Emerging Markets Q2 investment update

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<p><strong>Your capital is at risk. Past performance is not a guide to future returns. The following update is based on a representative portfolio. As such, stock examples may not be held in every client portfolio, and performance may differ.</strong></p> <p>&nbsp;</p> <p><strong>Ben Durrant</strong>: For some, recent months have increased uncertainty: the middle east conflict, cash flow questions for the US AI majors, as well as the disruption and maybe huge opportunity of implementing AI in even more industries. But uncertainty creates mispricing and offers fertile ground for active management.</p> <p>And that uncertainty is only true in some regards though, because investors are also becoming more certain about EM's role in the world. EM sits at the heart of AI and energy. Both are vital. AI may be designed in the US, but it is manufactured in Asia. The energy transition is also being built in emerging markets.</p> <p>Within EM, Taiwan and Korea have dominated recent attention and performance. That’s because AI is physical: it is foundries, memory, and these complex ecosystems which combine high technology with huge engineering scale. There is undeniable value being created here: Samsung and SK Hynix have seen their projected earnings rise so rapidly that, even with quickly rising share prices, they still don’t look expensive.</p> <p>That said, we have been long-time holders with substantial positions in both, so for risk management purposes, we have been trimming into strength and reinvesting elsewhere.</p> <p>One of the common questions we are getting is about whether EM is now simply a ‘double up’ exposure on the US? Are the two becoming more and more correlated due to AI?</p> <p>The evidence we see, though, is no. EM's correlation with US equities has not reached a new extreme. It is broadly in line with recent history, if anything slightly below.</p> <p>I was recently in China with my colleague Linda. This was about looking for new ideas and as well as meeting some of the founders of China’s own frontier AI labs. China does not have the same power bottlenecks as the US, which could matter a lot for relative AI success. US chip restrictions were meant to push China out of AI, but perversely they have had the opposite effect by forcing them to do more with less. You can see that now with Chinese models offering 90 percent of the functionality for 10 percent of the price.</p> <p>As a result, China already produces over half the world’s AI tokens though, more challengingly from our perspective, still offers very little of global AI revenue.</p> <p>China is building a parallel stack: all the way from ByteDance, Tencent and Alibaba in applications and models at the top; to both public and private companies building each infrastructure layer beneath; underpinned by scale in batteries and energy.</p> <p>The US is focusing on frontier models and a capex race. While China is focused on cost and adoption to create AI cheap enough for gaming, healthcare, factories, robotics and electric vehicles. We as investors need discipline because some strategic companies may serve state goals more than shareholders.</p> <p>But where AI meets commercial applications and real-world productivity, China is central. So we've been adding to underappreciated opportunities here.</p> <p>The other ‘vital’ role for EM is in energy.</p> <p>Emerging economies do not just need cleaner energy, they simply need more energy. India, China and the rest of Asia are likely to drive much of the incremental demand. AI adds further pressure because data centres need reliable power and are willing to pay very highly for it.</p> <p>So that's creating another source of ideas in energy, materials and infrastructure. Our recent additions to Vista Energy and Vale fit this pattern. Vista gives exposure to world class oil assets, and Vale to materials needed for electrification, infrastructure and industrial growth.</p> <p>CATL, the Chinese battery manufacturer, bridges the two themes. It’s about energy infrastructure, but if it’s the key infrastructure layer for China then it matters a great deal to it’s AI ambitions too.</p> <p>Its battery capacity is roughly three times Europe's and four times that of the US, yet its dominance as a company remains underappreciated. Batteries are becoming core technology for grids, energy systems and industrial competitiveness. This company is not just about electric vehicles anymore.</p> <p>Our outlook for EM is constructive, but also selective. This is not one macro trade. It is a set of companies central to what the world needs. AI hardware, China's AI stack, energy supply, batteries, metals and electrification. I think about it like this: EM is no longer just a beneficiary of global growth. rather, it is becoming the enabler of it.</p>