Q2 was a strong quarter for emerging market equities, but the headline return hides a more interesting story: this was not a broad, indiscriminate rally. Leadership was highly selective, with investors rewarding markets and companies exposed to visible earnings momentum, AI infrastructure, semiconductor supply chains and domestic financial strength.
The quarter began with a genuine macro shock. The Gulf disruption pushed energy prices higher and created pressure across freight, insurance and supply chains. For emerging markets, the impact was uneven. Energy importers such as India faced pressure through inflation, currency weakness and reduced policy flexibility, while the broader market looked through the shock as global growth proved more resilient than feared.
By quarter-end, the key macro message was clear: the global cycle is being led less by consumers and more by corporate capital expenditure. The AI investment cycle, data-centre buildout and broader technology infrastructure spending became the dominant drivers of market leadership. That mattered greatly for emerging markets, because much of the physical AI supply chain sits in Asia.
North Asia was the standout region. Taiwan and South Korea delivered exceptional returns as investors recognised that the AI boom is not only a US software story, but also a semiconductor, memory and hardware story. Demand for advanced chips, high-bandwidth memory and data-centre capacity drove strong earnings expectations and a sharp re-rating across parts of the technology supply chain.
China remained more complicated. Policy support was visible, but it did not translate into a broad recovery in domestic demand. Consumption stayed subdued, property remained a drag and confidence was fragile. China was therefore investable only on a selective basis, with the better opportunities concentrated in specific policy-supported areas and globally competitive companies rather than the market as a whole.
India’s long-term structural case remained intact, but Q2 was a reminder that valuation and macro sensitivity still matter. Higher oil prices, a weaker rupee and inflation pressure created near-term headwinds, particularly given that Indian equities had already been pricing in a great deal of optimism. The opportunity remains attractive, but the market became more demanding.
The sector pattern reinforced the same message. Technology led, driven by real earnings momentum from AI infrastructure rather than speculative growth. Banks also performed well, reflecting resilient domestic cycles and healthy nominal growth in several markets. Industrials benefited from the physical investment behind the AI and infrastructure cycle. By contrast, Energy and Materials were less compelling as the geopolitical premium faded and China failed to deliver a strong commodity-demand impulse.
Overall, Q2 was a constructive quarter for emerging market equities, but not a simple one. The asset class performed well because the right parts of EM performed extremely well. The key lesson was dispersion. Investors were no longer buying emerging markets as one broad risk basket; they were differentiating sharply between countries, sectors and companies. That is a favourable backdrop for active management, where stock selection, country allocation and valuation discipline can add meaningful value.
Performance Attribution — Q2 2026
Against this backdrop, the Fund delivered a very strong absolute return in Q2, rising 21.4%. The shape of performance closely mirrored the market environment described above: this was a quarter in which the right exposure to North Asia, technology hardware and AI infrastructure mattered enormously, while weaker domestic consumer exposure in China and Brazil acted as the main drag.
The largest contribution came from South Korea, where the portfolio’s technology holdings captured the powerful re-rating of the memory and semiconductor supply chain. SK Hynix was the standout contributor, benefiting from the market’s growing recognition that high-bandwidth memory is one of the most important bottlenecks in the AI infrastructure buildout. Several of our Korean industrial holdings also contributed positively, particularly those exposed to electrical equipment, power infrastructure, defence and shipbuilding. This was a good example of the Fund’s broader investment approach: the opportunity was not only in the obvious semiconductor winners, but also in the industrial companies supplying the physical infrastructure behind the cycle.
Taiwan was almost equally important to performance. Taiwan Semiconductor was a major contributor, but the strength went well beyond one company. Holdings across the broader Taiwanese technology ecosystem — including printed circuit boards, connectors, thermal management, testing equipment and server-related supply chains — performed strongly. This reinforced one of the key themes of the quarter: the AI cycle is not just about software or US mega-cap technology companies. It is a global hardware and infrastructure cycle, and Taiwan remains central to that ecosystem.
India also contributed positively, despite a more mixed macro backdrop. The strongest returns came from financials, healthcare, consumer staples and industrials. Indian banks and financial companies benefited from resilient domestic growth and healthy credit conditions, while selected consumer and healthcare holdings performed well. The contribution from India was encouraging because it was broad-based and stock-specific rather than dependent on a single macro call. Even in a quarter where higher oil prices and currency pressure created headwinds for the market, our holdings generally proved resilient.
The main detractors were China and Brazil. In China, the weakness was concentrated in consumer-related holdings, where confidence remained fragile and the hoped-for improvement in domestic demand failed to materialise. Guoquan Food was the largest individual detractor, while 361 Degrees, Guming, Tencent and selected auto and materials holdings also weighed on returns. The lesson from China in Q2 was clear: policy support may be enough to stabilise parts of the economy, but it is not yet enough to create a broad recovery in consumer confidence. We continue to find interesting companies in China, but the market requires selectivity and patience.
Brazil also detracted, primarily through consumer discretionary holdings. Magazine Luiza, Cosan and Cogna were the largest negative contributors, reflecting continued pressure on rate-sensitive domestic consumer businesses. Localiza and selected consumer staples holdings also weighed on returns. Brazil remains a market with significant long-term opportunity, but Q2 was a reminder that domestic cyclicals can be vulnerable when investors demand greater evidence of earnings recovery.
At the sector level, Information Technology was by far the dominant driver of performance. This was not simply a valuation-led rally; it reflected real earnings momentum and a powerful upgrade cycle across semiconductors, memory, equipment and AI-related hardware. Industrials and Financials also contributed positively, providing useful breadth beyond technology. The main sector drags were Consumer Discretionary and Consumer Staples, particularly in China and Brazil, where domestic demand remained weaker than expected.
We do not expect every quarter to be as strong as Q2, and after such sharp moves we remain alert to valuation and positioning risk. However, the underlying message from the quarter was encouraging. Emerging markets are offering genuine structural growth opportunities, but they are not evenly distributed. Our focus remains on finding the companies with the strongest earnings momentum, the clearest competitive advantages and the best long-term reinvestment opportunities, while avoiding areas where macro hope is doing too much of the work.
