Roundtable 'Emerging Market Equities'

June 17, 2026

      

Chair: Harry Geels, Auréus Participants: Ben Buckler, Baillie Gifford James Cook, Federated Hermes Wim-Hein Pals, Robeco René van der Zeeuw, onafhankelijk bestuurder

        

What exactly do we mean by ‘emerging markets’? Are we also talking about frontier markets and small-caps, for example?

James Cook: ‘For us, the focus is primarily on core emerging markets. So not so much frontier markets, but an all-cap approach, including small-caps. We don’t want to define the universe too narrowly, because then you miss out on opportunities within the asset class.’

Ben Buckler: ‘In our view, the benchmark is fairly concentrated, whereas the opportunity set is actually much broader. If you focus solely on the index, you run the risk of missing out on interesting companies and markets that fall outside it. That can also mean having exposure to frontier-like markets or companies that aren’t in the index, but are certainly attractive.’

Wim-Hein Pals: ‘For us, the MSCI Emerging Markets is certainly the foundation, as that index is the frame of reference for most investors. At the same time, we also have scope for a limited allocation to frontier markets, such as Vietnam. That is particularly interesting, because such a market may be promoted to an emerging market, and that is often accompanied by an inflow of capital and extra returns.’

Cook: ‘As contrarian investors, we are not benchmark-driven in any case. So if we see opportunities outside the index, for example in Vietnam or even in developed markets with a large proportion of their turnover in emerging markets, then we take advantage of them. Ultimately, it’s about where the value lies.’

René van der Zeeuw: ‘From an institutional perspective, I would still focus primarily on the definition of the MSCI Emerging Markets. Frontier markets simply present many additional challenges. Think of tradability, establishing property rights and actually repatriating your capital. For investors, these are serious obstacles, with Vietnam as a possible exception.’

Pals: ‘To sum it up, we’re actually talking about the MSCI Emerging Markets including small-caps, alongside selective exposure to frontier markets such as Vietnam, where it makes sense.’

Van der Zeeuw: ‘And as far as I’m concerned, small-caps are simply part of that. They form part of the entire universe.’

We often hear that institutional investors are underweight in emerging markets. Is that correct? And when they do invest, do they usually do so hedged or unhedged?

Cook: ‘Historically, institutional investors have often been underweight. That does vary by region, though. In Latin America, for example, we’re actually seeing more demand for Asia. But in a broader sense, it remains the case that investors want to diversify their allocation outside the US. At the same time, there’s still some caution, despite sentiment having become a bit more positive recently.’

Buckler: ‘If you look at the figures, it’s quite clear. Around two-thirds of global investors are underweight in emerging markets relative to the MSCI ACWI weighting, which stands at around 11%. The asset class has also given investors plenty of reasons to remain underweight over the past fifteen years. But the debate is shifting: it is no longer about why you should invest, but rather how sustainable the recovery is.’

Van der Zeeuw: ‘I recognise that. Certainly with Dutch pension funds, you can see that they are still a long way from a neutral weighting. The most positive thing you can say is that they are once again considering a return to that neutral position. But they are still a long way off.’

Pals: ‘Our analyses also show that emerging markets are underrepresented among institutional, retail and wholesale investors. But last year we saw a turnaround. For the first time in a long while, it was painful not to have exposure, because emerging markets were outperforming. That was also the case at the start of this year. However, the recent escalation in the Middle East is now causing uncertainty once again. If this conflict persists, it could have a negative impact on the asset class.’

Van der Zeeuw: ‘There are other reasons for this underweighting too. Think of geopolitical factors, such as Russia and China, and reputational risks. Many investors simply found it easier to avoid emerging markets. But if performance picks up, that could change quickly.’
 

It is only since 2024 that we have seen earnings growth in emerging markets exceed that in developed markets, and this looks set to continue in the coming years.

