Since the start of the year, emerging markets have outperformed developed ones as far as equities are concerned. We talk to asset managers who think there is further room to run.

Emerging markets have outperformed their developed peers so far this year â€“ asset managers at Franklin Templeton reckon there's further room for them to run. 

Speaking at a media event in London, portfolio manager Andrew Ness at Franklin Templeton said he was confident in emerging market equities this year, even as global uncertainty rises. He thinks the market is underestimated and under-owned.

The opportunities for growth in emerging markets are better than developed markets, and valuations are attractive: “It is an exciting asset class,” Ness said.

Such comments are part of a pattern. A number of wealth managers such as Paris-based Carmignac, Amundi and Indosuez are also positive about emerging markets this year – see here. Emerging markets have benefited from forces such as a weaker US dollar because debt that is denominated in the US currency becomes easier to service; and local currencies can strengthen, boosting investment returns. Emerging market equities have traded at cheaper valuations in recent years, so they are seen as attractive; China’s economy – a major part of the emerging market jigsaw – has recovered some of its vigour. On the downside, these markets are buffeted by US tariffs and geopolitical worries.

Ness is a portfolio manager of Templeton Emerging Markets Investment Trust (TEMIT), an investment company listed on the London Stock Exchange, which provides access to the growth potential of firms from fast-growing economies with about ÂŁ2.18 billion ($2.95 billion) in total net assets such as China, Mexico, Brazil, Taiwan, Korea and India. He works with Chetan Sehgal, lead portfolio manager of TEMIT who is also responsible for overseeing TEMG’s global emerging markets investment strategies. Sehgal also spoke at the London event.

The outperformance of emerging markets, while not large, is notable. Since January, the MSCI World Index of developed countries' equities has delivered net returns of 13.78 per cent, as of August; for the MSCI Emerging Markets Index, the result is 19.92 per cent.

Structural advantages of emerging markets include a young population, an expanding pool of middle-income consumers and leadership in high growth industries including AI and the electrification of transport. “Investors in emerging markets can buy companies with exposure to these themes at attractive valuations and a clear pathway to higher earnings,” Sehgal said.

Franklin Templeton is overweight in South Korea, where some of the world’s largest semiconductor companies are found. Top holdings include South Korea’s Samsung Electronics, the largest global producer of DRAM chips which has benefited from the price increase of DRAM and NAND flash memory chips – driven by demand for generative AI. The managers said they also invest in South Korean SK Hynix, the world’s second largest maker of memory chips and supplier of semiconductors.

“We are also less underweight in China than we were and have been increasing our exposure there,” Sehgal said. Chinese tech giant Alibaba, which has become a Chinese artificial intelligence favourite among investors, and Tencent are in their top 10 holdings.

Taiwan neutrality
Attention turned to Taiwan.

“We are neutral on Taiwan but overweight on Taiwan Semiconductor Manufacturing Company (TSMC),” Sehgal said. “We have also added to our exposure in Brazil, despite the recent tariffs imposed by the US...It offers attractive investment opportunities in a range of industries including the financial, commodity and healthcare sectors. We are particularly attracted to the shareholder return policies of companies in the energy and financial sectors."

Although India is still one of the fastest-growing economies, Sehgal said he has been underweight in the country for the past five years, as he believes that the market is expensive and it has its challenges. There was a 50 per cent increase in tariffs on Indian exports to the US recently, due to its continued purchases of Russian oil and high import barriers. However, TEMIT’s top 10 holdings include India’s ICICI Bank and HDFC Bank.

Another voice
This week, Vincenzo Vedda, global chief investment officer at German asset manager DWS also highlighted that many emerging-market corporations from the sectors of e-commerce, sportswear and e-mobility have outperformed their US counterparts. "We continue to be constructive on selected consumer goods and technology corporations. China remains our preferred investment region since its economy has turned out to be surprisingly resilient," Vedda said.