Despite the Iran conflict and soaring energy prices, UK-listed emerging markets investment trusts have been outperforming over the past 12 months. Portfolio managers outline what is behind the strong performance and possible risks.
As a number of wealth managers
step up their exposure to emerging markets, driven by AI
optimism in the tech sector, the UK Association
of Investment Companies (AIC) has
highlighted that the average investment trust in the
AIC global emerging markets sector has returned 65 per cent over
the past 12 months versus 24 per cent for the average investment
trust. And the average investment trust in the global emerging
markets sector has returned 60 per cent over five years and 257
per cent over ten years, according to AIC.
“Many emerging markets are either exporters of energy, or home to
some of the leaders in the technology revolution and are helping
to power the astonishing growth in the AI sector. In other words,
emerging markets are not just about cheap manufacturing anymore,
they are global leaders in research, innovation and production at
the cutting edge of this unprecedented AI hardware boom,” Annabel
Brodie-Smith, communications director of the Association of
Investment Companies (AIC), said in a note.
AIC asked managers of the trusts why their portfolios had
performed so well, whether it could continue and what challenges
they saw ahead. A number highlighted how these markets have
benefited from the tech and AI boom as well as a weaker dollar.
They also emphasised how an escalating conflict in the Middle
East is the biggest near-term risk for some emerging markets as
it restricts the free flow of oil, particularly for oil importing
countries like India. A sharp reversal in the AI theme could also
lead to underperformance of tech-heavy markets like Taiwan and
Korea. See more below.
What has driven emerging markets’ outperformance this
year?
Omar Negyal, manager of UK-listed JPMorgan Emerging Markets
Dividend Income Trust
“Emerging markets have benefited from a weaker US dollar and
strong earnings growth, as well as investors looking to diversify
away from concentrated US markets. Structural themes have also
supported returns. For example, South Korean and Taiwanese
markets have both been lifted by the AI boom due to increased
demand for semiconductors and memory chips, while companies
across Latin America have been supported by stronger commodity
prices and increased demand for energy and resources.”
Jacqueline Broers, co-fund manager of UK-listed Utilico
Emerging Markets Trust
“Emerging market performance has been supported by a favourable
mix of macroeconomic and market factors. The ‘sell America’
dynamic under Trump”s second term has accelerated capital
rotation into non-US assets, which has helped drive a weaker US
dollar (until recently). This has reduced a key headwind for
emerging markets and further encouraged flows into higher
yielding emerging market assets. Emerging market equities have
also benefitted from lower valuations relative to developed
markets. This valuation discount has helped attract capital from
investors seeking value and diversification away from the US.”
Hiren Dasani, chief investment officer at UK-listed
Ashoka WhiteOak Emerging Markets Trust
“Headline emerging market performance has been supported by a
combination of earnings growth and valuation rerating. Earnings
upgrades in technology-heavy markets such as Taiwan and Korea
have been driven by optimism around the AI supply chain and
semiconductor demand. Importantly, despite the recent rally and
relative outperformance versus developed markets, emerging market
valuations continue to trade at a meaningful discount.”
Chetan Sehgal, portfolio manager of Templeton Emerging
Markets Investment Trust
“Emerging market outperformance was predominantly driven by
structural growth themes, with AI acting as the primary catalyst.
Surging global demand for AI infrastructure fundamentally
supported the asset class, given that Taiwan and South Korea
house critical components of the global technology supply chain.
These technological tailwinds were complemented by rising
commodity prices, including gold and oil, which bolstered equity
returns in South Africa and Latin American countries.”
What has done best in your portfolio and why?
Hiren Dasani, chief investment officer at Ashoka WhiteOak
Emerging Markets Trust
“Since inception as well as year-to-date, irrespective of
underlying market conditions, stock selection rather than country
or sector allocation has been a key driver of alpha generation
for WhiteOak. Having said that, so far this year, performance in
markets such as Taiwan, Mexico, Korea has helped, while from a
sector perspective financials, technology and materials have done
the best.”
Omar Negyal, manager of JP Morgan Emerging Markets
Dividend Income Trust
“A few markets and sectors have stood out. In Brazil, companies
like Petrobras have benefited from stronger commodity prices,
easing inflation and improving profitability. In China,
meanwhile, we are seeing positive consumption trends, as well as
an overall increase in quality companies with stronger capital
discipline that are delivering better shareholder returns.
Holdings such as Tencent and battery manufacturer CATL are both
good examples of this, having benefited from continued AI-related
demand and stronger earnings. From a sector perspective,
financials – particularly banks – have performed well,
benefitting from supportive interest rate environments and strong
balance sheets.”
Chetan Sehgal, portfolio manager of Templeton Emerging
Markets Investment Trust
“Our best-performing markets, in the 12 months ending March 2026,
were the technology-heavy countries of South Korea and Taiwan,
driving substantial outperformance in the IT sector. By
dominating essential semiconductor and hardware supply chains,
these markets benefitted from strong demand for AI components.
This was complemented by strong returns in Latin America, which
benefited from stronger commodity prices and attractive starting
valuations.”
