Q3 2025 CIO Review and Outlook

Overview

Emerging markets generated robust returns this quarter, gaining 11% overall. Returns were primarily driven by North Asia and Latin America, continuing a trend throughout the year in which emerging markets outperformed developed markets, including the U.S. In contrast, Southeast Asia and India underperformed peers, impacted by political instability and geopolitical tensions respectively.

Our markets performed well against a benign economic backdrop. The U.S. Federal Reserve implemented a rate cut late in the period and though inflation remains above the Fed’s target it seems to be tempered, while U.S. economic growth also recovered. Additionally, a weaker U.S. dollar provided a tailwind for inward investment and debt-servicing costs in emerging markets. Another key driver of returns, particular in China, was positive sentiment building behind the artificial intelligence (AI) boom. It was also a period when investor concerns over U.S. tariff policy subsided as most countries with the notable exceptions of China, India and Brazil made substantial progress toward reaching trade agreements with the U.S.

Key Markets

North Asia

North Asia was a cornerstone of emerging market returns during the quarter, with South Korea and Taiwan posting returns of around 12.8% and 14.7% respectively. Both markets continued to benefit from strong demand for AI-related semiconductors, however, we also identified broader opportunities in South Korea. In addition to positive sentiment toward companies in the computer memory and hardware space, South Korea is experiencing accelerating growth in industrial and defensive sectors. This momentum is partly supported by increased military spending in Europe and the U.S.

South Korea’s ongoing corporate reform initiatives also present potential for more value creation, and the recently-elected president’s pro-business agenda continues to be well received by investors. In contrast, Taiwan has generally higher valuations than South Korean equities, its market is more directly linked to the U.S. economy, and earnings growth rates have been weaker.

China

China was the top-performing major emerging market during the quarter, posting a gain of approximately 21%. While economic growth remains uneven and the property market continues to struggle, investor sentiment improved as U.S.–China political tensions appeared to ease and trade tariff threats moderated. At the same time, Chinese authorities have continued to implement targeted stimulus measures, including providing liquidity backup in markets and initiatives to aid consumer spending and stabilize the housing market, and this has improved confidence at the margin. The government’s explicit support for private enterprise and the technology sector has also provided a significant tailwind for large internet platforms and fast-growing tech hardware companies.

In recent weeks, global investor enthusiasm toward AI opportunities has accelerated and China’s equity markets have benefited as domestic hardware and internet platforms have made progress in developing AI-related solutions and committed to large CapEx expenditures. Amid this surge in sentiment, our investment focus remains on the fundamentals of companies and avoiding momentum and market froth. Beyond technology, select insurance companies, industrials and financials also contributed to gains in Chinese equities.

Japan

Japan delivered a robust quarterly performance, generating a return of 8.2%. Market gains were broad-based as a strengthening yen lifted returns in U.S. dollar terms but acted as a headwind locally. Japanese corporates demonstrated earnings resilience although there were less stock-specific opportunities compared to the previous two quarters. Macroeconomic factors also played a role, with investors focused on the government’s fiscal policy and the trajectory of interest rates.

The main style beneficiary in the quarter was momentum, especially within AI segments. We adopted a cautious approach, concentrating on fundamentals. At the portfolio level, corporate governance reforms and rising dividends supported returns.

Domestic politics, we believe, will play a significant role in the market in the months ahead. The election of Sanae Takaichi as leader of the ruling Liberal Democratic Party signals a more reformist and market-friendly agenda—one that may lead to increased fiscal expansion and a slower pace of interest rate hikes.

Southeast Asia

In Association of Southeast Asian Nations (ASEAN) markets, global macro indicators were favorable. However, they were overshadowed by negative sentiment stemming from domestic instability in several countries, most notably political unrest in Indonesia and border conflicts in Thailand. As active managers, we continue to see value in the region but as key markets such as South Korea and China continue to outperform, it will be challenging for investor flows to return to Southeast Asia markets without internal developments that help restore confidence.

An exception to this environment is Vietnam. Our earlier concerns that Vietnam’s growth trajectory could be disrupted by the U.S. government’s tariff policy have eased as the country appears to have successfully negotiated trade terms that are much less restrictive than initially anticipated. After a period of consolidation, the Vietnamese market attracted more positive sentiment and generated a gain of around 30% during the quarter.

India

India’s economic growth weakened relatively during the quarter and its equity markets registered a decline of around 7.5%. Slowing growth was countered with rate cuts and monetary easing by the central bank, consumer tax reductions and increased fiscal spending. Still, earnings estimates continued to be downgraded and we expect further downgrades in the next quarter. The surprising spike in geopolitical tensions with the U.S. over India’s continued purchase of Russian oil and the Trump administration’s decision to double tariffs on Indian exports to 50% also had an adverse impact on valuations in the quarter. Additionally, concerns were raised over new H-1B visa regulations, which could limit the mobility of Indian professionals, including in the IT sector.

Despite the challenging economic and trade environment, we believe there are select stocks and sectors in India with the potential to generate alpha. We are positive toward telecommunications, supported by pricing improvements, continued market penetration and healthy dividend payouts. E-commerce and quick commerce continued to perform well. There was also a slight recovery in the rural economy, evident in increased activity in the auto sector.

Latin America

Latin American markets performed well during the quarter, posting a gain of 10.2%. The more benign global macro landscape was beneficial for the economies of the region, particularly Brazil, where interest rates are relatively high. Mexico’s market has also been supported by the U.S.’s extended tariff negotiations with the Sheinbaum administration. However, underlying economic growth in Mexico weakened during the quarter.

Brazil stands in contrast. It is facing higher tariffs from the U.S. as the Trump administration pushes against the left leanings of the Lula government’s agenda and the final trade policy outcome remains uncertain. Despite this, there were signs of earnings improvement and continued structural opportunities, particularly in the e-commerce sector. We also see growing potential in the financials sector. While falling interest rates can pressure net interest income, they tend to stimulate economic expansion which supports loan growth and capital market opportunities.

Brazil is an appealing but complex market. Its two main drivers are, firstly, the possibility of political change following the 2026 general election particularly if a more business-friendly, centralist government is elected. Secondly, on the macro side, we believe there is the potential for 350 basis points (3.5%) to 400 basis points (4.0%) of interest rate cuts in the run-up to the election. Brazil’s high rates are challenging for both consumers and businesses. A meaningful reduction would be a significant catalyst for the equity market.

Outlook

Looking ahead, we see a broadly supportive “goldilocks” economic environment which we believe will buttress emerging markets. Rate cuts in the U.S. will encourage rate cuts in international markets while a weaker dollar gives an added incentive for investors to add exposure in emerging markets, in our view. However, it is important to remain mindful of the possible headwinds. Strong growth in the U.S. could bolster the dollar and restrict rate cuts. On the other hand, a slowdown in the U.S. may materialize if tariffs have a bigger negative impact on economic growth and consumer spending than expected.

As we look out to the final quarter of the year, the key question is whether markets can continue to generate meaningful gains. While we see more upside through the rest of 2025, careful positioning will be critical as some areas have generated returns driven more by multiple expansion than by improving fundamentals, underscoring the need for a disciplined investment approach.

Further out, we believe that emerging markets are at the beginning of a potential five-year period of outperformance relative to U.S. equities. Following more than a decade of exceptional returns by the U.S. stock market, other global markets are beginning to catch up. Asset flows into non-U.S. equities have increased as investors consider diversification amid growing uncertainty over the sustainability of Big Tech-related investment returns in the U.S. For active investors in emerging markets and Asia, maintaining a balance between opportunity and exposure remains fundamental.

Sean Taylor
Chief Investment Officer