Beyond Macro: A Value Lens on Emerging Markets Equity

Anu Rajakumar: When most investors think about emerging markets, they think top-down: country-level macro calls, currency bets, commodity cycles. They think growth, equating fast-growing economies with fast-growing portfolios. They tend to treat emerging markets as a monolithic block, one allocation, one thesis. But what if those assumptions are exactly what gets in the way of potential returns?

What if the single most important variable in emerging market investing isn’t the macro backdrop but the price you pay? What if the best opportunities tend to show up precisely when fear and uncertainty are highest, which in a universe of 24 countries at different stages of development is almost always happening somewhere? My name is Anu Rajakumar, and today, I’m joined by two guests, Vera German and Juan Torres, portfolio managers on Neuberger’s Emerging Markets Equity team.

We’ll talk about why a value lens may be the most natural and most overlooked way to approach emerging market equity, the misconceptions that shape how most investors think about the asset class, and where the most interesting pockets of opportunity are showing up today. Vera and Juan, welcome to the show.

Vera German: Good to be here.

Juan Torres: Thank you very much for having us.

Anu Rajakumar: Juan, I want to start with something that you mentioned before we started recording, that you feel many investors are thinking about emerging market equity the wrong way. Tell us about what big misconception investors often have and why you think that investors should look at emerging markets with a different lens.

Juan Torres: You mentioned something in the introduction about emerging markets not being a monolithic block. I think that that’s something that we’ve been hearing for a very long time, yet people keep thinking about the asset class as just this one big theme, and everyone is the same and equal. Actually, you have 24 different countries in very different parts of their development curve in many different regions, and they are just culturally very different.

I always make the joke that I’m Colombian born and raised, and the only thing that we have in common with the Mexicans is that we share a common language. Actually, a flight from Mexico City to Bogotá takes longer than one from London to Morocco. We are very different. That’s one thing that is very important. The other thing about investing in EM is that most people will associate EM investing with a top-down macro approach.

Actually, we all know that getting the macro right on a six-month basis in just one country is extremely difficult. If you think about it, people were expecting interest rates to come down all over the place just a few weeks back, and that doesn’t seem to be happening any longer. Trying to do a top-down asset allocation with 24 different countries, plus frontier markets, plus understanding what the US policy macro impact might be in any of those jurisdictions, we think it’s very, very difficult. The best way to approach what is a very inefficient asset class is through a bottom-up, one-stock-at-a-time, deep-value approach.

Anu Rajakumar: Excellent. All right. We covered the big misconception. Let’s talk about something else that surprises a lot of people, and that’s that some of the fastest-growing economies in the world have actually produced lackluster equity returns. Vera, how do you explain that, and what does it tell us about the difference between investing in EM broadly versus investing in EM in really a more thoughtful way?

Vera German: Of course, I absolutely love that question because we have a poster child example in China. China, if you think perhaps from the late ‘90s, has been one of the fastest-growing economies in the world. Yet, if you look at the Shanghai Composite Index or MSCI China or any other index that you would like to use to measure annualized returns in that country, they are roughly flat over that period of time.

China may be an exceptional example in terms of the size of that discrepancy, as well as perhaps the historical circumstances, but to be perfectly honest, the way that we think about it is the most important factor to consider is valuation. It’s not GDP growth. If you’re starting valuation on aggregate on a country or on an individual company is low, that means that the market, by definition, is pricing in very little growth and very little excitement.

It’s much easier if you choose to take the view that actually the prospects are a bit more rosy. It’s much easier to get a re-rating off a low base if your assumptions prove to be correct. In cases, for example, like Taiwan today or India a couple of years ago, when valuations were very, very high, they ultimately indicate to you that those countries, sectors, or companies are priced for perfection. Even a little bit of bad news goes a long way to re-rate them downwards.

For us, macro is important. GDP growth is important. Of course, it drives top-line performance of companies and profitability of companies. If we were to pick one factor, that will always be valuation because that is where the market view is reflected, and that is what you’re ultimately competing with as an active fund manager.

Juan Torres: The other thing that is quite important to mention is EM has a great disadvantage to other asset classes in that it’s always on the news for the wrong reason. It’s only on a newspaper or online when something bad is happening. When you are seated very far away and you have never actually lived what it means to be part of an EM country, then that noise will pervade the way that you are going to make good decisions.

It’s going to impair your capacity of making good decisions. Actually, we know that in investing, human biases are very powerful. All of these biases might conduct or might force or might lead you into overreacting to those bad news and maybe concentrating too much in either the short term and missing a little bit the potential for the long term.

