Emerging markets equities: Game on or game over?

In the latest episode, Devan and Tom recap the first quarter of 2025 before delving into the impacts of US policies and exploring the opportunities ahead for the asset class.

Devan Kaloo Head of Global Equities 
Tom Harvey Senior Equity Specialist

"I suppose in the short term, what I'm concerned about is growth and the consequences of that.”

“But over the medium term,” Devan Kaloo, Head of Global Equities states, “I'm actually positive for the asset class, because I think it means that potentially these countries and companies benefit from the refocus on the opportunity outside.”

In the latest Quarterly Perspectives podcast, Devan joins host Tom Harvey to recap the quarter that was (Q1) for the asset class, before discussing:

• The outperformance of emerging market value stocks over quality stocks and the impact of geopolitical developments on market dynamics
• Despite recent market volatility, the outlook for emerging markets remains positive due to potential opportunities arising from global economic shifts

Tune-in to listen to our Quarterly Perspectives episodes on Apple Podcasts, Buzzsprout, and Spotify.

 

Tom Harvey: Hello, I'm Tom Harvey from Aberdeen, and you're listening to the Emerging Market Equity Quarterly podcast show that looks at what happened in the most recent quarter and provides our outlook for the asset class today. Joined by my colleague Devin Kaloo, Head of Global Emerging Markets. Devan, welcome to the podcast. It's great to have you on.

Devan Kaloo: Thanks very much.

Tom: Now there's a lot obviously happening in markets, as we speak and over the last few weeks. But I think before we get into, all things, tariffs, trade wars and Trump, can you discuss a little bit about what we saw to start 2025? How did the first quarter shake out for emerging markets?

Devan: Yeah, of course. So, I suppose in terms of the asset class, it was quite a good quarter. The emerging markets were up around 3%, versus the US, where I think the S&P was down about for the Nasdaq, down about 8%. And I think that was a big surprise for quite a few people going into Q1. And there were a number of things that, potentially drove that. The first was that there seemed to be this increasing concern about, to US policies and the risk of stagflation. The, the second and this was the biggest surprise, I suspect, was the announcement of China's deep seek in terms of the alternative AI model, which certainly seemed to undermine the confidence in US big tech. In contrast to that, we've seen increasing noises out of China around stimulus. And perhaps probably the biggest surprise of all was that in response to the US views of withdrawing support for NATO and perhaps Ukraine, the EU has, looked like it stepped up to try and stimulate. So, one of the big changes, of course, was, Germany's election and the subsequent move of the debt break, and potential stimulus that comes on the back of that. And interestingly enough, as a consequence of all of that, what you saw was, emerging markets value doing significantly better than the quality. And as a result, certainly that's been a bit of a tougher time for us. As we went into Q1, it's probably worth just reflecting on our stance. We were perhaps not. Perhaps we were more defensively positioned. Certainly, we were expecting a stronger dollar and achieve, relatively resilient US growth. On the prospects of tax cuts and deregulation buoying the corporate sector there. Of course, that hasn't come through. And as we've seen in the last few weeks, there's an awful lot to think about and talk about in terms of outlook, because since the end of March, we've seen a significant sell off in markets as a number of, tariff policies were announced, which has had consequences for markets. So maybe I'll stop there before we get to that, talk about outlook. And maybe if you've got any questions, expand on the quarter that was yeah great Devin thank you very much. And it's obviously perhaps maybe nice to see that that him did a little better than maybe you were expecting. You know what has this really meant I suppose for the strategy and and has your thinking is this gets into, I guess, the outlook a little bit.

Tom: Has your thinking changed? From where you came into the year, where if I break down our performance relative to the EM index?

Devan: A little, I perhaps that will help answer the question. So, I think, you know, in terms of the key things for us, obviously we have a quality bias within the portfolio that's been a feature through the many decades, and that's not likely to change. So, as a result, you know, some of this stimulus, chat is potentially a headwind. And we can talk about the outlook for that, but that's, something to think about. But the other interesting feature to think about is that we have had a preference for Taiwanese tech over China tech and, certainly we've seen Taiwan tech selling off on the back of the US, but also with the increasing risks of a global recession as a result of US policies. In contrast, in China, we've seen quite a lot of AI mania, with many of the Chinese tech companies doing much better. So that is, something that we do need to think about and how we position ourselves for. We have, at the margins, manage some of that risk, but we still remain skewed in terms of the higher quality Taiwanese names. The second thing, which I think is probably worth just having a think about and how it pans out going forward is obviously the big surprises I mentioned was the European stimulus. And within that, you know, we've been underweight EMEA. So emerging markets, Middle East and Africa, so Europe, Middle East and Africa and within the context of EMEA, we favored the Middle East. We've seen greater underpinnings to growth. So, the surprise of the stimulus has certainly seen Eastern Europe do a lot better. So, places like Poland and others, is is there some depth to the stimulus which would actually counter the impact of potential tariffs? And that is something that we need to think about as well. And finally, just how bad it gets in the US because, we have had a number of companies with significant exposure, to the US growth and corporate investment, which if we're about to see a prolonged period of stagflation or a cut in corporate CapEx, will have a significant impact on some of these businesses. So, these are all the various things that we've had to think about. And as we talk about, the outlook, I'll try and address them, but certainly, those have been some of the headwinds we've seen.

