Emerging market equities: AI, inflation, and selective value

Robbie Robertson: Welcome to the Emerging Market Equities Quarterly Perspective Podcast. I'm Robbie Robertson, Associate Director at Aberdeen Investments. In each episode, we take a closer look at the latest developments across emerging markets and share our outlook for the quarter ahead. I'm delighted to be joined today by Nick Robinson, Aberdeen's Global Head of Emerging Markets Equities. Nick, welcome. Thanks for joining us.

Nick Robinson: Thanks very much for having me. It's a pleasure to be on today.

Robbie: Likewise. Nick, emerging markets delivered a particularly strong performance in the second quarter of 2026. What do you see as the key factors that drove returns and were there any developments that stood out to you as especially important?

Nick: Yes, so emerging markets had a very strong quarter in the second quarter, returning some 24%, which was about 10% ahead of developed markets. I would say there's a few things going on in Q2. Firstly, yeah, the rally was pretty narrow in emerging markets. Only 20% of stocks in the benchmark by number actually outperformed the benchmark, which indicates that the rally was really driven by some pretty large benchmark index names, notably the big tech companies in Korea and Taiwan, which really make up a very large proportion now of the benchmark on an individual basis. So, it wasn't a particularly broad rally and certainly tech was a key driver. I'd say the other things that were going on in the quarter was the continuation of the conflict in Iran. We saw concerns over higher oil prices and we saw a divergence in performance of some emerging market countries based on whether or not they are an oil exporter or an oil importer like India, which continued to have quite a weak time. And then also, I suppose we saw a change in the Fed chair and his move to a slightly more hawkish stance, which probably weighed on emerging markets a bit towards the end of the quarter, given the slightly stronger US dollar and the concerns over what that would mean for the performance of emerging markets going forward.

Robbie: Absolutely. You touched on the conflict involving Iran there, Nick. Were you surprised by the market's ability to look through those geopolitical risks? And I guess what does that tell us about investor sentiment today?

Nick: I mean, I think the market has kind of moved towards this kind of taco trade, if you've heard of that, Trump always chickens out type kind of view of these types of things. And yeah, we saw increasing desire from the US administration to dampen down the war and look for a solution. And the market, I think, started to discount that very, very quickly, which meant that stock prices continued to perform quite well even as we got into the kind of the second phase of the war, particularly as we started to hear more, kind of a softer tone from the administration. Another point we observed was, I mean, valuations have re-rated in a number of areas following the strong performance we've seen.

Robbie: Do you still view emerging markets as attractively valued or are the pockets of the market where valuations are beginning to look a little stretched?

Nick: Yeah, I mean, on the whole, emerging markets are still very attractively valued. You've got to remember also that, as I mentioned, a lot of emerging market companies, or 80% of emerging market companies aren't keeping up pace with the benchmark. So, there's still very attractive valuations in some of the financial sector and some of the commodity sectors. And on the other hand, where valuations are becoming a bit richer is within the tech space. I mean, that's fairly clear, I think, now. If you look at China, Taiwan, Korea, depending on which stock you're looking at, you're seeing valuations for tech stocks kind of look quite frothy in certain places, particularly on price-earnings ratios. So, I think that's probably the part of the market where it pays to probably be a bit more cautious on valuation discipline. But meanwhile, you can still buy very cheap stocks which aren't really tied to the kind of AI boom and excitement around AI. And stocks in that part of the market are still pretty decently valued.

Robbie: Bringing it a bit closer to home, how did Aberdeen's emerging market portfolios perform during the quarter and what were some of the biggest contributors to returns?