Jacqueline Broers, co-fund manager of Utilico Emerging
Markets Trust
“Brazil has been a standout performer in our portfolio this year.
The country’s relatively closed economy has partly insulated it
from ongoing geopolitical noise, as Brazil’s energy and food
security provide a natural hedge in today’s volatile environment.
In addition, in March the Brazilian Central Bank began its
monetary easing cycle following a prolonged period of elevated
interest rates, which supports markets. Our second largest
holding, a Philippine port company, International Container
Terminal Services, has been a beneficiary of the volatile global
environment, through trade rerouting to its diversified portfolio
of emerging market container ports.”
What has detracted from performance?
Hiren Dasani, chief investment officer at Ashoka WhiteOak
Emerging Markets Trust
“So far this year China has been a detractor led by
underperformance in the consumer tech segment, due to concerns
over higher regulatory scrutiny, scale and rising competition in
select segments. Small and mid cap underperformance in India was
a headwind in the first few weeks of 2026, but that seems to have
reversed of late.”
Omar Negyal, manager of JP Morgan Emerging Markets
Dividend Income Trust
“While quality companies can be found in many markets, broader
conditions have weighed on some areas more than others. India,
for example, has been particularly exposed to higher oil prices
because of its reliance on energy imports, which has added
pressure at a time when valuations are elevated and earnings
growth has slowed. Our longstanding underweight position in the
market has therefore helped.”
Chetan Sehgal, portfolio manager of Templeton Emerging
Markets Investment Trust
“Holdings across the IT services, consumer staples and utilities
sectors had a negative impact on the performance over 12 months
ending March 2026. A primary detractor was our exposure to IT
services – specifically businesses deriving earnings from India,
which suffered from market concerns that AI would disrupt
traditional software delivery models. Furthermore, the Chinese
consumer staples sector weighed on returns due to weak domestic
consumption and competition. Geographically, while India holdings
lagged for the fund, our underweight position in the country
aided our relative returns.”
Jacqueline Broers, co-fund manager of Utilico Emerging
Markets Trust
“Recently, there has been a rotation by foreign investors out of
some markets that have performed strongly in recent years, such
as India and Indonesia, amid concerns over valuations, fuel
prices, shareholder structures and their relatively lower
exposure to technology names. In contrast, more technology
focused countries such as China, Korea and Taiwan have come
sharply back into favour. “However, not all technology stocks
have benefited from the AI rally at the start of this year. There
has been significant weakness in the IT services and software
sector globally on concerns that AI coding will adversely impact
this industry. The sell-off has been indiscriminate and our
holding in FPT Corporation, a Vietnamese telecoms and IT services
group, has fallen by more than 20 per cent so far this year,
despite the company reporting a strong start to the year and a
record order intake.”
What threats lie ahead?
Hiren Dasani, chief investment officer at Ashoka WhiteOak
Emerging Markets Trust
“In the near term, the major risks include higher oil and energy
prices which will likely weigh on consumer sentiment, and supply
chain constraints including shipping route disruptions. Any sharp
reversal in the AI theme may lead to underperformance of
tech-heavy markets like Taiwan and Korea. Our portfolio
construction approach remains balanced, without disproportionate
exposure to any single factor, theme or emerging technology. The
sectoral and country exposures are an outcome of our rigorous
bottom-up stock selection philosophy. Our investment philosophy
is that outsized returns are earned over time by investing in
great businesses at attractive valuations.”
Jacqueline Broers, co-fund manager of Utilico Emerging
Markets Trust
“A key threat to the strong performance in emerging markets (and
developed markets) is a prolonged conflict in the Middle East
that continues to restrict the free flow of oil. The US is also
likely to face elevated inflation, potentially causing the US
Federal Reserve to raise interest rates. This, in turn, could
strengthen the US dollar, weaken emerging market currencies and
undermine the macro position of many emerging economies. Another
risk that remains under the radar of many investors is the
potential impact of El Niño on emerging markets. A strong El Niño
could impact markets by increasing droughts in some countries,
whilst causing flooding in others, damaging crops and disrupting
agricultural output.”
Omar Negyal, manager of JP Morgan Emerging Markets
Dividend Income Trust
“We believe that escalating conflict in the Middle East is the
biggest near-term risk for emerging markets. While higher oil
prices may support exporters such as Brazil, this is putting
significant pressure on oil-importing economies like India. We
are also watching pockets of the AI and technology supply chain
where valuations now look stretched after a very strong rally,
leaving markets more vulnerable to volatility if sentiment
turns.”
Chetan Sehgal, portfolio manager of Templeton Emerging
Markets Investment Trust
“Potential risks for emerging markets include a possible delay in
hyperscaler spending, which has been a major driver of AI
investments. Rising energy prices are another challenge, hitting
lower income, energy importing countries hardest by pushing up
inflation and straining trade and government budgets. A lasting
resolution of the Middle East conflict is important before we
become positive on those markets.”
See more about UK-listed emerging market investment trusts
here, here and
here.