Valuation and governance are making a comeback (roundtable 'Emerging Market Equities' – part 2)

June 18, 2026

      

Chair: Harry Geels, Auréus Participants: Ben Buckler, Baillie Gifford James Cook, Federated Hermes Wim-Hein Pals, Robeco René van der Zeeuw, onafhankelijk bestuurder

         

We’ve discussed underweighting and disappointing performance. What do you think are the main reasons emerging markets have lagged behind for so long?

Pals: ‘A key factor is earnings growth. Ultimately, for equity investors, it’s all about earnings. For a long time, these lagged behind developed markets in emerging markets. It is only since 2024 that we have seen earnings growth in emerging markets exceed that in developed markets, and this looks set to continue in the coming years.’

Van der Zeeuw: ‘That is indeed striking, because emerging markets have been growing faster economically for some time. But that growth was not sufficiently reflected in earnings per share. That had to do with governance, but also with other factors, such as China’s disappointing performance.’

Pals: ‘Exactly. In many countries, state-owned enterprises dominate, and they are less focused on shareholder returns. In addition, there was significant dilution as companies raised new capital. As a result, earnings per share lagged behind, despite economic growth.’
 

The question is no longer why one should invest in emerging markets, but rather how sustainable the recovery is.

 
Buckler: ‘In the US, you saw exactly the opposite. There, share buyback programmes strongly supported earnings per share. This happened much less in emerging markets. But that is now starting to change, particularly in China, where companies are placing greater focus on shareholder returns.’

Van der Zeeuw: ‘Geopolitical factors also played a role. Think of Russia, but also how investors view China. Reputational risks and uncertainty have made many investors cautious. That came on top of the disappointing returns.’

Cook: ‘At the same time, the composition of the market has changed. Emerging markets are no longer just about energy and commodities. Technology now plays a much greater role, particularly in relation to AI. That makes the asset class fundamentally different from what it was twenty years ago.’

Van der Zeeuw: ‘What you mustn’t forget is that, in recent years, developed markets have not only shown better earnings growth but, above all, have undergone a strong revaluation. Valuations there have risen from around 16 to 22 times earnings, whilst emerging markets have remained stuck at around 11 to 12. At the same time, the asset class has also shrunk, for example due to the exclusion of Russia following the invasion of Ukraine, which disappeared entirely from the index in a short space of time. All of this has meant that emerging markets have lagged behind relatively, both in terms of size and valuation. But it is precisely that difference that makes it interesting, as it offers scope for a catch-up.’

And has ESG, and in particular governance, also played a role in this?

Van der Zeeuw: ‘Yes, absolutely. Governance has been an important factor. For a long time, investors have had doubts about how companies are managed and to what extent shareholder interests are prioritised.’

Cook: ‘Korea is a good example of this. It was an underperformer for years, precisely because of weak corporate governance.

Companies were dominated by family conglomerates, with minority shareholders having virtually no protection. Investors have been pressing for change on this for years. We are now seeing a real shift, with new legislation requiring companies to treat all shareholders equally. That is an important step and helps to reduce the so-called Korea discount.’

Buckler: ‘At the same time, you can see that this shift is also complex. Some companies that performed well did so despite weak governance or low growth, which presented quite a dilemma for growth investors. But the direction is clear: governance is being taken more seriously.’

Cook: ‘And that doesn’t just apply to Korea. In China, too, you see that companies, both private and state-owned, are increasingly being driven by returns. Think of higher dividends and share buybacks, partly to return capital to the stock market.’

Buckler: ‘That is part of a broader trend. In China, the stock market is increasingly intended as a means of wealth creation for domestic investors. This creates more pressure to deploy capital more efficiently. We are probably still at the very beginning of this, but the impact could be significant.’
 

Emerging markets are no longer just about energy and commodities. Technology now plays a much greater role, particularly in relation to AI.

 
Van der Zeeuw: ‘It shows that governance was long a drag on performance, but can now become a key driver of improvement.’

Buckler: ‘To put all this into perspective: since the launch of ChatGPT, US equity markets have added an estimated $26 trillion in market value. The total market capitalisation of emerging markets stands at around $11 trillion. That does indicate just how big the gap has become and how much value may still be unrealised in emerging markets.’

Which strategies work best in emerging markets? Do you mainly take a thematic, factor-based or bottom-up approach? And what does that mean for investors looking to build exposure?

Pals: ‘We operate on two key pillars: country allocation on the one hand, and stock selection on the other. Around a third of the added value comes from country selection and two-thirds from stock picking. We do this in a fundamentally driven way, supported by quantitative models. Essentially, we look for value with a future, i.e. relatively cheaply priced companies with positive earnings growth.’

Van der Zeeuw: ‘From an asset owner’s perspective, what you ultimately want is risk exposure to countries and specific shares. You try to limit factors such as style risks. You can achieve this effectively by combining different managers who consistently follow their own style. That is how you build a robust portfolio with stable alpha.’

Buckler: ‘We, on the other hand, look at things from a growth perspective. Our approach focuses less on broad market coverage and more on discovering exceptional companies: we try to find companies whose long-term growth is underestimated. That requires a long-term horizon and discipline. The emerging markets are often short-term focused, and that creates inefficiencies. By looking further ahead, you can capitalise on them.’
 

Governance was long a drag on performance, but can now become a key driver of improvement.

