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Erika van der Merwe (EM): Global markets are reeling from unpredictable US policy shifts, from tariff wars to geopolitical moves, all of which has left emerging market equity investors on edge.
Welcome to a new episode of the Robeco Podcast.

EM: Positioning portfolios for 2025 and beyond demands a clear grasp of regional, country and sector dynamics, and that’s no small feat given the sheer complexity of these markets. My guests grapple with these issues every day. Wim-Hein Pals leads Robeco’s Emerging market equities team and Joshua Crabb heads Asia Pacific Equities at Robeco. Welcome both.

Both: Thank you very much. Good morning.

EM: Well Josh is joining us from Hong Kong. Wim-Hein is here in our Rotterdam studio. Now the emerging market equity index is up nicely so far in 2025, outpacing many of the global indices. Is this mostly a China story? Josh I'll start with you. With the AI-related news, tech related developments out of China driving that overall moment in emerging markets, or is there a broader story at play here?

Joshua Crabb (JC): I think there's a broader story at play. I think, you know, emerging markets and particularly Asia have been delivering solid, normal returns over the last sort of last year. And the people that has been eclipsed by people being focused on the US and particularly the Magnificent Seven. Now, this year, we've seen that not being quite as attractive for various reasons, and we've seen that start to underperform, not just for the usual one month of reversal in January, but accelerating into March. It's actually been Europe that has been the sort of, I guess, standout market of the major ones, which is one of the ones that people were not speaking about at all.

And I think this comes into question when you have north of three quarters of the world tied up in US equities, which have been performing well, and now looking that perhaps there are other things to invest in. Asia has a plethora of very, very cheap assets, that people will come back to sort of have a look at. And, you know, we think people will start to reassess their asset allocation decisions. But I think that is really because of the US reaching almost peak multiples. And if you take away the multiple expansion story and you're left with earnings growth and dividends, then there may be more attractive opportunities. And we think Asia Pacific is a great path for that.

EM: Wim-Hein, feel free to elaborate on that. But I'd like to ask you and then Josh, looking at the emerging market landscape right now, what, in your opinion, is the one big either risk or one big opportunity that's really focused in your mind?

Wim-Hein Pals (WHP): Well, you have one big risk. And that is coming from Washington, right. Trump 2.0 is perhaps the biggest risk to emerging markets equities But that's not a new phenomenon. And we have anticipated Trump 2.0 since his early election and the end of last year. And since then, he has been relatively mild to China, which was the first victim, in our opinion, and in most investors opinion that he was going to hit China hard. Well, it's reasonably mild in that regard. And that is also behind the rally in China after it sold off in 2024.

And with this headwind being less harsh than anticipated, and we get more and more tailwinds – cautious tailwinds – blowing mildly in the financial markets, we have a reasonable constructive view on emerging markets without being all too bullish. That is a bit overdone. One of the tailwinds is – obviously the biggest tailwind is valuation. That's not a new one. And I won't bore you with that. But the other, the additional tailwinds are earnings growth in emerging markets which, that did beat last year the earnings growth in developed markets, with 20-odd, 23%, 24% earnings growth against 15% for developed markets. So that's a reasonable gap in favor of emerging.

This year again emerging markets earnings is superior over developed market earnings. And also the US is going a bit less ‘Hosanna’ as it did in in ’23, ’24 – ‘26 as well by the way, but we have to take that with a [grain] of salt.

So that is the earnings tailwind. And then also the dollar has been reasonably weak. And I spoke to a number of clients and potential client prospects, and they were worried earlier on and so far this year about the strength of the US dollar. I've never been a believer of a strong US dollar, but it has been strong last year because of this Magnificent Seven absorbing so many fun flows toward the United States, and that the dollar was strong and a safe haven in in the uncertain world. That is now sort of ruining – Trump is ruining the party from a dollar perspective as well as he seems to shoot himself and the US economy in the foot. And the dollar taking is going with that South. It's not a huge depreciation, but it's going really, weaker and weaker. And that's good. And that correlation has always been there. It's good for EM – a weak dollar [is] good for EM. And that still counts. So that's another significant tailwind.