Tom: Great. Thanks for that, Devan. And and we'll move into outlook now because, there's a lot to discuss. I guess if you could, you know, kind of touch briefly what, you know, what has the last kind of week plus meant for emerging markets? What's your take, if any, on, Trump's policies and what we see and, you know, what's what's the path forward, maybe look like?

Devan: Well, I think being an emerging market manager for many decades now, I've learned to take things, in my stride and, and, one of the things which was quite surprising to us, or at least in terms of our colleagues, but less surprising for Em investors, was the prospect of the US seeing both the equity market and the bond market selling off. That is typical of a sovereign debt crisis that is typical of an underlying problem. Which, of course, can have significant consequences both for the economy as well as for financial assets. So, I suppose that puts into some context what the last ten days have held, since Liberation Day. And I think, if I think about the big issues and one to them, you know, the US attempt, to reorder the world's economic model brings quite clearly threats. But we should also remember, bring some opportunities and, the response of the markets to the announced tariffs in terms of the flat tariff, the reciprocals and the sectoral tariffs taking up the overall tariff burden in the US to levels we last seen in the 19th century, certainly has caused, this big market selloff. And of course, good news last night in terms of the delay in terms of implementing some of the reciprocal tariffs, although obviously the ones with China continues. But I think that has really bought into question for a lot of people. The US exceptionalism. So let me talk about the threats first. The threats are very clear. I mean, it is the risk of us stagflation. Whereby we have a consequence of, the tariffs being slower growth in the US, places of higher inflation. That means a weaker dollar and potentially creates greater uncertainty globally in terms of corporate investment. So, there is a very real prospect of a recession. That might have taken a step lower as of yesterday's news, but I think it still remains very much on the table, because it's not like the typical tariffs have gone away. They're just being delayed. So, the, the threat is of to global growth and the role of the US within that the opportunity though is that we are seeing greater stimulus, coming out to China to try and offset, some of the issues that they're facing with the US tariffs. And here the good news is the increasing focus on domestic consumption, which is something which has been really important, overall for the Chinese economy and indeed the markets. And so, we are hopeful there. But I would be misleading you if I did not say that having tariffs of 100 plus percent on Chinese goods into the US is not going to have an economic consequence to China. It just means the Chinese are going to have to work harder to try and find other means to stimulate. The other aspect of that, of course, is in Europe, where the stimulus that I've referenced earlier on potentially has some benefits as well with regard to infrastructure and defense and maybe, maybe even better. Yet, market reform, which is much needed in the European market. So, there's some opportunities that come potentially from the threats that have been raised, out of the US policies and of course, within an Em context, they're also winners and losers from some of the policies coming out. From the first announcement of the tariffs, we see early winners being India, Mexico, Indonesia, and I mean early winners in that the tariffs lower for these countries versus other countries. And on the other side of that, you have quite clearly China, but also markets like Taiwan, standing out as being potential losers in this. And I suppose the third points is that one I've made already, which is that this change in perception about US exceptionalism, either via the policy uncertainty that's being created in the US or by the rise of, deep seek and the challenge to big tech in the US, I think is actually positive for the asset class. And when I what I mean by that is that, for the long time now, the view has been the US has been the only game in town. And I think, with what's been coming out over the last few months, I would say that actually, perhaps that idea is being challenged and certainly promotes, the idea of greater diversification, because it's quite clear that the risks have risen in the US and therefore, as a consequence, potentially capital flows start to go other places. So, I suppose in the short term, what I'm concerned about is growth and the consequences of that. But over the medium term, I'm actually positive for the asset class, because I think it means that potentially these countries and companies benefit from the refocus on the opportunity outside. So, kind of a nuanced response and perhaps too longer response. But lots of lots of interesting things going on and really a lot to keep us, interested and busy in the days and months to come. No doubt.

Tom: Well, I thought that was great, Devan. And also feels like maybe this is a good place to bring this podcast to a close. Devan, just want to thank you for joining us today.

Devan: Thank you.

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.

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