CFS Market Insights: Emerging markets amid global uncertainty

Welcome to CFS Market Insights. 

So this month we're going to focus on two areas. We're going to talk a little bit about the recent developments in the Middle East and what that may mean for markets overall. And then we're going to talk about emerging markets, which is something that we have talked about in previous episodes.

And I'm joined by Leroy Qian who is the portfolio manager for emerging markets at CFS. So to start off with, it's important that we address the recent developments and events in the Middle East. And they are obviously continuing to evolve and having a material impact on markets, both equities and also fixed income investments.

One thing we do think is important to remember is that these periods of geopolitical tensions don't automatically mean that you're going to see long lasting market weakness.

Markets are forward looking. And to date, they continue to sort of function normally. However, it is important that as investors we understand the first and also second or third order impacts of what we're seeing within markets. And the impact that significant disruptions in the energy markets may have on investments going forward.

Energy has been the most obvious visible area of impact in markets with oil prices moving around very significantly.

One of the areas we are focused on is second order impacts from an investment perspective. An example of this is actually the damage that has occurred within Qatar, which is also a major supplier of helium as well as LNG. Helium is very critical in the semiconductor manufacturing processes and has some very significant medical applications as well.

So the disruptions can have much broader implications for global supply chains, including those areas which are linked to technology and also artificial intelligence. So there's been a lot of attention on the focus on large US technology companies, but actually many of the components that support the AI infrastructure are actually constructed within emerging markets.

And that's actually probably a very good segue to talk about emerging markets.

And what we might do is actually start off by talking a little bit about what we really mean by emerging markets, the type of, opportunities that exist there. So, Leroy, why don't you give us an overview of emerging markets, their importance, and our thoughts on why they're attractive?

Thanks, Jonathan. So emerging market equities remain attractively valued relative to developed markets even after the very strong outperformance through 2025, while at the same time continuing to offer strong earnings growth prospects.

But if we step back from the headlines, it's worth visiting why emerging markets play a role in our portfolios. Emerging markets span 24 countries across Asia, Latin America, the Middle East and Eastern Europe, representing over 80% of the world's population and around 60% of global GDP. They include major manufacturing and technology hubs such as China, Taiwan, South Korea and India.

I think it's interesting to think about the way that emerging markets have evolved over the last sort of 10 to 15 years, because there have been some significant developments in terms of what drives emerging market performance.

Exactly. So while emerging markets were once dominated by banks and resources, they've moved up the value chain and now include a wide range of globally competitive companies across technology, manufacturing and services, including familiar companies like Samsung.

Although emerging markets are often viewed primarily as a growth story, our focus has been on valuation. When we assess the opportunity, emerging market equities were trading at meaningfully lower valuation than developed markets. This is despite stronger earnings growth. So in simple terms we're paying less for high expected growth.

So I think that that's a good way of framing what the valuation opportunity was. But I think it's also worth talking a little bit about the role that the emerging markets can play in, portfolio diversification as well.

This was reflected in high‑quality emerging market companies that still trade well below comparable developed market peers, despite being similar or having even stronger fundamentals.

For members this matters because diversification and valuation discipline helps build more resilient portfolios during periods of uncertainty.

And I think that's a good point to make. And it may well be worth talking a little bit about why we think emerging markets now are perhaps in a much more robust position than they might have been historically. When you've had periods of economic uncertainty.

Yes. Emerging markets have evolved, and many emerging market countries now have stronger balance sheets, lower government debt and more resilient external positions, including ongoing trade and current account surpluses, which helps to navigate these periods of global uncertainty.

At CFS, our approach has evolved accordingly, rather than relying on broad country or currency calls. We focus on diversified exposure to high‑quality companies with sound fundamentals and attractive valuations. This is all supported by detailed risk analytics work across asset allocation and manager selection.

Diversification and active management remains central to managing risk across different market environments, and CFS has been managing emerging market exposures on behalf of our members Since 2008 and across multiple market cycles. This experience supports disciplined decision making when markets unsettled, helping ensure portfolios are managed thoughtfully rather than reacting to short‑term market headlines.

Thanks a lot, Leroy.

And I think that that is a very important message that we want to leave you with that, notwithstanding this market volatility, we do think that our portfolio is a very well positioned to whether what you're seeing within markets at the moment. As Leroy said, we're very experienced managers, not just in terms of emerging markets, but the team together.

You've got senior portfolio managers who've got over 30 years of experience. And so we have managed through times of significant dislocation, whether or not it's within emerging markets or developed markets, and through periods where you've seen both economic disruption, like what we're seeing from very high energy prices, but also through periods of conflict as well. 

Thanks for watching CFS Market Insights. See you next time.