 
Pals: ‘As far as hedging is concerned, it’s quite simple: most investors invest unhedged. It is difficult and costly to hedge currencies in emerging markets, so in practice this hardly ever happens.’

Emerging markets are often seen as inefficient. Is this therefore a market par excellence for active management, or is there also a role for passive investing?

Pals: ‘This is an asset class par excellence for active management. There are many countries and companies in the index that you actually want to avoid, because they are illiquid or fundamentally less attractive. For example, we are not invested at all in a number of benchmark countries, such as the Philippines, Malaysia, Colombia, Egypt, Qatar and Kuwait. That freedom of choice is crucial. Over the long term, this has also enabled us to generate structural alpha, partly through country allocation and partly through stock selection.’

Buckler: ‘I agree. It’s not just about generating alpha, but also about reducing risks. In a passive strategy, you are automatically exposed to markets or companies that your clients might not want to be involved in at all. Active management gives you the ability to manage those risks and consciously avoid certain parts of the market.’

Cook: ‘Furthermore, sentiment plays a major role in emerging markets. Some markets may be viewed as uninvestable for a long time, such as China recently. That creates opportunities for active investors. The spread in returns is wide, and that offers scope to add value through bottom-up selection, certainly if you are prepared to invest against the tide.’

Van der Zeeuw: ‘There is certainly a role for passive investing, mainly because of the low costs and simplicity. But you do have to accept what you’re buying. That also means exposure to governance risks and less efficient parts of the market. If you look at the results, you see that the best active managers in emerging markets add solid value over the long term. For investors with a long-term horizon, active management is therefore, in my view, the better choice.’

We’ve discussed underweighting and disappointing performance. What do you think are the main reasons emerging markets have lagged behind for so long?

Pals: ‘A key factor is earnings growth. Ultimately, for equity investors, it’s all about earnings. For a long time, these lagged behind developed markets in emerging markets. It is only since 2024 that we have seen earnings growth in emerging markets exceed that in developed markets, and this looks set to continue in the coming years.’

Van der Zeeuw: ‘That is indeed striking, because emerging markets have been growing faster economically for some time. But that growth was not sufficiently reflected in earnings per share. That had to do with governance, but also with other factors, such as China’s disappointing performance.’

Pals: ‘Exactly. In many countries, state-owned enterprises dominate, and they are less focused on shareholder returns. In addition, there was significant dilution as companies raised new capital. As a result, earnings per share lagged behind, despite economic growth.’
 

The question is no longer why one should invest in emerging markets, but rather how sustainable the recovery is.

 
Buckler: ‘In the US, you saw exactly the opposite. There, share buyback programmes strongly supported earnings per share. This happened much less in emerging markets. But that is now starting to change, particularly in China, where companies are placing greater focus on shareholder returns.’

Van der Zeeuw: ‘Geopolitical factors also played a role. Think of Russia, but also how investors view China. Reputational risks and uncertainty have made many investors cautious. That came on top of the disappointing returns.’

Cook: ‘At the same time, the composition of the market has changed. Emerging markets are no longer just about energy and commodities. Technology now plays a much greater role, particularly in relation to AI. That makes the asset class fundamentally different from what it was twenty years ago.’

Van der Zeeuw: ‘What you mustn’t forget is that, in recent years, developed markets have not only shown better earnings growth but, above all, have undergone a strong revaluation. Valuations there have risen from around 16 to 22 times earnings, whilst emerging markets have remained stuck at around 11 to 12. At the same time, the asset class has also shrunk, for example due to the exclusion of Russia following the invasion of Ukraine, which disappeared entirely from the index in a short space of time. All of this has meant that emerging markets have lagged behind relatively, both in terms of size and valuation. But it is precisely that difference that makes it interesting, as it offers scope for a catch-up.’

And has ESG, and in particular governance, also played a role in this?

Van der Zeeuw: ‘Yes, absolutely. Governance has been an important factor. For a long time, investors have had doubts about how companies are managed and to what extent shareholder interests are prioritised.’

