Over the past 12 months, emerging markets have demonstrated resilience and delivered robust positive returns, despite facing considerable volatility driven by trade tensions, geopolitical factors, and shifting monetary policies. The performance was mainly driven by strong performance in emerging Asia. China rallied notably following the release of the country’s new artificial intelligence (AI) model in January and signs of a recovery in economic activity. Gains were, however, limited largely to AI-driven technology and internet companies and high dividend yielding yet lower quality financials. Elsewhere, technology-heavy markets, particularly Taiwan saw strong performances, buoyed by the outlook for AI-related demand. India rallied after a period of weakness as the central bank eased monetary policy. EMEA posted moderate gains, with South African equities initially declining post-election but later rallying due to the formation of a market-friendly government and interest rate cuts by its central bank. Conversely, Latin America lagged overall, weighed down by weak performances in Brazil and Mexico.
Over the period, the Fidelity Global Emerging Markets Fund underperformed the Index, primarily because of the narrow rally in China. Our holdings in Chinese/HK consumer discretionary names (Li Ning, Shenzhou, Samsonite and Zhongsheng) underperformed, while being underweight financials and select Chinese internet companies (Alibaba and Xiaomi) was also unrewarding. On a positive note, robust security selection in South Africa (primarily driven by the position in Naspers, which owns a large stake in China’s Tencent), India and Taiwan added value.
Looking ahead, we maintain a positive outlook on global emerging markets due to their diverse political, social, and economic landscapes, offering stock pickers an array of low-correlation opportunities. Valuations in the asset class are attractive, reflecting several known risks, including dollar strength and tariff concerns. Additionally, low earnings expectations and the potential for a recovery in China, the largest component, provide further upside.
Our portfolio is well-positioned, with three key areas driving potential alpha. Chinese consumer names stand to benefit from demand recovery and margin expansion. Chinese equities, which have largely seen thematic rallies in information technology and internet sectors, are expected to broaden as consumption recovers. With household balance sheets improving and the property sector stabilising, Chinese consumers are well-positioned to regain spending confidence. Domestic consumption, underrepresented in China’s GDP, is likely to become a key focus for the government, benefiting sectors like sportswear, dairy, beer, and white goods. Elsewhere, Indian private sector banks offer significant upside due to penetration growth and market share gains over state-owned peers. In Latin America, Mexico and Brazil present unique opportunities, with Mexico leveraging its proximity to the US and Brazil poised to benefit from rate normalisation.