EM: Josh, multiple themes covered there by Wim-Hein. So what to you is the one element that you focused on or you're hearing from your clients, for example.

JC: On the risks.

EM: On the risks and possibly the opportunities.

JC: Well, for me, I think the biggest risk is relatively simple. It's that the US goes into some form of a recession, we have an earnings collapse and it's super high valuations. The US market comes down dramatically, in which case other equity markets are likely to come down as well. However, given that they're nowhere near as highly valued, they should come down less. And in the resulting stimulus that happens, at the end of that, via fiscal and monetary purposes, we're likely to see a strong performance out of emerging markets, which will have the cyclical benefit. That, to me, is probably the single biggest risk, outside of the extreme geopolitical, you know, obvious ones that we all hope don't happen.

EM: Yeah.

JC: In terms of opportunities, so for me, again, it's like there are two things that really happen from here. If we see the US economy continues to be reasonable, but there's no more opportunity for rerating, then people will start to look for other opportunities where those reratings could exist. People have been a bit caught out in Europe so far this year. People have been a bit caught out on China, but there are many more opportunities. I could talk about the opportunities in Japan and Korea. Some of it doesn't require strong markets. It has corporate governance reform. It has restructuring. Those are benefits that are coming through. We can look to Southeast Asia: very, very cheap, 680 million people, phenomenal growth prospects over the very, very long term.

Another great opportunity: India, which if you had asked me six months ago, I would have had my concerns, not about the markets, not about the long-term structural issues, but about the valuation. It had got up to around a 95% premium to emerging markets, when it had been in a range of 0 to 80. Historically, we're now seeing that come back off again. So that again is offering another opportunity.

So there's lots of opportunities. I'm not going to say if we see a massive US selloff that Asian equities are going to go up because that will not happen. And in which case, you're probably better off buying your five-year US treasuries at 5% yield. However, at the end of that process, or in the event that the US economy continues to be good, people will look for where other opportunities are. And so far this year, that's exactly what we have seen. We have seen cheap assets with good fundamentals be rerated.

EM: Picking up on one of those aspects of the geopolitics. Now in recent weeks I think even days the geopolitics around Europe, it's really sort of shifted tack there. And with Europe now seemingly planning to ramp up on its defense spending, how does that affect the European component of the emerging market index Wim-Hein?

WHP: Yeah, that's a very topical question. And it's exactly where we've added over the last couple of months to emerging Europe. We're now overweight Poland, Hungary, and we maintain our overweight in Greece. And we've added to Turkey. So all these countries do look very good on the basis of a stronger EU. And [the] EU is strengthening and accelerating, by the German investments in their economy, right, to get the defense apparatus –

EM: You see it as a net positive?

WHP: Yeah. All these, these billions of dollars are needed to push up and to get our defense system at a reasonable level. It's not a couple of billion, that's tens of billions of dollars in the next couple of years. And it's not only Germany. It's you see the – or you hear the noises in Holland [the Netherlands] as well. In the Dutch political environment, 3.5% of GDP is some of the noises you heard yesterday, as a minimum requirement. Well, in that sense, we are definitely going to invest a lot more in our EU economies. And that's net-net positive for the whole EU GDP growth. It's typically good investments as well, believe it or not. That sounds counterintuitive, but it's mostly in technology, defense technology. So it's also good for investment.

EM: Growth generating investments.

WHP: Yeah. So that is filtering through to the periphery of the EU, i.e. Poland, Hungary, Greece and Turkey.

EM: They're talking about those good investments. Josh, your terrain within Asia. This has really been one of the key driving themes in the Asian emerging market world around technology, whether it's AI, whether it's electric vehicles, semiconductors, etc., so much excitement. Is there a risk of that being hype or will that just continue to be a fundamental driver?