Cook: ‘Korea is a good example of this. It was an underperformer for years, precisely because of weak corporate governance.

Companies were dominated by family conglomerates, with minority shareholders having virtually no protection. Investors have been pressing for change on this for years. We are now seeing a real shift, with new legislation requiring companies to treat all shareholders equally. That is an important step and helps to reduce the so-called Korea discount.’

Buckler: ‘At the same time, you can see that this shift is also complex. Some companies that performed well did so despite weak governance or low growth, which presented quite a dilemma for growth investors. But the direction is clear: governance is being taken more seriously.’

Cook: ‘And that doesn’t just apply to Korea. In China, too, you see that companies, both private and state-owned, are increasingly being driven by returns. Think of higher dividends and share buybacks, partly to return capital to the stock market.’

Buckler: ‘That is part of a broader trend. In China, the stock market is increasingly intended as a means of wealth creation for domestic investors. This creates more pressure to deploy capital more efficiently. We are probably still at the very beginning of this, but the impact could be significant.’
 

Emerging markets are no longer just about energy and commodities. Technology now plays a much greater role, particularly in relation to AI.

 
Van der Zeeuw: ‘It shows that governance was long a drag on performance, but can now become a key driver of improvement.’

Buckler: ‘To put all this into perspective: since the launch of ChatGPT, US equity markets have added an estimated $26 trillion in market value. The total market capitalisation of emerging markets stands at around $11 trillion. That does indicate just how big the gap has become and how much value may still be unrealised in emerging markets.’

Which strategies work best in emerging markets? Do you mainly take a thematic, factor-based or bottom-up approach? And what does that mean for investors looking to build exposure?

Pals: ‘We operate on two key pillars: country allocation on the one hand, and stock selection on the other. Around a third of the added value comes from country selection and two-thirds from stock picking. We do this in a fundamentally driven way, supported by quantitative models. Essentially, we look for value with a future, i.e. relatively cheaply priced companies with positive earnings growth.’

Van der Zeeuw: ‘From an asset owner’s perspective, what you ultimately want is risk exposure to countries and specific shares. You try to limit factors such as style risks. You can achieve this effectively by combining different managers who consistently follow their own style. That is how you build a robust portfolio with stable alpha.’

Buckler: ‘We, on the other hand, look at things from a growth perspective. Our approach focuses less on broad market coverage and more on discovering exceptional companies: we try to find companies whose long-term growth is underestimated. That requires a long-term horizon and discipline. The emerging markets are often short-term focused, and that creates inefficiencies. By looking further ahead, you can capitalise on them.’
 

Governance was long a drag on performance, but can now become a key driver of improvement.

 
Cook: ‘Our approach is contrarian. For us, the price you pay is decisive: if we can buy a Ferrari for $50,000, we’ll do so. But we’re just as happy with a $5,000 Ford or a $10,000 Mercedes. We’ve had far more $5,000 Fords than Ferraris, because the biggest returns usually come from what is cheap and overlooked, not from what is admired and expensive. The key is not to pay too much for quality. We deliberately look for situations where the market overestimates the risks and valuations are consequently under pressure. That means we often invest in markets or sectors that are out of favour at the time, such as China or Korea in the past. That requires patience, but it has already yielded significant returns for us.’

Van der Zeeuw: ‘We combine the approaches mentioned earlier. For a pension fund, the lesson is that you should not choose a single active style, but several. By combining growth, value and contrarian strategies, you reduce style risks and achieve a more stable return pattern.’

Buckler: ‘And in doing so, it is crucial that managers remain consistent in their approach, even if it performs less well temporarily. It is precisely that discipline that makes the difference in the long term.’

We have seen strong performance in emerging markets over the past year and a half, aided by a weaker dollar. But much has changed recently due to geopolitical tensions. How do you view the current market dynamics?

