Tom Harvey: Hello, I'm Tom Harvey with Aberdeen and you're listening to the Emerging Market Equity Quarterly Podcast, the show that looks at what happened in the recent quarter and provides our outlook for the asset class. Today, I am joined by my colleague, Nick Robinson, head of Global Emerging Markets. Nick, welcome to the podcast. It's great to have you on.
Nick Robinson: Thanks, Tom. It's good to be on again.
Tom: Great. And markets continue to be anything but boring, which I suppose keeps you quite busy. I was hoping you could address a little bit about what we saw in emerging markets in the most recent quarter.
Nick: Sure, yeah. So I mean, the third quarter was a bit tougher for emerging markets. You'll remember the second quarter was quite an unusual quarter in that we had a very narrow rally of tech and Korea and Taiwan and everything else underperformed. The third quarter was a bit different in that we had quite a large dispersion really between some countries and sectors and it was a bit of a tougher quarter. So emerging markets ended up roughly flat, doing a little bit worse than developed markets. In terms of what was working in the quarter, well, the tech story was still doing okay, although there was a bit of a divergence in tech between countries. So Taiwanese tech did quite well, but Korean tech lagged. I think part of the reason for that was just the Korean stock market had become quite frothy. There were some regulations put in place in terms of leveraged ETFs and the like, and that saw some capitals flow out of Korea. We saw a decline in China. Sorry, actually, I need to repeat that. We saw a decline in India. India fell about 5%. That was really largely driven by what was going on in terms of oil in the quarter in that some more hostilities in the Iran conflict meant the oil price went above $100 a barrel. So India is a big oil importer, suffered there. And we're seeing some of that now flow into real economies in that refining margins have become very high. That's leading to higher fuel prices and dampening consumer spending. Against that though, those countries which are oil exporters like Brazil did very well. So Brazil was up 8%, also being fueled by a gaining in popularity of right-wing presidential candidate Bolsonaro. So the market got a bit more cheerful about that. China as well did quite well, albeit there were some stocks within the strategy in China that didn't do so well.
Tom: Great, Nick. Thank you. And so with this, we'll call it maybe more divergent, background going on in emerging markets. What did that mean for our strategy?
Nick: Yeah, I mean, the strategy had a bit of a tougher time against that kind of flatter backdrop. I mean, I think from a style perspective, we saw value do a little bit better in the quarter. Growth didn't do so well. So that kind of goes against how the strategy is positioned. the strategy tends to be a little bit underweight value stocks and a little bit overweight growth stocks. So that was a little bit of a headwind. In terms of particular countries and the influence of various countries in terms of performance, China and Hong Kong probably weighed the most heavily. So, a couple of things going on, but probably most notably was the underperformance of some Chinese tech holdings. And what was going on there essentially was one of the larger memory companies within China just recently listed. So investors were selling out of Chinese tech in order to allocate capital to that newly listed company. You know, within the tech space, The strategy lagged in Taiwan. The strategy has more exposure to Korea. So the kind of overweight towards Korean tech hurt the strategy and then the underweight towards Taiwan was negative as well given the outperformance of Taiwan. And then in terms of where the strategy did a bit better, so Mexico did okay. There in particular, the copper miner did well, as did Eastern European holdings, particularly Greece. There we're seeing the market being upgraded to developed market status. So stocks rallied on the back of that, given flows into the stocks. And then Brazil did okay. So the strategy is overweight Brazil. It has some particular exposure to interest rate sensitive Brazilian stocks. which meant that as Brazil rallied and the market began to start discounting the election victory of the right-wing candidates, which means a likely faster decline in interest rates, those interest rate sensitive stocks did do quite well. So yeah, all in, the strategy underperformed a little bit, but quite a lot going on behind the scenes in terms of the drivers of that underperformance.
Tom: Great. Thanks, Nick. And we'll move on to outlook now. And obviously there's a lot of noise that has occurred maybe late last quarter and even in the start of this quarter, a hike in US interest rates that took place, continued conflict in Iran, obviously still concern over things like the price of oil and to some extent, at least for investors, maybe thinking about allocations, the unknowns of maybe, US midterm elections coming up. So, how do you process all of that and what is our view on emerging markets as we round out 2026?
Nick: Yeah, I mean, I think there's a few more macro headwinds now appearing, some of which are going to be quite tough for emerging markets. So, in particular, the higher US yields. likely to weigh on EM, particularly if that leads to a stronger dollar. So that's a bit tougher. I mean, a stronger dollar isn't necessarily always a bad thing for emerging markets, particularly if that stronger dollar is accompanied by growth. But in an environment where there's a bit more inflation and growth is slowing, that can be a bit more challenging for emerging markets. But that said, earnings expectations are still pretty strong for next year. And I think what's really important for EM is that we're seeing much broader earnings growth next year, or at least we're likely to see much broader earnings growth next year, which really reflects a lot of the wealth that's being generated by EM companies spreading out into broader consumption sectors. So we think that's giving some opportunities in terms of companies that are beginning to look a bit more attractive. And of course, the AI CapEx trade is still very much underway in terms of what we're seeing from earnings expectations from companies. So it's still pretty confident that the environment is favorable, although perhaps we're getting into a later innings now. So I think valuations in EM still look pretty decent. So putting the valuations alongside pretty good earnings growth means that the outlook should be okay, notwithstanding some of these macro headwinds that are beginning to emerge.
Tom: Great. Thank you, Nick. And that feels like a good place to bring this podcast to a close. Nick, I want to thank you for joining us today.
Nick: Thank you, Tom. It's been a real pleasure to be on again.
Tom: And thank you to everyone who took the time today to listen in. If you enjoyed today, then please download our other podcasts from our website or wherever you normally get your podcasts.
