Produced in partnership with Robeco.

The emerging markets surprised investors last year, coming out of a long period of underperformance relative to developed markets in a strong rally driven largely by a rethink of the outlook for Chinese technology companies. Kees Verbaas, global head of fundamental equity at Robeco, thinks that an increasingly supportive macro environment means that rally will be both sustained and extend to more sectors.

“The market is performing strongly, and there’s a good prospect of it continuing to perform strongly,” Verbaas tells Investment Magazine.

There are  three key shorter-term reasons why, Verbaas says. A US dollar that is weak and getting weaker – and so bringing borrowing costs down with it – earnings that are strong and getting stronger, and the prospect of more rate cuts across the emerging markets.

Then there’s the fact that they’re still trading at historically large discounts to developed markets while the US has come to comprise a worryingly large chunk of institutional equity portfolios through its weight in the MSCI World Index.

“If you put 80 per cent of your money in one market, 30 per cent in one sector and 28 or so per cent – these days – in just 10 companies, does that give you nicely diversified global portfolio? No, of course not.

“But you don’t buy emerging markets because they’re cheap. You buy emerging markets because they’ve got very strong and interesting drivers by themselves. We would argue that the outlook for both the short- and long-term favours emerging markets.

Verbaas thinks of his EM career as starting in his 20s, when he was head of the trade delegation of the Netherlands to Russia. At that time Russia was only just opening up to the rest of the world and liberalising its economy; rationing was in place for many foodstuffs, and the wait period for a landline could be as long as two years. But when mobile phones appeared, people forgot about landlines. That same “technological leapfrog” is occurring again in emerging market countries.

“You see it in rural India – people don’t go to a bank to apply for an account,” Verbaas says. “They go straight to internet banking. You don’t do the lengthy process of going to the shops; you have e-commerce.

“Brazil is a leading country in that aspect. They have free online banking. Nubank is a big company – it started 10 years ago, it now has 100 million customers and $140 billion market cap in Aussie dollars. It’s a phenomenally fast-growing company expanding in the region, and there are multiple examples of those providing services to people who otherwise would have had to wait years to access these.”

Without EM there is no AI

Related to tech leapfrogging are the technological megatrends unfolding in the emerging markets: AI hardware, the green transition, and digital infrastructure. Verbaas explains that “while US firms design the software, the physical engine of AI sits in EM”. Of the $650B capital expenditure being spent now on AI by the mega-cap tech firms, about a quarter of that ends up in EM parts of the supply chain – e.g. Taiwan (chip foundries), Korea (high bandwidth memory) and China (optical components and other hardware).”

While a lot of institutions take a broad-based approach to investing in emerging market equities (e.g. using an index or quant approach), Robeco’s fundamental equity team is more discerning in picking their stocks. While the fundamental team leverage outputs from internal quant team to kickstart their investment process, they wind up with very different looking portfolios.

“As fundamental investors, we leverage Robeco’s successful quant model into our investment process to support our judgement,” Verbaas says.

“For the quant team, the results of their rankings are used to build highly diversified portfolios of ~500 names. We build more concentrated portfolios, and we do fundamental work on top; we meet companies, we write investment cases, we make our own earnings estimates. But thanks to all the quant work we can do a lot of sophisticated help in idea generation and secondly provide an objective cross-check on our investment ideas.”

The team also emphasises country analysis, because the dispersion between different countries in the emerging markets can be extremely large.

“Take last year; Korea was plus 100 per cent, Indonesia minus 2 per cent, Greece plus 85 per cent while neighbouring Turkey is minus 3 per cent. The dispersion is huge, and there’s a lot of outperformance to be had from picking the right country – and then the right stocks within it.”

The fortunes of different emerging market countries might continue to shift amidst the advent of a multi-polar world and the new trade patterns that could come with it, Verbaas says; five years from now, a country like India – as one example – will be a much stronger economy with even greater stock market opportunities.

“The BRICS+ countries are now working very closely together. Oil trade between Saudi Arabia and China is now partly settled in renminbi, and to back it up China is storing its gold in Riyadh. That is an interesting expression of mutual trust. These are new forms of co-operation that are challenging dollar dominance.

“US exceptionalism isn’t coming to an end – Treasuries is the deepest market in the world, and the Gulf generates a billion dollars in oil revenue a day. There’s no other market where you can park so much money so quickly. But interesting new structures are emerging which are supportive of long-term emerging markets development.”

These trends all reflect an increasingly multipolar world. EMs are now a mosaic of distinct economies, each with unique growth engines, innovation stories, and policy paths. From India’s digital boom to Brazil’s green energy surge, these countries are no longer just following global trends – they’re setting them. In this new era, understanding the differences between EMs is essential for finding the next big opportunity.

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