Cook: ‘We are currently seeing a clear repricing of risk, mainly due to the escalation in the Middle East. Initially, it was thought that the conflict would be short-lived, but it is now becoming clear that the impact could be more prolonged, for example through disruptions to energy and trade flows. That is causing volatility. At the same time, the divergence between countries and sectors remains significant, and that creates opportunities for active investors with a long-term horizon.’

Van der Zeeuw: ‘Emerging markets are benefiting from both structural and cyclical factors. Those structural trends, such as demographics, technological development and supply chain shifts, have not changed. But in the short term, you can certainly see the impact of higher energy prices and geopolitical uncertainty. Some countries, such as India and Turkey, are directly affected by this.’
 

Emerging markets offer the greatest opportunities for impact. It is more difficult, but the potential returns are also greater.

 
Pals: ‘The war is also creating opportunities in the short term. Over the past eighteen months, we have significantly reduced our exposure to Asia and, conversely, increased our exposure to Latin America and, to a lesser extent, Europe and Africa. The main reason for this lies in valuations.

In parts of Asia, such as India, we simply found the market too expensive. India was trading at valuations comparable to the S&P 500, and we do not consider that justified. That is why we have a clear underweight position there. At the same time, we have taken profits in markets that had risen sharply, such as Korea, where the semiconductor and consumer sectors in particular performed well. We have reinvested that capital in Latin America. We are now overweight in countries such as Brazil, Chile, Peru and Mexico. Moreover, that region is less vulnerable to the energy crisis and, in some cases, actually benefits from higher commodity prices, which makes it relatively attractive in the current environment.’

Cook: ‘Amidst the uncertainty, you also see resilience. China, for example, has remained relatively stable, partly due to the size of its domestic economy and its capacity for stimulus. But there too, the external component, such as exports, could be affected if the conflict drags on.’

Pals: ‘China is indeed an interesting case. It has a large domestic economy, but is also dependent on energy imports. And many of those flows are under pressure. Yet the market has remained remarkably resilient so far.’
 

Essentially, we are looking for value with a future, i.e. relatively cheaply priced companies with positive profit growth

 
Van der Zeeuw: ‘The crux is that the short term is fraught with uncertainty, but the long-term drivers remain intact. As an investor, you need to be able to see past that.’

Cook: ‘And it is precisely during such periods of uncertainty that the best entry points often arise, provided you have a long-term horizon.’

Pals: ‘Exactly. Volatility is not just a risk, but also a source of opportunities for active investors.’

If we translate this into portfolio choices, how do you view regional positioning? Where do the opportunities currently lie, and where are the risks?

Cook: ‘You can now clearly see that emerging markets are increasingly diverging along geopolitical lines. You’re effectively seeing different blocs, with Asia heavily dependent on global trade and energy imports, and other regions such as Latin America actually benefiting from higher commodity prices. That makes the differences between regions greater than before. At the same time, you have to be careful not to steer things too much from the top down, because ultimately it’s still all about companies and valuations.’

Buckler: ‘We look less in terms of regions or blocs and more at individual companies. Even within a geopolitical tension, you can find companies that simply continue to grow and create value. The risk of thinking too much in terms of blocs is that you miss opportunities that don’t fit into that larger narrative. ’

Van der Zeeuw: ‘From an asset owner’s perspective, you actually need to combine both. You cannot ignore this geopolitical bloc formation, so you want diversification across different regions and power blocs. At the same time, you also want to combine different styles. Precisely because the world is becoming more fragmented, diversification is becoming even more important.’

Pals: ‘On top of that, these geopolitical shifts also affect the benchmarks. Countries may be upgraded or downgraded in benchmark weighting, and that leads to capital flows between those blocs. These are moments when, as an active investor, you can anticipate.’

Cook: ‘It underlines the fact that emerging markets are not a homogeneous asset class. The differences between countries, and also between geopolitical blocs, are enormous. As an investor, you need to respond to that actively.’