Anu Rajakumar: Actually, speaking of human biases, I wanted to speak about SOEs or state-owned enterprises because I think when it comes to emerging markets, they do have a reputation among investors as poor investments. As a result, a lot of folks just have a blanket rule, which is to avoid them. Vera and Juan, you don’t avoid SOEs. Walk me through how you think about this opportunity set, and if possible, even a case study that helps us understand where there might be an opportunity that you’ve considered in the past.

Vera German: One SOE is very different from another SOE. We would like to look at every investment case on its own merits and try not to allow labels, private, public, state-owned, commodity, cyclical. Those things often hide more than they reveal. As far as state-owned enterprises go, most investors’ issue with them is ultimately either governance. Decisions will be made that the shareholders may not approve of, and there will be nothing you can do. That is a fair enough accusation, and it is linked to the first point, that they’re poor capital allocators.

You, as a shareholder, should be entitled to the free cash flow, which is left after CAPEX and OPEX, but you will not have that because the company will have to waste it on uneconomical projects of national service of some kind or another. The roads to nowhere, bridges that nobody uses, and all of those slightly anecdotal examples that we see in the newspapers. My view on that would be that, first of all, poor capital allocation is really not exclusive to state-owned enterprises.

The other side of that coin is, frankly, in some cases, it doesn’t matter whether you are state-owned or privately owned.

The example that comes to mind most readily is China. For a very long time, people were saying the only companies that are investable in China are the privately owned ones because the government doesn’t have sway over them, because they’re genuinely run for minorities. Then, five years ago, we had the meltdown, which was precipitated by Jack Ma, his speech where he criticized the regulator effectively.

Then the government just cracked down on Alibaba as well as the entire tech sector. When you think about it, the state was not on the shareholder register in these companies, and it didn’t matter at all. When the government came calling and said, “You know what, now you’re not allowed to do this, you’re not allowed to do that,” they had absolutely no recourse and no choice. As a minority shareholder, you suffered enormous losses on the shares of those companies because the government just arbitrarily decided to change policy.

This is one more argument in our view why each case should really be seen on its own merits and analyzed as such, rather than lazily hiding behind the labels to guide your investment choices.

Juan Torres: We had this great example of two Chinese companies, both in the cement sector, one state-owned, one private, where the private company decided, or the board of directors of that company decided to take the company private, offering an extremely low price relative to the NAV of the company. The minorities, all of us, voted against the deal. Then, when the transaction didn’t go through, we actually reached out to the company, to both the management and the board, trying to engage with them to ask for a more fair treatment of the minorities, and they just didn’t want to engage.

There was no interest whatsoever in talking to any investor. They didn’t really care. The transaction never went through, and the shares are still very much undervalued relative to our own assessment, and I think the assessment of other investors’ true value in the company. In the same sector, Chinese state-owned enterprise, even for an SOE, they’ve been buying back shares. They’ve been paying a healthy dividend. The balance sheet remains in a very good position. You just had this very different outcome from two companies operating in the exact same sector, one being private and the other one being a state-owned enterprise.

Anu Rajakumar: Absolutely. Now, switching to talk about the benchmark here, emerging markets, equity allocations are often benchmarked to the MSCI Emerging Market Index. In the past, I’ve heard you call this index, for lack of a better word, I’m paraphrasing here, but poorly constructed. I’d love to hear you make the case. Tell us what’s wrong with this broad MSCI Emerging Market Index, and what do you think is a better solution for investors who are allocating to emerging markets?

Vera German: As the old saying goes, a poor workman always blames his tools. I don’t want to resort to just blaming the benchmark for all ills. However, I think, as someone who deeply believes in value investing, the one factor that I cannot ignore is that the benchmark of today is a reflection of all the shares that have done very well over the past, pick your time period, one year, five years.

Today, MSCI EM has very, very big index components such as TSMC, such as Samsung Electronics, SK Hynix. Those companies have done very, very well, and that’s great for the investors who have held those shares over time, but the past performance is not indicative at all of what the future of these companies looks like. You only become a big component of a benchmark after a lot of passive and active flows have gone into those shares, stretching valuations.

Of course, for us, when we look at those companies, what we see is not big index component, therefore, we should buy those. What we see is stretched valuations; everybody owns them. The opportunity for genuine difference from the view of the market is very, very small. I think that is a factor of index construction that is impossible to escape. When we think about our strategy, we think about it in almost absolute return terms.

Our job is to make sure that investors make money in absolute terms, that we particularly protect the capital on the downside, which in an asset class such as emerging market equities, which exhibits a lot of volatility and strong drawdowns, this is a very important component of your returns if you can avoid those strong drawdowns. Whilst we’re not saying benchmark your EM equities against cash, I think benchmark is one reference way of thinking about it, but we strongly believe that you shouldn’t allow it to drive your investment choices and your sector and particularly country allocations.

