Emerging Markets: investor letter Q3 2025

As with any investment, your capital is at risk.

While we are only three quarters of the way through the year, it has been gratifying to see the MSCI Emerging Markets Index outperforming the S&P 500. On a full calendar year basis this hasn’t happened since 2020, so it’s pleasing to see the asset class showing some momentum.

It is perhaps ironic that this performance should come despite the uncertainty of US tariffs, concerns about globalisation and heightened geopolitical tensions. Perhaps it has taken these febrile times to showcase what we have been saying for some time: many EM economies have been running conservative fiscal policy, orthodox monetary policy and have considerable political stability.

Even in non-democratic countries, governments are usually in favour of private enterprise and economic development. As a result, EM countries have started to look less risky relative to some of their Developed Market counterparts.

However, perhaps the biggest change in perception this year has been on China. Since Covid, many Westerners had regarded China as almost uninvestable. This view was perhaps not unreasonable: property prices were falling, consumption was weak, economic growth was lacklustre, private enterprise was cowed by greater regulation and tensions with the US were elevated. However, there have been several improvements in these areas in the last twelve months, and this has started to be reflected in share prices.

There has been some (very measured) fiscal and monetary stimulus to keep the economy ticking along, and some reduction in real estate controls – enough to induce stabilisation, not a recovery. The government has been supportive of domestic stock markets, in an attempt to lure the approximately US$20 trillion currently held in low yielding bank deposits, while providing a source of funding for China’s burgeoning innovators.

Finally, after a few rounds of tit for tat tariffs, a deal on TikTok appears close and it looks like Presidents Trump and Xi may meet at the APEC summit in South Korea at the end of October.

AI has also proved a helpful tailwind. Initially this was felt by the hardware makers such as TSMC and SK Hynix, but the demands of AI have percolated through much of the supply chain – there are numerous Asian beneficiaries of the hyperscalers’ capital expenditure, a number of the best of which are in our clients’ portfolio.

Recent news of Samsung Electronics and SK Hynix signing letters of intent with OpenAI for its Stargate project highlight this. What has changed towards the end of the quarter has been a widening appreciation of China’s ambitions and capabilities in Large Language Models. DeepSeek remains the most prominent of the private companies, though Huawei and Bytedance are also advancing rapidly. Among the listed companies, Alibaba and Baidu are investing heavily in AI and are beginning to enjoy something a little like the halo of the ‘Mag7’, though from a starting point of considerably lower valuations.

Views on the South Korean stockmarket are also being revised. The market has historically traded at a lower valuation to its EM peers because of the perceived ‘chaebol’ discount. Many companies in Korea are linked to large family-owned conglomerates or chaebol. In the past, this has often meant that minority shareholders were usually quite low on managements’ priority lists and that companies were not always run to maximise returns. 

However, recently the Korean government has sought to emulate Japan’s successful ‘Value Up’ programme. For instance, for the first time company directors now have a fiduciary duty to all shareholders, not just the company itself. Share prices have responded, though often it is those companies with the poorest governance and the weakest returns that have benefitted most; companies like these typically do not meet our growth and quality thresholds. 

However, we have found one or two opportunities at the top of the quality spectrum within the Hyundai Group, where the Chung family appear much more progressive than some of their peers.

Our portfolio continues to be underweight India. This had been a source of pain for a couple of years, but so far in 2025 has been helpful. While this positioning does not reflect any long-term concern about the country from a top down perspective (what’s not to like about 7.8 per cent real GDP growth?), from a bottom-up perspective we’re still struggling to find companies at anything like sensible valuations given their growth prospects. 

On top of this, in recent years, the Indian economy and currency has benefitted from cheap Russian oil paid for in rupees – will this continue in the face of 50 per cent tariffs from the US? In addition, the US$100,000 fee on H1B visas has shocked the Indian IT service sector (where the portfolio does have some exposure) but ultimately should prove a manageable inconvenience. Perhaps these headlines will finally bring share prices and valuations back to attractive levels.

Performance

The MSCI Emerging Market Index rose through the third quarter, driven by strong returns in China, South Korea and Taiwan while India was weaker. Enthusiasm for AI was a major driver for both Chinese platform companies developing their own chips and Large Language Models, and semiconductor and hardware manufacturers in South Korea and Taiwan. 

However, we would reiterate that it is important not to draw too many conclusions from short-term performance, whether good or bad: our investment horizon remains steadfastly five years and beyond. 