Van der Zeeuw: ‘Ultimately, it’s about building a portfolio that can withstand various geopolitical scenarios. That requires diversification, but also clear and deliberate choices.’

Returning to China: this country is a major and sometimes controversial part of emerging markets. How do you currently view China within the asset class?

Cook: ‘For a long time, China was seen as uninvestable, but that sentiment is beginning to shift. At the same time, macro challenges remain, such as property and weak consumption. But if you look at innovation and industrial strength, you see a different picture. In sectors such as electric vehicles, China has developed at breakneck speed and built up a strong global position. That shows just how competitive the country has become, although overcapacity also brings risks.’

Buckler: ‘China is increasingly recognising that the stock market must play a key role in wealth creation. Capital finds it difficult to leave the country, property is less attractive and interest rates are low. This puts pressure on companies to improve shareholder returns. At the same time, China has built up a dominant position in sectors such as EVs and batteries, which offers structural opportunities.’

Pals: ‘China is investable, but you have to be selective. In sectors such as EVs and solar energy, there is significant overcapacity and many companies are operating at a loss. Growth does not automatically translate into returns in these sectors. For us, it is essential that companies actually create value for shareholders.’

Van der Zeeuw: ‘Moreover, we live in a multipolar world. You should really view China as a separate allocation, alongside, for example, Asia excluding China and the Americas. That makes it easier to invest in a more targeted way.’

Pals: ‘China certainly offers opportunities, but requires a different and more conscious approach than in the past.’

To what extent does governance play a role in the development of emerging markets, and what can investors do in this regard?

Cook: ‘Korea is a good example. It had a governance discount for years, but due to pressure from investors and new legislation, you now see real improvements, such as better protection for shareholders. That has a direct impact on valuations. At the same time, regulatory risk remains important, certainly in China too, where government intervention can quickly affect confidence.’
 

We try to find companies whose long-term growth is underestimated. That requires a long-term perspective and discipline.

 
Pals: ‘In China, you see progress, but regulatory risk remains a make-or-break factor. Take the education sector, which was hit hard by regulation in one fell swoop. That is why we explicitly factor this into our valuations, for example through a higher discount rate. That protects against major downside risks.’

Van der Zeeuw: ‘There is growing awareness in boardrooms across emerging markets that a well-functioning capital market is essential. This is reflected in better capital allocation and higher dividends, partly driven by pressure from investors.’

Buckler: ‘Globalisation helps in this regard. As markets become more integrated, the pressure to meet international standards increases. We focus primarily on regulatory risks at the corporate level, both nationally and geopolitically.’

Van der Zeeuw: ‘It remains a long-term process, however. Governance is improving, but not everywhere at once. That is precisely why active management is important.’

We’ve already touched on ESG, but can a truly sustainable institutional investor with a strong focus on impact and decarbonisation invest effectively in emerging markets?

Pals: ‘Yes, certainly. But for us, it’s mainly about the change, the so-called delta. If a company is already fully green, much of the return is already priced in. It is precisely those companies that aren’t yet green, but are moving in that direction, that offer opportunities. Through engagement, you can accelerate that transition, and that also translates into returns.’

Van der Zeeuw: ‘Emerging markets actually offer the greatest opportunities for impact. It’s more difficult, but the gains you can make are also greater. ESG is no longer a nice-to-have there, but essential for assessing risk and return. By actively engaging with companies and local stakeholders, you can achieve both impact and financial returns.’

Buckler: ‘The variation is enormous. You can build portfolios comprising only the best companies, but often the greatest returns lie precisely in companies that are improving. At the same time, you see many contradictions. A company may score poorly on environmental issues but contribute significantly to social development. That makes selection crucial.’

Cook: ‘Engagement is the key word here. It is precisely by helping companies improve that you create value. Companies that already score perfectly are often already expensive. The real opportunity lies in change.’

Any final remarks?

