Emerging market equities: Venezuela, valuations, and volatility

Our equities expert Devan Kaloo joins Host Tom Harvey to discuss what drove emerging markets’ strong year and the key risks for investors in 2026.

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Tom Harvey: Hello, I'm Tom Harvey from Aberdeen, and you're listening to the Emerging Market Equity Quarterly Podcast, the show that looks at what happened in the most recent quarter and provides our outlook for the asset class. Today, I'm joined by my colleague, Devan Kaloo, head of Global Emerging Markets. Devan, welcome to the podcast. It's great to have you on.

Devan Kaloo: Thanks so much.

Tom: Certainly, you know, an interesting maybe start to the year given some geopolitical happenings across the globe. But really, as we look back at fourth quarter of 2025 and maybe even a bit of the full year, a really good year for emerging markets. And so just would love to get your take on kind of what we saw as 2025 rounded out.

Devan: Yeah, great. And as you rightly pointed out, what a fantastic year for emerging markets. It's the best year since 2017. And if you asked me at the beginning of the year whether I thought emerging markets would have outperformed NASDAQ by 12% and the S&P 500 by more than 14%, 15%, I would have said, I would like that, but I'm not sure necessarily that would come through. So, a lot to talk about. And certainly one of the big things for us is that the market, and indeed many investors, have been wrong-footed by how events have turned out. Because when we look at equity markets globally and specifically within emerging markets, they have largely ignored any and all of the geopolitical risk. And obviously this year there's been a lot of that, or certainly 25, there's been an awful lot of that with the Ukraine situation, the Middle East, the India war confrontation. and various other bits and pieces to that as well. So I suppose one of the big points I'd make is that it's really been a year of risk on. And that's because the markets have effectively focused on the positives. And let me run through those positives if I can. So I suppose the first thing to say is that we obviously had the election in the US at the end of 2024. With that, President Trump came to power and promising significant tariffs. And he delivered, right? I mean, both literally and figuratively, he brought those two at the end of Q1. And initially, there was a lot of concern about what that would have for growth, what that would have for emerging markets, and indeed, what that would have for the dollar, in the view that this would be in a risk-off environment, be positive for the dollar. And actually, what we've seen instead is that the markets quite quickly look through it. So initially, the view was that tariffs could come in anywhere between 30 plus to 30 to 40%. In the end, they've somewhere in the mid-teens. And it's because of that, we've seen this change in attitude, particularly from June onwards in emerging markets, that the tariffs had less of an impact on inflation, less of a negative impact on growth, and most importantly, perhaps, less of an impact on corporate profits. So for many, the tariffs was a positive in that you saw policy responses outside of the US to that, which actually were generally supportive of markets. The second big thing was technology. So at the beginning of the year, we saw the continuation of US big tech coming through. So we were now into the third year of the AI story and the accelerating AI story. But one of the really interesting things was that at the beginning of the year, we saw Deepseek, i.e. the Chinese company coming through and offering knockdown version if I can or a cheap but efficient version of AI. And that was really important because that saw the first shakeout in tech. And a concern there was that because the Deepseek and then subsequently the other Chinese companies were able to introduce AI equivalents. but were, while less efficient, were a lot cheaper. The view was that the money that US big tech spending on the AI infrastructure builder was going to be perhaps not going to generate the returns that had been hoped. And so as a consequence of that, we saw a sell off in tech. Markets quite quickly moved through that on the back of what the tech companies did. As a result of the deep-seek moment, what we saw instead was this catalytic event which saw AI companies in the US accelerate their build-out. So we saw more and more increase around that. And you had, in addition to that, the Chinese ecosystem starting to invest. And the reason why that's really important is because what you meant then was that we had an AI build-out or infrastructure build that led to a shortage of power, led to a shortage of chips, and indeed led to a shortage of capabilities. And that was extremely positive for many of the companies who are beneficiaries of that. The good news from an EM perspective was that many of those companies were based in emerging markets in terms of that infrastructure build. So that certainly drove and was one of the key drivers for performance for emerging markets. And the final point I'm going to make on this is just on the dollar. Now the dollar is a complicated beast, but I suppose the key thing was that we saw weakness in the dollar. And initially that was as a consequence of policy uncertainty. So the announcement of tariffs, what that meant, the potential risk of capital flows into the US being challenged, saw the dollar weaken rather than strengthen because the US, rather than being one of the safe havens versus policy uncertainty, became the epicenter of policy uncertainty. But in addition to that, we saw increasingly towards the end of the year, more and more pressure to be a dovish Fed. So with that, the outlook for rates coming down and a combination of overt pressure on the Fed certainly meant that the outlook for 2026 also sounds like it's one of lower interest rates. That actually create this Goldilocks environment for emerging markets. You had the combination of weak dollar and lower interest rates, but at the same time, a US economy which wasn't slipping into recession. And as a result, growth came to very strongly or growth is expected to come to very strongly in 2026. And you put all those things together and what you got was this quite incredible rally in emerging markets and indeed financial markets more generally. And so I think on that reason, we are being surprised at just how strong how the markets have been. And when we think about 2026, many of those ingredients still remain in place. So we're still quite constructive. But it's been, I think, quite telling that the markets have seen all of this to the prism of risk on.

