Chris Tennant, co-portfolio manager of Fidelity Emerging Markets Limited (LON:FEML), explains why growth in emerging regions is expected to outpace developed markets over the long term.
Conflict in the Middle East has pushed energy prices higher and increased volatility across global equity markets. Investors are reacting quickly to headlines, and sentiment has become more fragile. Even so, the longer-term case for emerging market equities has not materially changed unless the conflict leads to a sustained period of much higher energy prices.
Volatility can create useful opportunities for active investors. Rather than changing the investment process in response to short-term market moves, the focus remains on company fundamentals, balance sheet strength and valuation. Where share prices have weakened without a major change in long-term prospects, the strategy has been able to add selectively to preferred holdings at more attractive levels. This disciplined approach has helped protect capital and support relative performance during the recent period of market stress.
Technology remains one of the most important long-term themes within emerging markets. Selected companies in South Korea and Taiwan are well placed to benefit from continued investment in artificial intelligence infrastructure, including data centres and related hardware. The conflict in the Middle East is not expected to have a lasting impact on these businesses unless energy prices rise enough to undermine the economics of data centre investment. At present, capital spending linked to AI remains a clear support for parts of the Asian technology supply chain.
Power infrastructure is another area of interest. Many developing economies need to modernise electricity grids to support rising demand, industrial growth and electrification. Companies involved in grid upgrades and replacement projects could benefit from sustained investment over time.
Brazil also remains an important opportunity. Elections later this year could lead to a more business-friendly government, which may improve investor confidence and support corporate profitability. A better policy backdrop could be a meaningful catalyst for Brazilian equities, particularly if valuations continue to offer room for recovery. The country is home to several large mining companies, while other emerging economies such as Peru, Chile and South Africa also benefit from natural resource production. Copper remains supported by electrification and infrastructure demand, while gold has become more attractive as geopolitical risk has increased. Some profits were taken in mining-related holdings earlier in the year, before the conflict began, but selective exposure has been maintained where the long-term case remains strong.
Emerging market equities continue to trade at a discount to developed market peers, despite stronger expected long-term growth. Over time, this gap could narrow if investors gain confidence that structural trends are feeding through into company earnings.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