Cook: ‘As far as I’m concerned, the most important thing is that investors do not view emerging markets as a single homogeneous asset class. The differences between countries, sectors and companies are enormous. That is precisely what makes it interesting, but it also requires an active and disciplined approach.’
 

The differences between countries, and also between geopolitical blocs, are enormous. As an investor, you need to actively respond to that.

 
Buckler: ‘I would add that investors shouldn’t be overly guided by the past. The last ten to fifteen years have been challenging for emerging markets, but the structure of the market has now fundamentally changed. We often see that cyclical developments receive a lot of attention, whilst the structural changes beneath the surface are less visible. It is precisely those structural trends, such as technological development and corporate growth, that determine long-term returns.’

Pals: ‘As far as we’re concerned, we’re truly at a tipping point. The combination of improved earnings growth, more attractive valuations and shifting capital flows could lead to a prolonged period of outperformance. But that does require patience and conviction from investors.’

Van der Zeeuw: ‘And remain realistic in your expectations. You don’t need to aim for spectacular outperformance. A stable, consistent contribution to the portfolio’s total return is valuable in itself. You achieve that through diversification, discipline and combining different styles.’

Cook: ‘And perhaps one more point: volatility is part of the game. You shouldn’t try to avoid it, but rather understand and exploit it.’

Buckler: ‘Exactly. For investors willing to look beyond that volatility, emerging markets remain one of the most interesting parts of the global equity markets.’
 

SUMMARY Emerging markets appear to be reaching a turning point after years of underperformance. The outlook is improving thanks to higher earnings growth and attractive valuations relative to developed markets. Active management is essential due to inefficiencies and significant differences between countries and companies. Governance and shareholder focus are improving, particularly in China and South Korea. Geopolitics is causing volatility, but is also creating opportunities and regional differences: Latin America is benefiting, whilst parts of Asia are more vulnerable. China remains crucial, with strong innovation but also risks and overcapacity. ESG and engagement offer significant opportunities for both impact and returns, particularly in emerging markets.

 

Harry Geels Harry Geels is Deputy Editor-in-Chief of Financial Investigator. He also works at Auréus as a Senior Investment Adviser. At Auréus, Geels is jointly responsible for the research into and selection of investment funds. He is also a part-time lecturer at the Actuarial Institute. Geels obtained his Master’s degree in Financial Economics from VU Amsterdam in 1994. He writes columns for Financial Investigator in a personal capacity.

  

Ben Buckler Ben Buckler is an Investment Specialist in Baillie Gifford’s emerging markets equity team. He joined the firm in 2001 as an Investment Manager, moved to China in 2008, and spent six years as Executive Director of Asian Equities at UBS in Hong Kong. Since his return in 2018, he has focused on client relations for Baillie Gifford’s emerging markets team. He holds a Master’s degree in Geography and an MBA (Oxford).

  

James Cook James Cook is Head of Investment Directors & Specialists at Federated Hermes. In this role, he leads the team of investment specialists supporting equity, fixed income and multi-asset products, and also serves as Investment Director for emerging markets strategies. Previously, he was Product Director for emerging markets equities at Fidelity Worldwide Investments. He studied Economics at Royal Holloway, University of London.

  

Wim-Hein Pals Wim-Hein Pals is head of the Robeco Emerging Markets Equity team, which he co-founded in 1994. He is Lead Portfolio Manager of the Global Emerging Markets Core strategy. Previously, he was Portfolio Manager for Emerging European and African equities and Portfolio Manager for Emerging Asian equities. Pals began his career in the investment industry at Robeco in 1990.

 

René van der Zeeuw René van der Zeeuw is an independent board and investment adviser to pension funds and asset managers. He began his career in 1988 at Robeco and co-founded the emerging markets team in 1994. From 2008 to 2023, he worked at APG Asset Management, where he built up the emerging markets equities team and was later responsible for Global Fundamental Equities. From 2015 to 2020, he served as a director of the APG staff pension fund.

 

Read the full article in Financial Investigator magazine