Comment on Q4 2025: A strong end to an excellent year

The fourth quarter proved to be a strong finish to an excellent year, with emerging markets returning 5% and frontier markets 6%. For the full year, these markets returned an impressive 34% and 47% respectively. 

Indeed, it was a truly standout year, with emerging markets shrugging off trade wars to outperform the S&P 500 by 16.5%, their strongest relative performance since 2008 (Figure 1). This was driven by a weakening USD, investor concerns about over-concentration in the US and strong country-specific drivers. China, the largest market, surged by 31% on the “Deep Seek” moment, when the world realised that China could compete in AI, potentially in a more cost-efficient way than US hyperscalers. We believe that Chinese technological prowess remains underappreciated in the West, not only in AI, but also in areas such as electric vehicles (EVs), renewable energy and both industrial and humanoid robotics. Consequently, we expect this theme will be a primary catalyst for Chinese and, by extension, emerging market returns for many years to come. 

On an absolute basis, Korea was the top-performing market, with the MSCI Korea index returning over 100% in the year, while the broader, and more diversified KOSPI index gained 83%. This was largely driven by the large memory stocks in the index, Samsung and SK Hynix, which returned 130% and 278% respectively, during the year. Essentially, demand for memory from AI data centres is vastly outstripping potential supply, not to mention the additional demand from other sources such as computers and phones. As a result, these companies have been able to consistently raise prices for their memory chips. Consensus currently expects SK Hynix to increase server DRAM prices by 60-70% quarter-on-quarter in Q1 2026. This is driving a wave of earnings upgrades and leaving these stocks attractively valued. SK Hynix is currently trading at a 8.4x P/E for 2026, compared to Nvidia’s 21.4x P/E, despite comparable earnings growth and margins. We believe these earnings upgrades will continue and therefore see memory names will remain a key theme for us in 2026.

India took a breather in 2025, returning just 4% for the year. This was driven by a combination of factors, including challenging geopolitics, a cyclical slowdown, elevated valuations and limited AI exposure.  That said, we were pleased to deliver healthy alpha in H2 after a tricky H1, particularly in the finance sector, where Japanese Mitsubishi UFJ Financial Group announced they would be investing USD 4.4 billion to acquire a 20% stake in our largest holding, Shriram Finance. This was the largest ever foreign investment in India’s finance sector.  

Frontier markets were strong across the board, though Vietnam, the largest market (30% of benchmark), was the main driver of returns. The country index returned 42%, while the more concentrated set of names in the frontier markets benchmark returned 64%. We continue to view the handful of names that performed so strongly as expensive and of lower structural quality, and therefore we do not own them. This was the main reason for the fund’s relative underperformance in 2025. Still, the strategy has delivered three consecutive years of USD returns in excess of 20%, equating to a 95% gain over the past three years and highlighting the attractiveness of the asset class in general.

Vietnam was by no means the only exciting frontier market in the year. Morocco was another great example, up 45% due to anticipation surrounding infrastructure investment related to the 2032 World Cup. We have selectively increased our exposure there during 2025 through recent IPOs. Notably, SGTM, the country’s largest construction group, delivered an 118% return on its USD 550 million listing by year-end. 

The fourth quarter was a busy period for travel, with our team on the ground in Korea, Dubai, India, the Czech Republic and Uzbekistan. Given East Capital’s roots in Eastern Europe, we have long been monitoring Uzbekistan as an extremely promising economy, although its capital markets remain largely underdeveloped. However, this now appears to be changing, with two large IPOs planned for 2026: Navoi Mining, the world’s fourth largest gold producer, with strong operating and reserve metrics, and the asset manager Templeton, which plans to list a holding company, UzNIF, comprising many of the largest state-owned enterprises.

For 2026, in short, we believe that investors will continue to seek opportunities outside of the expensive and highly concentrated US equity markets which have dominated for many years. We believe that emerging markets present a compelling option, offering higher earnings growth and significantly lower valuations than developed markets, with 18% EPS growth and a PEG ratio of 0.8x for 2026-27 versus 16% and 1.5x for the S&P 500. Our fund is even more attractive, with 22% growth and a PEG ratio of 0.7x. For more details about our expectations for 2026, we would suggest to read our 2026 Outlook.

Most importantly, despite these arguments, global investors remain lightly positioned, with emerging market allocations at around 5% compared to 11% in ACWI, leaving ample room for capital inflows that could further boost returns. The high volume of meetings we have had in the last quarter suggests that investors are doing their homework, though they have not yet started to allocate more meaningfully to emerging markets, something we believe could change in 2026.

As in recent years, frontier markets continue to deliver on their core value proposition of attractive risk-adjusted returns, supported by low correlations across a diverse universe of approximately 20 markets. Looking ahead to 2026, this case is further strengthened by robust structural growth and improving financial conditions. Frontier economies are expected to grow by 4-4.5% on average, supported by large, young populations and ongoing reform momentum, meanwhile easing monetary conditions as central bank rate cuts are increasingly supporting domestic investment and consumption.  
Importantly, frontier markets are increasingly offering investors an attractive alternative to elevated valuations and the risk of a too heavy concentration of returns in a narrow set of AI-related stocks, which may prove unsustainable. In our view, this diversification does not compromise return potential, in fact, it may enhance it. This is underpinned by compelling valuations and consistent mid-teens earnings growth, which is primarily driven by domestic dynamics rather than exposure to crowded global themes.