Juan Torres: I would add to that, every time that someone is pitching the case for investing in emerging markets, they will list all of the great characteristics of EM. They will say the macro growth, the GDP per capita, the younger populations, the demographics, this and that. The one thing that people tend to leave out of that pitch is the fact that EM as an asset class is a risky asset class. We, all together as investors in EM, should demand to be compensated for underwriting those risks.

If we follow the benchmark, the benchmark will force capital allocation to places where we might not get that compensation for underwriting that risk. It’s best to actually maybe ignore the benchmark and allocate capital to where you’re going to get the most out of a risk-adjusted return. Which, at the end of the day, is what ultimately matters.

Anu Rajakumar: While we’re talking about risk then, follow-up question there, you both are running a fairly concentrated, high conviction portfolio. How do you think about sizing these positions when you might have high conviction from an evaluation perspective, but there could be some real uncertainty about the macro or political backdrop? How do you think about risk management and sizing?

Vera German: A very integral part of our process is risk scoring. Every investment case that we look at, every company that we look at, will, at the end of the analytical process, get a risk score from 1 to 10. 1 is the least risky and 10 is the most risky. That number really represents all of the risks that you would bear if you were to buy the shares, if you were to become a shareholder. Individual company factors, industry factors, macro and political factors that relate to the jurisdiction in which the company operates, et cetera, et cetera.

That risk score for us covers quite a lot of information, and amongst other things, that informs position sizes. Our rule of thumb is the lower the risk score, the higher the position size and vice versa. Generally, we run the portfolio in a reasonably flat manner because there has been some evidence that, for value portfolios, equal weighting or roughly equal weighting is a very value-added strategy.

We think that assessing risk on every level is extremely important for our process at the time that you are looking at the company itself. At the time that you are sizing the position, when you change your position size when you exit, its risk considerations are absolutely critical to every decision that we make as fund managers.

Anu Rajakumar: Maybe just continuing on this theme of portfolio management, Juan, I’m curious, where is the valuation screen pointing you towards today, as in where are you seeing the most compelling opportunities? Equally, are there any areas that you are staying away from at the moment?

Juan Torres: At the moment, our screen is pointing us to Asian countries, so mainly Thailand, Indonesia and the Philippines, which have been screening value and actually getting more attractive every single day, especially Indonesia, because it’s going through some governance issues in terms of their elected government, which is creating a lot of noise, and also you had MSCI threatening the country with the risk of downgrading them from EM into Frontier, which has created a lot of uncertainty, and we’ll find out soon what’s the outcome of that situation.

We also believe that China is a very interesting opportunity. It was, one of the most expensive markets in the world, but actually it then became uninvestable, and there’s no such thing as an uninvestable asset. It all comes down to the price that it’s being offered to you. Despite the fact that it has re-rated a little bit and it’s coming out of a quite strong 2025, it’s still offering quite important opportunities.

In that time, we believe that Brazil is quite an interesting market, and that’s where we’ve been allocating a lot of our capital over the course of the last few months. It’s also important to mention what we don’t own in EM, and what we are avoiding in EM is India. Well, it’s not anymore the most expensive market in EM. That place has been taken by Taiwan, but we have never owned an Indian stock due to valuations and us being able to find more compelling opportunities somewhere else.

We are also ignoring or staying away from Taiwan on the back of the fact that valuations are looking less attractive.

Anu Rajakumar: Absolutely. Now, one other theme, I think, in Emerging Markets is that a lot of folks understand that these emerging market companies are supplying critical infrastructure for the AI buildout, as in chips and high bandwidth memory, power management, et cetera. That comes with a price. Those are typically highly valued companies. Given that you have a valuation perspective, how do you grapple with that theme in your portfolios?

Vera German: I think one of the things that we like to say to clients is what you own is as important as what you don’t own. Those AI companies, the companies that are geared into the AI cycle, of course, like any popular growth stocks, become very, very expensive as time goes by. If you look at the share price chart of Samsung Electronics, it is literally practically vertical over the past six months or so.

To me, I know Samsung Electronics very well. It’s a great company. It’s one of the most innovative companies in my universe. However, it is also a Korean conglomerate with some questionable corporate governance choices. It is in a manufacturing business. We’re not talking about software. We’re not talking about network effects in the same way. In order to manufacture things at great scale and with great precision, you need a lot of CAPEX.

To me, when I look at the assumptions that are now baked into that share price, they seem stretched. I have absolutely nothing against an AI boom. I think it’ll be hopefully a fantastic gift to all of us in terms of improving our productivity, making our lives easier, more interesting, more rich. Everything needs to be drawn back to the risk-adjusted returns. At those valuations, I just don’t see how we as value investors could accept those price tags.

