East Capital Global Emerging Markets Sustainable

Following a strong first half of the year, emerging markets took a bit of a breather in Q3, driven by a sharp sell-off in July as the AI capex theme underwent rapid deleveraging. The fund returned -4.4%, compared with -0.4% for the benchmark. The setback was concentrated in July, with performance stabilising thereafter and gradually regaining ground on both an absolute and relative basis. As such, only a small part of the strong alpha generated earlier in the year was given back. Year-to-date, total return stands at 31.5%, implying 7.9% of alpha versus the benchmark.

The quarter began with highly volatility, as the AI capex trade unwound rapidly, most visibly in Leopold Aschenbrenner's Situational Awareness fund, which lost about two-thirds of its public equity portfolio in July before being forced to sell most of it to Citadel at a discount. The impact was also felt in Asia, particularly in Korea, where single-stock leveraged ETFs had become increasingly popular among both domestic and other Asian investors. At one point, these ETFs accounted for over 20% of the trading volume of SK Hynix and Samsung Electronics, with AUM totalling over USD 50 billion. The Korean KOSPI index fell by 22% in July, marking its steepest monthly decline since the global financial crisis. Elsewhere in the region, margin lending also unwound, contributing to sharp falls in Chinese and Taiwanese tech stocks.

While such volatility is always unwelcome (not least because our investment team was meant to be on holiday), we were growing increasingly concerned about the rising leverage in the system. This was partly why we took profits and significantly reduced our exposure to the AI capex theme, as discussed in the previous newsletter. However, with much of that leverage now flushed out, the market structure looks healthier and volatility has fallen notably. It is also worth highlighting that Korean regulators have only recently stepped in to restrict retail investors’ access to these leveraged ETFs. In mid-July, they suspended new single-stock leveraged ETF listings and tripled the minimum cash deposit required to trade them from KRW 10 million to KRW 30 million, with only cash accepted as collateral. The minimum trading lot has risen from one unit to 20, and the mandatory investor training period has been extended from two to three hours.

Hence the market has now turned its focus to global macro themes, most notably the rapidly rising US Treasury yields, with the 10-year yield at its highest level for almost 20 years as we write, driven by rising oil prices, Fed tightening and concerns over fiscal discipline (or lack thereof) in the US. As the global “risk-free rate”, this is clearly an alarming development that, in theory, should put pressure on valuations worldwide.

We can explain market resilience, at least in EM, by two factors: (1) continuously strong earnings momentum and (2) falling EM yield spreads versus the US. At the start of the year, the market expected around 20% earnings growth for EM. Now, expected growth is 74%. This is consistent with our on-the-ground view: our tech analyst, Hao, constantly reports from company meetings on how bullish and excited AI value chain companies are, despite their share performance. For the time being, at least, it appears that hyperscaler capex is here to stay, despite higher yields.

Our trades this quarter have continued the de-risking process that we started in Q2. In Korea, our exposure to AI capex was already broadly equal weight (we were just 1.4% overweight in the memory names). However, in Taiwan, we increased our exposure to non-AI-capex, meaning that we are now slightly underweight in AI capex. We did this by adding one of the world’s largest gym equipment producers, in which we have previously invested, and by increasing our holding in a bank that is benefiting from the higher interest rate environment. In China, we reduced our exposure to tech-focused and industrial names in favour of lower-beta exposure, such as China Foods, one of the largest Coca-Cola bottlers in the country. The company is undergoing a strong efficiency drive and seeing strong growth in segments such as Qoo-branded juice, which grew by 40% year on year in H1 2026. In terms of valuation, net cash accounts for 65% of the market cap, and the stock trades at a steep discount of 1.1x EV/adjusted EBITDA compared to Coca-Cola bottling peers Coca-Cola Europacific Partners (CCEP) and Coca-Cola HBC (CCH), which both trade above 10x. We also took the opportunity to acquire some “fallen angels”, such as the leading Indian travel platform Make My Trip, which is down 50% in the last 12 months, despite its strong fundamentals dominant market share of 45% (twice that of the next biggest player). The company is listed in US though is planning to list its Indian subsidiary (95% of revenue) on the Indian stock exchange, which should increase liquidity and also improve the multiple. The stock currently trades at a 40% discount to locally listed players, given the wider investor base in India, particularly mutual funds and retail investors Alpha loss was primarily driven by the higher-beta tech stocks that we still owned, such as Yageo in Taiwan and Victory Giant in China. This was partly offset by our strong stock picks in other areas, such as Korean K-beauty ODM Cosmecca Korea, which has risen 108% since we added it in June, as investors looked past the AI names to other sectors with rapid structural growth. Cosmecca reported record second-quarter results, with operating profit up 39%, well ahead of consensus, driven by domestic indie brands expanding overseas and a surge in exports of K-derma skincare products.

Going forward, it is clearly positive that the AI theme has endured its first major test (the July sell-off), and that EM are more broadly holding up well despite the tricky macro backdrop. However, we expect global macroeconomic factors to continue to drive markets, with investors remaining myopically focussed on US Treasury yields and commodity prices. Any improvements on these fronts would be received very well received, as valuations remain appealing. SK Hynix, for example, has announced a buyback of KRW 40tn (i.e. 1% of the company per month for three months) and a plan to return over 50% of free cash flow over the next few years, suggesting a double-digit all-in yield for next year. On the AI side, we expect that the Anthropic IPO will remain in focus, although this is unlikely to happen until after the US midterms in early November. News reports suggest contracted spending of USD 518 billion on AI infrastructure over the next decade, which serves as a reminder that AI is heavily reliant on intensive infrastructure spending, the benefits of which will be felt in Taiwan and Korea.

Our fund trades on 9.0x PE with expected earnings growth of 32% next year, compared with 9.4x and 22% for the benchmark. In light of macroecononomic uncertainty, we are positioned fairly defensively, with careful control of our factor exposures, including AI capex.

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.