Tom: So with that very strong year, maybe a lot of different market drivers at play, what does this mean for our strategies?

Devan: Well, it's really interesting, right? Because in the first half of this year, our strategies generally underperformed. And the reason for that being is that you saw initially a very strong rally in value led out of the China market. So you saw many of the more value-orientated state-owned enterprise banks and indeed companies similar to that doing quite well. And then subsequently, you saw in the sell-off on the back of the deep-seek moment, many of the tech stocks weakened as well as people were concerned, as I said, about some of that investment. And whether those investments will come through to support the outlook for the tech companies. So against that backdrop, we did poorly. Given within the portfolio, we have an underweight to value, a more positive skew towards growth and quality, but we were also relatively overweight on technology. So as a result, we lagged in the first half, but by the second-half, as we got through the tariff concerns, as we saw the doubling down on the AI infrastructure story, as we saw the leadership position in China go from some of these big state-owned enterprise financials, which we don't have exposure to, to the more interesting tech companies, private sector companies, performance came back very strongly. So over the year, we ended up 50 basis points or there or thereabouts relative to the index. So outperforming, but it was definitely a year of two halves.

Tom: Thanks, Devan. And you've alluded to this with some of your opening comments. this Goldilocks scenario potentially having played out a little bit this year as we move into 2026, though, after such a strong year, what are we thinking about emerging markets this year? Maybe from a valuation standpoint, from a growth standpoint, you know, either what excites you as you look at this year and perhaps, of course, the other side of that, what might worry you a little bit in 2026.

Devan: Yeah, absolutely. So I suppose the first point is valuations. And on valuations, emerging markets absolutely have rallied. They have done better than developed markets. But all that has meant is that the discount of emerging markets to developed markets, and specifically the US, has narrowed slightly. It still remains very much in place. So relative to their longer term history, relative to other equity markets, particularly the US, emerging markets still look cheap and therefore as a consequence of that, still pretty attractive. But in addition to that, I think there's a few things that we would point to as continuing to remain in place. And the first is that we talked about this dovish Fed We talked about, or I talked about the fact that we have a Fed which is cutting while we expect the US economy to accelerate in 2026. And that's quite unusual, right, to see such a cutting cycle at the same time, an acceleration in growth. Typically, you're cutting into a recession. And that has created this backdrop of growth. And that's really good, we think, still, for emerging markets more broadly. The fact that global growth is going to be pretty robust and maybe even slightly higher than last year, but also that you have these weaker rates or lower rates coming to in the US, which allows other countries to cut rates. And that obviously also means that you have the potential for a weaker dollar, which is also quite good. So you have those, if you will, macro considerations. But I think the other bit to then look at is we still see the continued CapEx story for emerging markets. So I've talked a lot about the AI infrastructure build, and that's around the chips, that's around the power that's required to keep these chips running. And the key elements here, really, that investment as that comes through on AI means that you still see that CapEx story coming through and the more broader story of electrification coming through. But the other bit, which if anything, the recent events in Venezuela show is that it's still a risky world out there. And therefore, as a result, there is a real focus and a continued focus on supply chain resilience. So that means, again, more investment as companies, governments look to build up their resilience. And therefore, as a result, we still think that's a strong theme coming into 2026. So against that backdrop of lower rates, stronger growth, weaker dollar, continued AI infrastructure or CapEx more broadly, we think that is pretty supportive of emerging markets. Now, within that, of course, there are still some pretty big risks we need to keep on top of. And the first one, which is very topical and one of the comments from which I quite liked in the Q4 of last year was that there was a bubble in bubble talk, is the emerging AI bubble. And certainly given the rise of some of these AI stocks and the fact that returns on capital are under pressure as they make these significant investments, you know, there will at some point potentially be a bursting of the bubble or de-rating of companies as people think that the profits aren't going to come through to support these higher valuations. We think we're not there yet, and certainly there's a lot of evidence to support that, but it's something that we need to be very conscious of because it is also one of the key drivers for the stronger growth in the US. If I look at the components of US cook, a lot of that's been driven by the significant investment that's coming through. So if we see the bubble bursting and potential cutback on CapEx, that has does not just a consequence for stock markets, it has a consequence also for economic growth. The other thing I would say that you need to be quite conscious of is that there is increasing, and this has been the case for a little while now, risk on policy mistakes. And here, I suppose the big one really is whether or not the US bond market goes into revolt. So if you have a situation where the market starts to think that inflation is not under control, if you think of a situation where they're worried about the ability or the capability of the US government to potentially pay back as perhaps fiscal deficits worsen and tax revenues don't come to as expected, including the tariff tax revenues. But in addition to that, you also have potentially the response by other countries in terms of their policies, in terms of either looking to protect their countries or their business areas and what that potentially means in terms of opportunities for companies. So I think there's lots of things that continue to support emerging markets and more broadly, equity markets, but the risks are increasing and you need to be monitoring these really, really carefully because it will have direct implications on stock markets. It will also have quite clear implications for what sorts of companies do well and indeed what sort of styles do well.

Tom: And that feels like a good place to bring this podcast to a close. Devin, I just want to thank you for joining us today.

Devan: Thank you. Great pleasure.

Tom: And thank you to everyone who took the time today to listen in. If you enjoyed today, then please download our other podcasts from our website or wherever you normally get your podcasts.

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