 
Cook: ‘Our approach is contrarian. For us, the price you pay is decisive: if we can buy a Ferrari for $50,000, we’ll do so. But we’re just as happy with a $5,000 Ford or a $10,000 Mercedes. We’ve had far more $5,000 Fords than Ferraris, because the biggest returns usually come from what is cheap and overlooked, not from what is admired and expensive. The key is not to pay too much for quality. We deliberately look for situations where the market overestimates the risks and valuations are consequently under pressure. That means we often invest in markets or sectors that are out of favour at the time, such as China or Korea in the past. That requires patience, but it has already yielded significant returns for us.’

Van der Zeeuw: ‘We combine the approaches mentioned earlier. For a pension fund, the lesson is that you should not choose a single active style, but several. By combining growth, value and contrarian strategies, you reduce style risks and achieve a more stable return pattern.’

Buckler: ‘And in doing so, it is crucial that managers remain consistent in their approach, even if it performs less well temporarily. It is precisely that discipline that makes the difference in the long term.’

We have seen strong performance in emerging markets over the past year and a half, aided by a weaker dollar. But much has changed recently due to geopolitical tensions. How do you view the current market dynamics?

Cook: ‘We are currently seeing a clear repricing of risk, mainly due to the escalation in the Middle East. Initially, it was thought that the conflict would be short-lived, but it is now becoming clear that the impact could be more prolonged, for example through disruptions to energy and trade flows. That is causing volatility. At the same time, the divergence between countries and sectors remains significant, and that creates opportunities for active investors with a long-term horizon.’

Van der Zeeuw: ‘Emerging markets are benefiting from both structural and cyclical factors. Those structural trends, such as demographics, technological development and supply chain shifts, have not changed. But in the short term, you can certainly see the impact of higher energy prices and geopolitical uncertainty. Some countries, such as India and Turkey, are directly affected by this.’
 

Emerging markets offer the greatest opportunities for impact. It is more difficult, but the potential returns are also greater.

 
Pals: ‘The war is also creating opportunities in the short term. Over the past eighteen months, we have significantly reduced our exposure to Asia and, conversely, increased our exposure to Latin America and, to a lesser extent, Europe and Africa. The main reason for this lies in valuations.

In parts of Asia, such as India, we simply found the market too expensive. India was trading at valuations comparable to the S&P 500, and we do not consider that justified. That is why we have a clear underweight position there. At the same time, we have taken profits in markets that had risen sharply, such as Korea, where the semiconductor and consumer sectors in particular performed well. We have reinvested that capital in Latin America. We are now overweight in countries such as Brazil, Chile, Peru and Mexico. Moreover, that region is less vulnerable to the energy crisis and, in some cases, actually benefits from higher commodity prices, which makes it relatively attractive in the current environment.’

Cook: ‘Amidst the uncertainty, you also see resilience. China, for example, has remained relatively stable, partly due to the size of its domestic economy and its capacity for stimulus. But there too, the external component, such as exports, could be affected if the conflict drags on.’

Pals: ‘China is indeed an interesting case. It has a large domestic economy, but is also dependent on energy imports. And many of those flows are under pressure. Yet the market has remained remarkably resilient so far.’
 

Essentially, we are looking for value with a future, i.e. relatively cheaply priced companies with positive profit growth

 
Van der Zeeuw: ‘The crux is that the short term is fraught with uncertainty, but the long-term drivers remain intact. As an investor, you need to be able to see past that.’

Cook: ‘And it is precisely during such periods of uncertainty that the best entry points often arise, provided you have a long-term horizon.’

Pals: ‘Exactly. Volatility is not just a risk, but also a source of opportunities for active investors.’
 

Harry Geels Harry Geels is Deputy Editor-in-Chief of Financial Investigator. He also works at Auréus as a Senior Investment Adviser. At Auréus, Geels is jointly responsible for the research into and selection of investment funds. He is also a part-time lecturer at the Actuarial Institute. Geels obtained his Master’s degree in Financial Economics from VU Amsterdam in 1994. He writes columns for Financial Investigator in a personal capacity.

  

Ben Buckler Ben Buckler is an Investment Specialist in Baillie Gifford’s emerging markets equity team. He joined the firm in 2001 as an Investment Manager, moved to China in 2008, and spent six years as Executive Director of Asian Equities at UBS in Hong Kong. Since his return in 2018, he has focused on client relations for Baillie Gifford’s emerging markets team. He holds a Master’s degree in Geography and an MBA (Oxford).

  

James Cook James Cook is Head of Investment Directors & Specialists at Federated Hermes. In this role, he leads the team of investment specialists supporting equity, fixed income and multi-asset products, and also serves as Investment Director for emerging markets strategies. Previously, he was Product Director for emerging markets equities at Fidelity Worldwide Investments. He studied Economics at Royal Holloway, University of London.

  

Wim-Hein Pals Wim-Hein Pals is head of the Robeco Emerging Markets Equity team, which he co-founded in 1994. He is Lead Portfolio Manager of the Global Emerging Markets Core strategy. Previously, he was Portfolio Manager for Emerging European and African equities and Portfolio Manager for Emerging Asian equities. Pals began his career in the investment industry at Robeco in 1990.

 

René van der Zeeuw René van der Zeeuw is an independent board and investment adviser to pension funds and asset managers. He began his career in 1988 at Robeco and co-founded the emerging markets team in 1994. From 2008 to 2023, he worked at APG Asset Management, where he built up the emerging markets equities team and was later responsible for Global Fundamental Equities. From 2015 to 2020, he served as a director of the APG staff pension fund.

 

Read the full article in Financial Investigator magazine