Emerging markets come into their own

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The average investment trust in the AIC Global Emerging Markets sector has returned 65 per cent in the last 12 months, versus 24 per cent for the average investment trust, as well as 60 per cent over the past five years, and an eye-popping 257 per cent in the last ten.

Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC), observes: “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.”

The AIC asked managers of global emerging markets investment trusts why their portfolios had performed so well, whether it could continue, and what challenges they saw ahead. Here, we present a snapshot of their responses.

What has driven emerging markets’ outperformance this year?

Omar Negyal, manager of JPMorgan Emerging Markets Dividend Income Trust, said: “Emerging markets have benefitted 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 at Utilico Emerging Markets Trust, observed: “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 Ashoka White Oak Emerging Markets Trust, commented: “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.”

What has done best in your portfolio and why?

Hiren Dasani said: “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.”

Chetan Sehgal, portfolio manager at Templeton Emerging Markets Investment Trust, said: “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.”

What has detracted from performance?

Chetan Sehgal said: “Holdings across the IT services, consumer staples and utilities sectors had a negative impact on the performance over 12 months. 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.”

What threats lie ahead?

Hiren Dasani concluded: “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.”