East Capital Global Emerging Markets Sustainable

Q1 2026 was very much a quarter of two halves for emerging markets. Overall, they finished flat, outperforming the S&P 500 by 4%. Despite the volatility, we were pleased to finish the period with positive alpha of 0,3%. This was largely driven by the strong performance of our AI-related names in Taiwan and South Korea, particularly in January and February.

We saw classic bull market conditions in January and February, with emerging markets up 15% as investors continued to rotate out of the US amid concerns over a weaker USD, as well as stretched valuations and positioning in the Magnificent Seven. In Asia, rising chip prices highlighted the dominant competitive position of chip makers, driving huge earnings revisions and inflows into Taiwan and South Korea. Retail investors amplified these moves, particularly in Korea.

However, this momentum was disrupted by the conflict in the Middle East. Initially, investors unwound their most profitable trades, including those in Korea. As the conflict persisted, the focus shifted towards the risk of higher-for-longer commodity prices, with the price of oil up 75% in March alone. This raised concerns about higher inflation, interest rates and weaker global growth, something that can clearly be seen in the significant shift in the Fed’s rate expectations.

Clearly, such spikes in oil and gas prices do not bode well for emerging markets, most of which are major importers of commodities. Many governments have introduced temporary measures, such as cutting fuel taxes (as in Korea) and freezing electricity prices (as in Taiwan). However, these measures are only short term and it is difficult to meaningfully cushion economies over the long term. As such, the key hope is that the conflict in the Middle East will end and the Strait of Hormuz will reopen as soon as possible, at least for major buyers such as China and India.

Our main trades, and a key focus of our discussions during the quarter, involved taking profits in the memory sector. This was a highly profitable trade for us and a major driver of alpha over the past year. For example, our average selling price for SK Hynix during the quarter implies a 3.4x return compared with when we began building the position in July.

Looking ahead, we believe the risk-reward profile is becoming more balanced, given that the pace of memory price increases is slowing and prices are even declining in certain categories. As a result, we have reduced our exposure and moved towards a more neutral position, while retaining some exposure, as we still anticipate further growth given the reasonable valuations. During the quarter, we sold a combined total of 7.6% of our holdings in both SK Hynix and its direct parent company, SK Square. This was partly offset by building a position in Samsung Electronics. Including Nanya, a Taiwanese memory company, which we sold at a 100% return since adding the position to our portfolio in October, we reduced our net exposure to memory names by 5.2% during the quarter.

Our alpha did not just come from the large-cap memory names. We spent a considerable amount of time analysing the AI value chain in order to identify the weakest parts of the supply chain. Many of these opportunities were found in Taiwan, including Elite Material, a manufacturer of high-end copper clad laminates and prepregs. These materials are among the most in-demand inputs for advanced printed circuit boards used in AI servers, data centres and other high-performance electronics. The shares delivered a 37% return in Q1, supported by exceptional year-on-year earnings growth of 50% year on year in 2025 and guidance of 70% for 2026, which is well ahead of consensus expectations.

We also generated solid alpha outside the technology space in markets such as Greece and South Africa, driven by strong single-stock selection. In Greece, our holdings returned 17%, compared with a loss of 7% for benchmark constituents. This performance was led by the off-benchmark cable manufacturer Cenergy, which returned 23% following its record results in 2025. Earnings were up 39% year on year, and there was a 200 bps margin expansion, supported by a very strong order pipeline, as global grid investment accelerates.

Amid the March turmoil, we remained disciplined. We immediately reviewed each holding to assess whether its underlying value had changed. To date, we believe that were only a handful of companies where this was the case, primarily in the Middle East. Consequently, we exited several positions in the region, such as a UAE real estate company and a bank. Somewhat surprisingly, we sold the bank with a positive return year to date, and the real estate company with a positive return over the last six months. Both companies are still trading comfortably below our sell price. We also added a bank in Saudi Arabia, as the country is a beneficiary of the higher oil prices and the valuation had come down following the outbreak of the conflict.  

As usual, Q1 was a busy period for travel, with the whole team meeting in Shanghai for a week of detailed portfolio discussions alongside various company and broker meetings. One of the most interesting meetings was with Hesai, one of the two leading LiDAR manufacturers. LiDAR technology is used to improve vehicle safety, particularly that of autonomous vehicles, as well as for a wide range of robotic applications.

As LiDAR prices continue to decline, demand is booming. The company expects to sell 3.0-3.5 million units in 2026, up from 1.5 million in 2025. This growth is driven by major contracts in the automotive sector and strong expansion in the robotics market, which offers higher margins.

Hesai is a prime example of a key investment theme for us in China, namely, investing in exporters of cutting-edge technology rather than companies exposed to the consumer market. Exports remain a bright spot for the Chinese economy, as reflected in recent data, with exports rising by 22% year on year in January and February 2026, driven by these types of high-technology products.

Clearly, going forward, a lot will depend on the outcome of the extremely difficult to predict Middle Eastern conflict. If Trump can extricate the US from the conflict smoothly and Iran opens the Strait of Hormuz to most countries, we would expect the positive sentiment seen in January and February to continue, provided that commodity prices normalise. However, until this happens, we expect the market to continue trading based on headlines coming out of the US and Trump’s Truth Social account.

It is worth noting that the broader narrative for emerging markets remains intact. AI data centre capital expenditure and second-quarter 2026 chip orders continue to exceed expectations, which should drive strong earnings growth in two of the three largest markets, Taiwan and South Korea. The other largest market, China, appears relatively insulated from the crisis. This is supported by extremely low inflation and a lower reliance on imported fossil fuels compared with other Asian countries, although export data remains exceptionally strong. Headwinds persist in India, exacerbated by high commodity prices. This is the only large market where we remain more cautious and have kept our positioning relatively conservative.

The fund is trading at a P/E ratio of 10.0x based on 2027 forecasts, compared with 10.4x for the benchmark. Forecasts indicate earnings growth of approximately 20.4% for 2027, compared with 14.8% for the benchmark.

Performance in USD net of fees.

The information in this document should not be considered investment advice and should not be used as the sole basis for an investment decision. Please read the Prospectus and the KID, which are available on the fund page. This publication is not directed at you if we are prohibited by any law in any jurisdiction from making this information available to you and is not intended for any use that would be contrary to local laws or regulations. Every effort has been made to ensure the accuracy of the information, but it may be based on unaudited or unverified figures or sources.

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.