Fidelity Emerging Markets Limited (LON:FEML) portfolio managers Nick Price and Chris Tennant share their outlook for 2025 and provide an insight into how they are looking to position the portfolio against an evolving macroeconomic backdrop.
What is your outlook for emerging markets?
We continue to see broad balance sheet strength among emerging markets (EM) companies. Many central banks in emerging markets were ahead of the curve in acting decisively to raise rates and bring inflation under control, meaning they could cut interest rates well ahead of the Fed. While the new US administration and the potential for higher inflationary pressures is a potential headwind, EMs in general have higher foreign-exchange reserves and less dollar-denominated debt today, making them better equipped for a what could be an environment of structurally higher rates and a stronger dollar. EMs also benefit from an improved fiscal backdrop, which stands in stark contrast to the UK and the US.
China is key to the outlook. This year the government has shifted from deleveraging the property market to looking to mark a bottom in property prices, with meaningful stimulus measures announced, and we think that any signs of stabilisation should support consumer confidence. However, excess capacity in industries like steel, cement, and solar will likely persist, while the potential for higher tariffs is also a consideration, making it vital to be incredibly selective when investing in China.
The EM universe is trading at multi-decade lows relative to DMs. Part of this is down to concerns about geopolitics. The US election result has both direct and indirect implications for EM equities; these are the types of events we continue to scrutinise incredibly carefully, drawing on the inputs of external experts and our own locally based research analysts to help us make sense of elevated unpredictability in markets.
How are you looking to position your portfolio against this backdrop?
The financials sector continues to offer up opportunities; here we make use of our comprehensive EM research team to traverse a broad investable universe and examine underexplored areas of the market. Areas of interest include fintechs, for example digital banks and payment apps that benefit from low operating costs and have fast expanding and engaged user bases that allows them to plug new verticals with no customer acquisition costs. We continue to have a favourable view of structural growth stories like Indian financials, including leading private sector banks, which trade on cheaper multiples than the broader Indian market but still provide exposure to the theme of expanding middle class wealth. Other areas of focus include value opportunities in central and eastern European markets such as Greece, where many high-quality banks trade on cheap multiples, with the market overlooking the fact that these banks have excellent asset quality and have started returning capital to shareholders.
Our focus in China is largely on the consumer-facing space and we see opportunities among internet names and premium sportswear companies that are returning capital to shareholders through buybacks. We also think that companies such as white goods businesses should be beneficiaries of an improving consumption backdrop as stimulus measures come through. We take a highly selective approach to China, however, and are avoiding areas of the market like banks, which are being used to reflate the property market. We are also wary of parts of the industrial complex suffering from overcapacity, and export-dependent businesses with inadequate supply chain diversification that could be vulnerable to any increase in tariffs.
We have a constructive view of technology hardware stocks. While US companies are typically thought of as AI beneficiaries, this ignores the fact that the bulk of the AI supply chain sits in Asia, including semiconductor foundries and producers of high bandwidth memory, which is used in AI chips. As a result, the EM universe offers exposure to the structural trend of growing demand for AI at much more attractive valuations.
Our outlook for commodities is mixed. The supply/demand environment for oil remains challenged as we see high levels of excess capacity among OPEC producers and weak demand from China. The backdrop for copper is more constructive: while the new US administration could have implications for clean energy investment, we continue to see electrification as a strong structural driver over the medium term, which is matched with a very muted outlook for more supply coming online over the next decade, all pointing to large forecast deficits and a constructive price environment in the years ahead.
