have eroded market confidence in both growth prospects and fiscal management. Large-scale protests have returned to the streets and the equity market has significantly underperformed. We maintain a zero weighting in Indonesia.

By contrast, Vietnam has been one of the region’s strongest performers. The economy has continued to accelerate despite tariff-related noise and the equity market has staged a solid recovery.

Vietnam remains our largest country overweight, with holdings such as Vietnam Technological and Commercial Joint Stock Bank and Mobile World Investment performing well. We continue to view Vietnam as a long-term structural growth story within ASEAN.

India

For India, the key macro event of the quarter was the imposition of US tariffs, which came as a surprise. While Indian exports to the US represent a small share of GDP and therefore have limited direct impact, the new visa restrictions and tariffs on pharmaceutical exports have affected some key listed companies.

North Asian markets – South Korea and Taiwan – have shown improving earnings momentum and attractive entry points, prompting a rotation of capital out of India

These developments have contributed to India’s underperformance relative to broader emerging markets through Q3. Combined with a temporary slowdown in both capex growth and consumption, this has led to some earnings downgrades while valuations remain elevated.

At the same time, North Asian markets including South Korea and Taiwan have shown improving earnings momentum and attractive entry points, prompting a rotation of capital out of India. We were positioned early for this trend, having trimmed our Indian exposure last year, and we now maintain an underweight position.

That said, several of our smaller Indian holdings underperformed during the quarter. While disappointing in the short term, these remain high-conviction positions that we believe offer compelling long-term potential once near-term sentiment improves.

CE-MENA

Our exposure to Central and Eastern Europe, the Middle East and North Africa (CE-MENA) remains limited.

Within the region, our main holding is Aldar Properties in the UAE, which has performed strongly since we initiated the position. Elsewhere, Eastern European markets such as Poland have delivered good performance, though they remain small in the global emerging market context. Following a recent correction after a strong run – and a visit by members of the team – we are reassessing select opportunities in Poland and monitoring a handful of cases that now appear attractively valued.

By contrast, the Middle East has been a notable underperformer, validating our decision to maintain minimal exposure.

In Saudi Arabia, equities rallied in September on speculation that foreign ownership limits may be lifted above 49%. This initiative is seen as an attempt by the Capital Markets Authority to reinvigorate the local market after a period of underperformance. While we acknowledge the potential benefits, we remain sceptical that this alone will sustain performance. Ultimately, oil prices remain the primary driver of Saudi economic and market outcomes.

Regarding regional geopolitics, Ukraine and Gaza have become non-events for equity markets, with investors assuming these conflicts will remain contained. Encouragingly, there are tentative signs of progress toward a more viable solution in Gaza, though uncertainty persists.

Latin America (LatAm)

Latin America delivered its usual volatile quarter but saw a positive quarter overall. The two largest markets – Brazil and Mexico – lagged broader emerging markets but still achieved acceptable absolute returns, while smaller markets performed more strongly.

Brazil was hit by politically motivated tariffs, which will effectively make US consumers pay more for imports such as coffee. Meanwhile, Mexico continues to navigate a delicate trade relationship with the US.

We continue to find the region attractive on an absolute basis, but relative to Asia, Latin American equities currently offer less compelling growth and valuation upside.

Strategy performance and attribution

For the third quarter of 2025, the strongest contributors to relative performance included Delta Electronics (Taiwan, technology), TechWing (South Korea, software) Ivanhoe Mines (Africa, copper), Eugene Technology (South Korea, semiconductors) and Chroma ATE (Taiwan, electronics).

Among the weakest were VTEX (Brazil, e-commerce technology), Reliance Industries (India, diversified conglomerate), MercadoLibre (Brazil, e-commerce and FinTech), Globant (Latin America, IT services) and eMemory Technology (Taiwan, technology).

After a challenging start to 2025, we are pleased to see Ivanhoe Mines rebounding strongly and regaining both relative and absolute performance. On the negative side, it remains frustrating to see Globant underperform, though we continue to view it as a structurally attractive name with long-term potential.

Outlook

Our long-term outlook for emerging markets and the strategy remains unchanged.

In the short term, we continue to expect further Federal Reserve rate cuts, which should support emerging market sentiment. At the same time, the persistence of volatile US inflation data may continue to drive fluctuations in investor confidence.

Overall, inflation and liquidity conditions across emerging markets remain benign, providing a constructive backdrop. However, sentiment can shift rapidly in response to global developments.

In the short term, we continue to expect further Federal Reserve rate cuts, which should support emerging market sentiment

Looking ahead through the remainder of 2025 and into early 2026, we see the most attractive fundamentals in North Asia, particularly South Korea, as discussed above.

The risk of new US tariffs remains an ongoing concern for several countries, but we are increasingly confident that our portfolio companies possess the pricing power and operational resilience to navigate such disruptions. Only a small number of technology holdings have direct headline exposure to tariffs and we believe that companies such as TSMC maintain sufficient pricing strength to pass on any cost increases.

We continue to monitor US hyperscaler capex trends closely. While we recognise the potential for sentiment shifts, we do not yet see evidence of a structural downturn.

We remain confident that the resilience and growth potential of our key emerging market holdings are still underappreciated by the market. Across the investable universe, we see a growing number of true ‘Star’ companies capable of compounding significant economic value added (EVA) over time – even amid short-term policy volatility.

As long-term investors, we continue to focus on identifying secular growth leaders and future champions in local markets. We are convinced this approach will continue to deliver sustainable and responsible returns for our clients in emerging markets.