JC: Well, all of the above. So again, this where being focused on stock selection and looking at the real fundamentals and what's reflected in the valuation is what matters. So, you know, defense is an interesting one. It's not just about Europe. It's about this part of the world. It's about everyone that hasn't been spending north of 3% of GDP. There are fantastic opportunities we've seen in Japan and Korea, direct manufacturers, not just manufacturers for their own countries, but also as significant low-cost exporters. When we look at things like technology, there are some very overpriced technology assets.

But as we've seen recently with some of the – again, I assume we're not really supposed to go into names here – but as we've seen with some of the cloud providers in China, they were trading at single digit multiples. They were doing 5% buyback some of them, phenomenal cash flows. And these things have been massively rerated. Now again, whilst everyone was focused on maybe say, you know, GPU manufacturers in the US, and then there was a concern that maybe there was some competition coming out of China.

But the real opportunity was thinking about when people now have the access to the likes of ChatGPT or whatever else in China, which they haven't had before, what is that going to do? And that drove a huge amount of excitement and drove a huge amount of – the need to have cloud-based backups, cloud-based computing in order to take advantage of this. And here you had these stocks trading on a single digit multiple because people were ignoring it. Not overhyped at all. If anything, they were hugely underhyped.

EM: Forgotten.

JC: And as we saw these developments happen, you had a fantastic opportunity to generate alpha.

EM: Another theme, Wim-Hein, I've heard your team speak about this a lot, but equally, you Josh, you referred to improving governance in some of the Asian markets, Korea's value add program being an example on the tails of Japan having done similar program. To what extent do you see that as being a real driver of the earnings growth, for example, Wim-Hein, that you refer to?

WHP: Yeah, Korea is a typical example where you see this accelerating earnings coming through as a result of more value up programs among the corporates. And one by one they're coming up with their value up agenda, which makes a lot of sense from a return-enhancing perspective. Return on equity should go up.

EM: But it's been a bit disappointing right? I mean it's taken a while.

WHP: Yeah, it has been. The companies have been very slow to adopt to this value up program, corporate value up initiated by the Korea Stock Exchange and the government. So that's rather new phenomena for the Korean society and the Korean executives in the corporate. So they have to do their part. And slowly, slowly they're coming through.

And now you have the season of all these shareholder – how do you call it? – shareholder events. The annual meetings with these topics on the agenda as well. So they are unfolding their programs and their measures. They're going to take over the next couple of years and quarters to enhance the return on equity, to come back, to come up with share buyback programs, canceling these shares to increase dividend payments to their shareholders.

So it's a national phenomenon which is [taking] hold of the whole society and all the corporates involved. Some have a much more ambitious agenda than others. And that's up to us to find alpha in the most attractive companies – also from a value-up perspective.

EM: To what extent do you think this will – I can ask this of both of you – will this sort of spread out to other emerging market investors? Because, again, I hear both your teams talking about improving fundamentals, improving governance in emerging markets more generally. So could this structurally be a phenomenon that investors could benefit from? Josh.

JC: Yes. For me, absolutely. You know, this something that it doesn't happen overnight. You know, Japan had a bubble 30 years ago. It got to very cheap valuations 8 to 10 years ago. But then it required a catalyst. And there's been a lot of reasons why that's been coming. Aging populations, changing management, changing shareholders. So it was always going to happen as these pressures built.

And then it happened slowly. And in Korea they have a few other hurdles. We had a very – we were one of the members of the team over here is very heavily involved with the Asian Corporate Governance Association. And we had an interesting meeting there with a Korean activist investor recently. And there are a lot of – I won't go into detail – but there are a lot of issues that make it a little bit harder in Korea.

And I'll go back to earlier question. I think why Korea is being disappointing was actually not really to do with this. It was because we had a martial law come into practice at the end of last year, and I was actually in Seoul at the time. I was at dinner and I came out and you sort of saw that little alert on the phone. I was like, “oh, okay, might be a bit hard to get out of the airport. The North Koreans have done something.” And then there were planes flying overhead, helicopters. There were APCs on the street. And you thought, “okay, this a bit more serious.”

