The war in the Middle East remains unpredictable and the broader impact of the situation is determined by two main factors: the extent of damage to key regional oil infrastructure and the duration of the closure of the Strait of Hormuz. This will ultimately determine the magnitude of the increase in oil prices and the length of their elevated level, resulting in higher inflation and a negative impact on global growth. The extreme risk scenario remains: an unexpected geopolitical escalation or Iran’s attempts to continue targeting key infrastructure, including desalination plants, would be unfavorable to growth for extended periods. We believe that our exposure to precious metals should help mitigate the potential negative impact of this extreme scenario.
The factors supporting emerging markets in the long term, such as demographic growth, urbanization, and the rise of the middle class, remain intact. Trade tensions have eased in recent months and, despite structural challenges in China, the country’s growth prospects have stabilized and improved, thanks to strong economic policy support.
The Federal Reserve’s rate-cutting cycle largely depends on inflationary pressures and the slowdown in global growth, as is the case with many emerging market central banks. We believe the current strengthening of the US dollar is temporary and that structural weakness persists, fueled by growing concerns about the sustainability of US fiscal policy, a context that tends to support stronger emerging market currencies. Meanwhile, many emerging economies continue to benefit from high real interest rates and relatively healthier sovereign balance sheets, with positive carry enhancing investment returns.
In our view, emerging market equities present attractive valuations (projected price/earnings ratio for 2026 of 13 times) and are undervalued. Thanks to intact secular growth, emerging markets generally offer faster macroeconomic growth compared to developed markets. We believe our thematic exposures are well positioned for this environment and we see a wide range of opportunities for the future.
The portfolio is positioned on a series of secular themes, including emerging domestic spending and consumer credit, upstream technology, and the energy transition. We also favor companies that generate high levels of free cash flow.
We believe China has the capacity and willingness to support its economy as it faces the slowdown in the real estate sector and the impact of tariffs. The multi-year “anti-involution” campaign means China is gradually introducing policies across all sectors to address the problem of deflation, including measures aimed at promoting fair, open, and legal market competition, as well as anti-dumping measures.
Global capital expenditure on artificial intelligence is expected to remain high in the coming years, supporting earnings growth in the Asian technology sector. We focus on the upstream part of the value chain and favor memory-related stocks. We also appreciate Chinese technology software stocks.
Conversely, we are not exposed to the Indian technology sector, which we continue to consider expensive and overly exposed to US growth. We also believe that opportunities in the utilities, consumer staples, and healthcare sectors are limited.
