East Capital Global Emerging Markets Sustainable

2024 was a strong year for our Global Emerging Markets Sustainable fund, which closed up 12.6%, 4.8% above the benchmark. Absolute performance was driven by Taiwan, India and China, while alpha was generated across most countries, with India being the largest contributor. The fund has generated 27% alpha since inception in January 2019, which we are immensely proud of, and believe is a testament to our ability to deliver value to our unitholders throughout the various emerging markets cycles. In the fourth quarter, the fund returned -7.8%, in line with the benchmark.

We have long argued that it’s an oversimplification to think of emerging markets as a single asset class. This is clearly illustrated by the 2024 returns (Figure 1) which show that they are a group of inherently diverse markets at different points in their cycles, with distinct market drivers. This naturally requires a slightly differentiated investment approach for each market, something we are increasingly focused on. For example, what works in India is unlikely to work in Brazil or China.

In 2024, Taiwan was clearly the standout performer, returning 35% as investors piled into the AI theme. The largest name in the benchmark, and in our fund, TSMC, reached a market capitalisation of USD 1 trillion in Q4 2024, returning 74% to our Global Emerging Markets fund during the year. This performance was largely driven by earnings revisions, as the highly sophisticated AI chips they make for Nvidia offer significantly higher margins, which is why the company consistently raised its margin guidance throughout the year. Q3 revenues were up 36% year-on-year, but profits were up 54% as a result of this margin increase.

The Chinese market ended the year up 19.7%, outperforming developed markets, which may come as a surprise to most people. We have commented extensively on China throughout the year, for example in this detailed piece. In general, we are seeing some improvement in the country. The government clearly understands how bad the situation is and has acted forcefully to address the key issues. At the very least, their actions show that they are not prepared to let things get much worse, which puts a floor under the stock market. Going forward, we believe the government will do what is necessary, but in incremental, small steps that will take time. While this may disappoint some of the more vocal Western investors, we expect China will exit 2025 in a much better position than it started, which should be supportive for markets, especially given the country's highly attractive valuations—assuming the situation does not deteriorate further.

As noted above, our largest alpha generator over the year was India, where our holdings returned 41%, compared with 11% for the benchmark's Indian holdings. We note that, given our broadly country neutral approach, this alpha was purely stock selection rather than a "bet" on India.  

India is in many ways a classic emerging market, benefiting from strong structural growth but also from a thriving local investor base. Indeed, the country is so large and dynamic that there are over 1,000 companies with a market capitalisation of over USD 5 billion. Even after the strong market performance, we are still finding very attractive new companies with strong growth that are trading at reasonable valuations.

Another major alpha contributor for us has been the global electrification theme. While we are not the only ones discussing this, we looked along the value chain for names where the upside from this theme has not been priced in. Such names include Korean transformer exporter Hyundai Electric, which returned 240% in 2024, and the "Siemens of emerging markets" WEG, a Brazilian company that outperformed the Brazilian index by 45%. The latter is particularly interesting as it has benefited from Brazil's weaker currency as it exports its products globally, providing a soft hedge against the country's weakening currency.

In line with our dynamic portfolio management style, turnover remained relatively high during the year at around 60%. We believe this is the approach needed in emerging markets to take advantage of the rapid changes in the micro, macro, political and geopolitical environments. One of our biggest trades was to increase beta in China by rotating into some of the more widely held technology companies, which helped us generate alpha during the strong Chinese market rally in September. We have since reduced these names as we believe the outlook is more nuanced.  

We encourage you to read our 2025 Outlook for a detailed view of our expectations for the year ahead. In short, we believe that many of the widely discussed issues have already been priced in and are reflected in the current valuations. For example, everyone knows that China is at risk of tariffs and that the economy is not doing very well. As a result, markets like China and Brazil look very cheap on a historical basis, while markets like India and Taiwan are more expensive. Overall, however, this means that emerging markets are trading at historical levels (Figure 2), while the US looks incredibly expensive. This makes emerging markets a compelling consideration, particularly for diversification away from the US, as other regions—such as Europe—face potential struggles. Emerging market earnings growth is projected to be 14% in 2025, and we see this as a reasonable estimate of returns for the year, although there are clearly many developments throughout the year that will push this up or down. 

East Capital Global Emerging Markets Sustainable is an Article 9 fund under the EU Sustainable Finance Disclosure Regulation (SFDR) which means that we are explicitly looking to invest in companies that have a positive impact on the world around them in addition to outperforming the market.

The key proprietary tool developed to assess this has been highlighted on various occasions by the PRI - UN Principles for Responsible Investment. The implications of this approach are that the fund:

• Doesn’t invest in fossil fuel companies and most mining companies
• Has a strong quality bias
• Aims to identify the future “ESG darlings” of the market before the ratings agencies and international banks 

You can find key documents explaining the sustainability process and outcomes in the "Sustainability" section.