Nick: Most of the strategies outperformed by several percent. I think what was encouraging was the positioning in the tech sector was pretty positive for the strategies. So, the strategies have had a fairly consistent overweight positioning towards tech for about the last year or so that came through really in the performance in Korea and Taiwan, but also quite encouraging was the performance out of China. So, the strategies did generally quite well in China. And there we've really benefited from the view we've taken that a lot of the kind of e-commerce plays, which are large parts of the benchmark in China, are seeing quite increased competition. And that's dampening returns. So, we've largely been out of that space and we've had more exposure more recently into positions in Chinese tech companies that we've built, particularly in semiconductors and semiconductor capital equipment, and they've been performing quite well where we've kind of lagged a little bit, I would say Indonesia's been a market where we've had a bit more invested in relative to the benchmark, and there you've had a few things go on this year in terms of a bit of kind of political unrest, a bit more interference by the government in some of the state companies, concerns over changes in tariffing and taxation and that's weighed a bit, you know, this policy uncertainty there has weighed on markets. But, you know, we've stuck with that overweight position in Indonesia as we think that valuations and actual yields that are coming off the companies are really very attractive at the moment.

Robbie: On some of those decisions that proved especially beneficial during the last quarter, what drove your conviction in some of those calls?

Nick: Well, I think we've really benefited recently just from a lot of the work that we've been doing in terms of changes to the team structure. So, a couple of years ago, we started a process really to try and build focus and expertise on our analyst team. So, you're really trying to kind of focus in analysts on particular sectors, have them essentially build as much expertise as possible in those sectors, and then encourage them to take high conviction calls. And really, we've benefited a lot, particularly in the tech sector, I would say, on that, in that our analyst team there have made some really great calls. They've taken some really significant out of consensus positions in terms of earnings expectations on companies. And I think we've really been able to feed that into the funds and generate real alpha from that. So, I would say, it's a real credit to the analyst team in terms of the alpha that was added in Q2.

Robbie: Excellent. As we look forward and turn our attention to the second-half of the year, where are you seeing the most attractive opportunities across emerging market equities? And I guess while you touch on that, what are some of the key risks we should be keeping an eye on?

Nick: Yeah, I mean, I think, you know, the AI remains probably the best structural story within emerging markets, but I think you really have to be quite careful now on valuations. The opportunity remains very significant, particularly across chips, memory, advanced packaging, servers, cooling, all sorts of parts of the value chain. And I think one thing that's clear is you're starting to see real bottlenecks emerge in parts of the value chain. And bottlenecks are really great investment opportunities in the short term, but they also present some risk as well in that, bottlenecks won't always last forever. If you invest in a business that's enjoying the benefit of a bottleneck, then you may see some good stock price upside in that, but there's always a risk that bottleneck will be resolved. And then the other issue we're seeing with bottlenecks is that it can influence the whole AI value chain. So, a small bottleneck in one component can have quite a significant impact on demand for other components but aren't necessarily in bottlenecks. So that's something that we're keeping an eye on, and certainly we've shifted the exposure in the portfolio a bit more towards more defensive companies within the tech space recently, and particularly companies with a bit more valuation support. So, we're being a bit more selective there. I think the other thing that's probably worth being wary of is just, this idea that there is a bit more inflation around at the moment. Central banks are raising rates. And so you need to be a little bit careful about investing in companies which are able to pass more inflation through more easily. So, we've been shifting the portfolio a little bit on the margin there as well, just buying stakes in businesses that have kind of more inflation pass-through opportunities, particularly those businesses which operate under concessions, like toll road businesses, like utility businesses. So, I think there's a pretty good opportunity there. And then I suppose, the other part of the market we're looking at is really just those businesses which have been kind of left behind a little bit in the rally, as investors have been pretty singularly focused on AI. And I think that's left quite a few businesses around which are just very, very cheap at the moment, given their cash generation potential. And so we've just been picking around a little bit at some of these kind of businesses that have been really overlooked by investors recently. And I think that represents quite a good long-term opportunity to generate returns for funds shareholders.

Robbie: That's brilliant. I think that sounds like a positive note to end on. I'm sure you and the team will be busy in the second-half of the year. Nick, thank you so much for joining us today.

Nick: Thanks, Robbie. It was a pleasure.

Robbie: And thank you to everyone who took the time today to listen in. If you enjoyed today's episode, please tune in again next quarter. And remember to download and subscribe from our website or wherever you get your podcasts. Thanks for listening.