EM: Oh my word.

WHP: But that was a couple of days event and then it was ended.

JC: And it wasn't even that. It wasn't even that. But the key to me on this really important. So when we think about what's the problem that we have as investors in Korea, it's that they've been overinvesting. It's that they're not really paying attention to the cost of capital, it’s that they're not treating shareholders in the most optimum way.

And the more that this uncertainty comes, the more the motivation is to self-help, right? It's not about growing. It's not about new opportunities. It's about just running your business well, focusing on capital efficiency, returning money to shareholders that you should do. And the valuations are so cheap. It doesn't require a good surging stock market. It doesn't require any of these sort of benefits coming through. And I think that uncertainty will come through.

Again, I know we shouldn't talk about names, but here's a very interesting fact: when you think about all the big chaebols and all the powerful families in Korea, the new person who's the wealthiest one would come from a company that if I told you, you wouldn't even know the name. And you know what? He's embraced. He has embraced the value up. He's pushed this to the limit, and he has become the wealthiest man in Korea.

Now people take notice of these things. They take notice of share prices doing well. They take notice of wealth. And over time that builds, particularly when you have a system that is starting to embrace it. Remember, Korea has an aging population. It has a lot of people that have been putting money into this, and now they need to take it out. They're going to start caring about these returns. It won't happen in a straight line. It won't happen overnight, but it will happen.

And so getting back to your original question, will that happen in other places? Look, it should happen at some, but not in others. We talked about India and Southeast Asia. These are in investment stages. They should be taking money, reinvesting and getting high returns on their marginal capital deployed. But if we look at some of the Northeast Asian countries where you potentially have declining populations, the focus should be a lot more on optimizing capital and investing selectively, where the return on invested or the marginal return on invested capital is high. So we hope that this, does spread further and further.

EM: Mhm.

WHP: Yeah. And you do see more and more dividends coming from Chinese corporates these days. And relative to the recent past, they are definitely increasing their dividend and their payout ratio to minority shareholders.
EM: But also with incentive from the government.

WHP: Also within the SOEs, the state-owned enterprises also deliver higher dividends to their shareholders, which the government is one of their shareholders, obviously. But overseas shareholders are also getting more and more dividends from both public and private Chinese enterprises.

Slowly, slowly. It's a slow process. As Josh mentioned, it's not going to change overnight, but it's definitely a structural phenomenon, and the structural trend in Asia and broader as well in the EM.
EM: You both have a super tough job. There are multiple moving parts here, within countries within sectors, within regions. And then sort of the broader picture, it's really tough to predict what's going to happen next week, never mind, you know, six months from here. So let's get down to portfolio positioning. Is it a matter of hedging one's bets and being as diversified as possible, or can you afford to really kind of select some themes or regions that could work best for you? Josh.

JC: This comes back to the fundamental question of investing. What is your edge? And the more granular you get, the better the opportunity for an edge you have, right? Do I know what Donald Trump is going to say tomorrow? Probably not. Do I know better than anyone else? Definitely not. So what we try to do is, ironically, not think about what's going to happen tomorrow and not what's going to happen next week. We try to think about where the fundamental value sits, what's reflected.

Again, using the example, just because we've seen the moves in it recently in China, what could we observe at the end of last year, there were companies that were sitting at ten-year lows on valuations. There were companies that people used to want to play 20, 30, 40, 50-times earnings for that they would now would not even pay a single digit multiple for. They have good cash flow generation. Where they can they're doing the right things, buying back stocks.

What this means is that when anything turns positive, you will see a rerating. And I think investors are very focused on the rear view mirror. Unfortunately, everyone can tell you exactly what has happened and that's why we are where we are. But in investing, Delta is key. What's going to happen or what is not being priced in what's going to happen.