Juan Torres: I think that it requires a strong stomach to avoid owning many of the names that are the flavor of the day.

Anu Rajakumar: It’s FOMO, right? Fear of missing out. [laughs]

Juan Torres: Actually, there’s this great stat that I saw the other day in an FT article in that 92% of every single long-only fund out there owns TSMC in some sort of capacity. Even some of our value peers own TSMC in a passive way just because it’s very difficult not to own it. We have never owned TSMC in our lives, despite the fact that it went from 4.5% in the benchmark a couple of years ago to today’s 13%.

At least in the way that we look at the world, EM, again, it’s a risky asset class. It doesn’t really matter how good a company is. The left tail is quite fat. There’s a lot of risks that you might not be seeing that might expose you. It doesn’t really matter how good a company is. It doesn’t matter what the quality of that company might be. Overpaying or getting too excited about the expectations of growth or the quality of that company in the context of EM, historically, it has proven to be a very risky proposition.

Anu Rajakumar: Absolutely. Juan and Vera, as we wrap up here, I would like for you to just speak directly to the listener who either has zero emerging market equity exposure in their portfolio or perhaps who has exposure but is basically just holding the MSCI emerging markets index or just a passive allocation. What would be your message to them?

Vera German: I think the message is that emerging market equities today are probably one of the most compelling asset classes. The valuation on the index remains quite attractive. It is one of the few universes, if not the only major universe, which has actually grown in net terms. More companies are listing than delisting, so you actually have more and more choice going forward.

The universe naturally lends itself to diversification because you’ve got 24 different components, as we have referred to throughout the podcast. Doing it through the index simply means that you end up holding risk concentrations and exposures that reflect the winners of yesterday, not the winners of tomorrow. As an asset class where there is a lot of behavioral biases, where they’re even more pronounced than in DM, where there’s less transparency, less good quality information, it is natural hunting ground for those who choose to exploit behavioral biases. Value investing and value investing with a very strong process is exactly the right way to do it.

Juan Torres: I would add to that it is a great asset class to be an active investor. It’s very inefficient. It’s inefficient because it has a lot of characteristics that makes investing in EM difficult and challenging, and to a certain extent uncertain, which drives away competition. The lack of competition makes the market attractive for those who are interested in price discovery and getting a good risk-adjusted return.

Anu Rajakumar: Excellent. Wonderful. Thank you so much for all of your thoughts today. I can’t let you go without a very quick bonus question. Juan and Vera, I’d like to know if you had to pack up tomorrow and live for a year in any emerging market country that you cover purely for the experience, I’d love to know which one you would choose and why.

Vera German: I know it’s technically still a frontier market, but I think it will come into the remit in due course. It would have to be Argentina. The food, the music, the nature, the very, very messy politics, it’s got everything that a good EM can offer. It will definitely be that.

Anu Rajakumar: It’s a great choice.

Juan Torres: For me, without a doubt, it would be South Africa. South Africa is one of the most underrated countries in the world. It has absolutely everything. It has animals, it has the sea, it has nature, it has the mountains, it has great nightlife, great restaurants, dining, it has the vineyards, it has absolutely everything. It’s a magnificent country, and I would love to spend one year of my life there.

Anu Rajakumar: If you dream it, then you can do it, so let’s start manifesting. That sounds great. Thank you so much for sharing that. We covered a lot of ground today, and some of the snippets that I wanted to just summarize, and we talked about why the traditional top-down, macro-first approach to emerging markets may not be the best way to approach this specific area. We talked about why valuations are really quite attractive for emerging markets equities at the moment, and going forward, there is a rich opportunity set that investors should really pay attention to.

Vera, you said something I wanted to highlight here, which is that what you own is as important as what you don’t own. Juan, you had mentioned that overpaying historically for some of these companies in emerging markets has really proved quite detrimental to investor returns. I think, bottom line, from both of you, emerging markets is not a macro bet, it’s a really rich stock-picking opportunity, and for investors who are willing to look past some of the unpleasant headlines that we often see in the news and focus on price and valuation, this asset class may really be very compelling today than it has been for some time.

I just want to say thank you so much, Juan and Vera, for being here today, and we look forward to having you on the show again soon.

Vera German: Thank you so much for having us.

Juan Torres: Thank you very much.

Anu Rajakumar: To our listeners, if you’ve enjoyed what you’ve heard today on Disruptive Forces, you can subscribe to the show from wherever you listen to your podcasts, or you can visit our website at nb.com/disruptiveforces, where you can find previous episodes as well as more information about our firm and offerings.