Emerging Markets Soar Amid AI Frenzy and Election Surprises
The second quarter of the year saw emerging markets surge, driven by investor enthusiasm for artificial intelligence and significant election outcomes in key countries. The MSCI Emerging Markets Index rose 5.0%, with Emerging Asia leading the charge with a 7.4% gain. Eastern Europe also performed well, climbing 6.7%, while Latin America struggled, falling 12.2%.
In Emerging Asia, Taiwan and Korea led the way, with their stock markets rising sharply thanks to the ongoing AI boom, which boosted the information technology sector. India’s stock market also surged after the country’s election results, despite a somewhat disappointing show by Prime Minister Narendra Modi. China’s stock market advanced on positive sentiment about the country’s improving economic outlook.
In contrast, Latin America was the worst-performing region, with Mexico’s stock market tumbling 16.1% in response to the results of the country’s presidential election. Investors were concerned that the Morena Party’s landslide win would allow it to claim a mandate to enact aggressive reforms. Colombia and Chile also saw their stock markets fall sharply, weighed down by the stock prices of raw materials producers.
The region encompassing emerging Europe, the Middle East, and Africa (EMEA) underperformed, with most stock markets in emerging Europe recording gains, but Turkey’s stock market rising on positive sentiment about the country’s more orthodox monetary policy. South Africa’s stock market surged after the country’s election, which raised the possibility of a coalition government between the African National Congress and the pro-market Democratic Alliance (DA).
In terms of sectors, information technology, communication services, and utilities were the best-performing, while healthcare, consumer staples, and materials were the worst-performing.
The Emerging Markets Equity Portfolio (MUTF:LZEMX) advanced in absolute terms and outperformed its benchmark, the MSCI Emerging Markets Index, thanks to stock selection in the materials and financials sectors, as well as in Korea, South Africa, and India.
Several stocks contributed to the portfolio’s performance, including Taiwan Semiconductor Manufacturing Company, GALP, China Construction Bank, Indus Towers, and Lenovo. However, stock selection in the consumer discretionary and industrials sectors, as well as in Chile and Taiwan, detracted from relative performance.
The team initiated positions in Brazil-based oil and gas explorer PRIO and Peru-based lender Credicorp, while divesting from UK-based miner Anglo American, Taiwan-based contract electronics maker Hon Hai Precision, China-based coal miner and power plant operator China Shenhua, India-based metals miner Hindalco Industries, and China-based real estate developer China Vanke.
Overall, the team believes that the unsynchronized global economic environment is resulting in a relatively balanced level of economic activity that is positive for equities, and as long as this does not change or significant exogenous risks appear, it should be a reasonably good backdrop for emerging markets equities.
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