And that's where we try to spend our time focusing. And what's interesting about that is when I look at Asia today, I see a lot of very cheap assets with very different drivers. We talked about India, we talked about Southeast Asia, very different to what we see in Korea, to what we see in Japan, arguably we could even throw in the likes of Australia in there with the mining sort of side of things. So there are a lot of opportunities. So I would go back to the point, be diversified, be deliberate, be granular about what you're trying to achieve.

WHP: Yeah. And it all boils down to value with the future. That's our style in the emerging markets. We look at value opportunities but not deep value for the sake of being cheap. We look at value stocks, attractively valued companies with earnings potential. And that is – in the long run – countries and companies that are undervalued will rerate and particularly the ones with earnings potential. And that is the strength of the strategy and the adage ‘value with a future’. And that boils down to – and that translates into alpha not in every year, but in the long run, value strategy plays out from an alpha perspective.

EM: And then final remarks. Yes. Not paying out in every year. So pointing to the fact that there remains much volatility, much risk in emerging markets, despite what you're saying about improving fundamentals and governance, etc. So a final remarks on this point. Wim-Hein, how do you how do you get through those volatile times? How do you position and structure the portfolio accordingly? And what mindset do you need.

WHP: Yeah, you need to take risks. And the lowest risk environment is in countries and in companies that are extremely low valued, with a strong capability of executing on their business strategy. And that's what we are here for. We continuously challenge management teams when we meet them in Rotterdam, in the field, and ask them “what is your strategy going forward and is it going to change anytime soon, and if yes, where and why.”

So that is the key to your fundamental analysis on a company basis. And from a risk element, I need to say this because the risk in terms of volatility in emerging markets is now more or less the same as the volatility in developed markets. And the perception is EM is risky, much more riskier than, developed markets. That absolutely has been the case. But that is converged. And now the volatility is exactly in line of EM and DM. So that's an interesting phenomenon. And we can talk about it in another podcast in the future.

EM: Indeed. Josh, final words from you on this point, just generally touching on the outlook or your mindset from your vantage in Hong Kong.

JC: Look, I think the starting point is what is what you're trying to achieve. Everyone comes from a different starting point. Understand the risk tolerance. You have the asset classes that are available and what you get paid to wait. The benefit we have today is you are actually paid to wait quite a lot. So as an equity investor, I'm going to show that I'm not too biased and say that, you know, 5% is not a bad place to sit and wait.

But then if we take a step forward and think about what plays out from here. So the two things to deal with uncertainty. One margin of safety. And that's not – part of that's around valuations. Part of it's about understanding things risks, whether they're politics or whatever else, and understanding the range of outcomes that can occur around this and building enough safety around that in the way that you sort of look at things.

So, you know, from my perspective, I think that it is a very uncertain world that we live in. It is always good to keep a little bit in reserve in times like that and look for where there are things that you have high conviction in. And for us, again, there is an element of bias here. I think that having a diverse range of growth opportunities in the likes of Southeast Asia and in India, having some great, relatively macro benign events like corporate governance change, wage growth that's happening in places like Japan, corporate governance change in places like Korea, and maybe even a little sprinkling of some sort of commodity, insurance in a market like Australia is a good place to be.
That's how I would deal with it. And again, just be open minded to all of the outcomes. I talked earlier about the rear view mirror. The best thing about the rear view mirror is using that as a framing for how things could play out in the future. But as I said, Asia is not quite as close, but is pretty close to it. And the US equity markets are pretty close to their highs. And that's an interesting frame. Last time it was like this, there was phenomenal outperformance from Asia over a ten-year view.

EM: Josh and Wim-Hein, great, great perspectives. Thanks for your time.

Both: Thank you. Thanks very much, Erika.

EM: And to listeners, thank you for being here with us. We publish a new episode every month covering a range of investment related topics. This podcast and Robeco’s Markets podcast, In Tune With The Markets, are available on all major podcast platforms and on the Robeco website. If you subscribe, you’ll receive a notification as soon as the new episode is published. Now, in the meantime, please rate the show and share the show link with a friend. Until next time.

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