In China, leading battery maker CATL’s 2Q25 results exceeded market expectations, delivering around 150GWh in battery sales volume (up 35 per cent year-on-year with Energy Storage System (“ESS”) accounting for over 20 per cent of shipments) and RMB16.5bn net profit (up 35 per cent year-on-year), driven by stable margins and high operational efficiency. 

Revenue grew 8 per cent year-on-year to RMB94bn despite declining lithium prices and lower average selling prices, while gross profit margin expanded to 25.6 per cent (up 2.0 percentage points year-on-year), reflecting cost management and strong demand dynamics. The company maintained a 90 per cent utilisation rate in 1H25, indicating full capacity operation, and announced a 15 per cent interim dividend payout (RMB1.0 per share), signalling robust cash flow generation with RMB58.7bn net operating cash flow in 1H25. 

Management expressed a constructive outlook for 2H25, citing sustained demand momentum in both EV and ESS markets globally, particularly in Europe where CATL's market share rose to 44 per cent in 2Q25 from 37 per cent in 2024.

Also among the top contributors was tech behemoth, Samsung Electronics. Samsung’s share price was in the doldrums for the first half of the year as it struggled to be both competitive in High Bandwidth Memory and its Foundry business. However, despite the company reporting lacklustre 2Q25 results, the news flow on qualification for High Bandwidth Memory for Nvidia and AMD has turned more positive through the quarter.

In addition, Tesla signed a US$16.5 billion multi-year chip supply deal with Samsung, confirmed by Elon Musk. Under the agreement, Samsung’s new Texas facility will produce Tesla’s next-generation AI6 chips. This is the largest single-customer order Samsung’s foundry business has ever secured, and is viewed as a validation of Samsung’s ambition to compete with TSMC in logic chips. With KRW 101 trillion of cash on the balance sheet, Samsung can continue to invest across its businesses.

While Mercadolibre has been a regular contributor to the portfolio, this quarter it somewhat unusually finds itself amongst the detractors. Its 2Q25 net profit of US$523 million missed estimates, largely due to margin pressure from an expanded free-shipping policy in Brazil, and currency losses, notably from the Argentine peso. The free-shipping push, while boosting gross merchandise volume and sales, squeezed operating margins. We view concerns as relatively short term as the company sacrifices some margin to drive revenues and market share.

It is notable that Mercadolibre’s share price had a similar wobble after the 3Q24 results, due to elevated spending on logistics and the expansion of its credit-card portfolio, causing profits to miss expectations. That correction was short lived as we expect this one to be too. 

Owner of the Brazilian stock exchange, B3 also was a detractor. Brazil’s benchmark interest rate stands at 15 per cent and, with inflation at just over 5 per cent, this represents one of the highest real rates in the world. In such an interest rate environment there is little incentive to put money in the stockmarket. However, it is our belief that interest rates will fall soon and with it we will see stock and financial market volumes improve. 

There has also been the additional headwind in August of the US imposing an additional 40 per cent tariff on top of an existing 10 per cent “reciprocal tariff” on many Brazilian imports, bringing the total to 50 per cent. This has obviously hurt sentiment in the short term.

However, the tariff regime includes significant carve-outs: sectors such as aircraft, energy, wood pulp, fertilizers, certain minerals, and civil aviation are exempted. According to some estimates, about 35 per cent of its exports to the US (by value) will face the 50 per cent tariff, while others will be taxed at the baseline 10 per cent rate or the US global tariff levels (25-to-50 per cent). The economic impact of this is obviously being digested by the market.

Clearly sentiment towards Emerging Markets is improving, though there could still be a long way to go given starting valuations. In addition, the last six months have seen strong operational performance by many of the companies in our clients’ portfolio. 

This gives us some confidence that the rise in share prices can be sustained. There will obviously be volatility along the way, so the portfolio remains suitably diversified, especially on a geographic basis. 

Moreover, in aggregate our clients’ holdings are net cash, so that the vast majority have the balance sheet strength to weather any disruptions. 

Looking forward, we have been researching a wide range of ideas from Chinese ride hailing companies to under owned Vietnamese stocks, all the way to Brazilian power generation: there remains considerable competition for capital in the portfolio. Things are warming up in EM.

Emerging Markets

Annual past performance to 30 September each year (%)

Annualised returns to 30 September 2025 (%)

Source: Revolution, MSCI. US dollars. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.

Past performance is not a guide to future returns.

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