Monthly Archives

July 2025

In Insights, News, Uncategorised

The EM Pendulum

It’s easy to forget, after a decade dominated by US stocks, that investing is not about chasing what has just done well, but about building a portfolio that is robust across a wide range of possible futures. Emerging markets have, for some time, lagged their developed market counterparts – particularly the US. This has led some to question their place in a diversified portfolio. This underperformance is not a reason to abandon them. In fact, it’s precisely why they remain important.

Emerging markets are expected to deliver higher log-term returns than developed markets. Why? Because they come with higher risks – political, economic, governance-related – and investors demand compensation for bearing those risks. Over the long term, this ‘risk premium’ has been rewarded. Since July 1989, emerging markets have delivered around 0.7% per annum over developed markets[1], a small but not insignificant number.

Of course, these returns don’t come in straight lines. If they did, there would be no reason to own developed markets at all. The reality is that emerging markets are volatile, even more so than their developed counterparts. They can detract from a globally diversified portfolio for certain periods and add to it in other periods, as the chart below demonstrates. Those who remain invested through both the ups and downs tend to be the ones rewarded.

Figure 1: Emerging markets have zigged and zagged

Indices: Fama/French Total US, International, Emerging Markets indices. Period: 01/07/1989 – 31/05/25. Returns in GBP.

A well-diversified global portfolio, with exposure to both developed and emerging markets, helps manage the risk of any one part of the portfolio performing poorly. It reduces reliance on any single region or sector and increases the likelihood of capturing returns wherever they arise. Diversification is the antidote to both FOMO and regret – the chart below captures this well with the green squares performing in the middle of the various regions around the globe.

Figure 2: Diversification mitigates poor outcomes in any one region

Indices: Fama/French Total US Market, International, Emerging markets indices. Albion World Stock Market Index
Period: 01/01/2010 – 31/12/24. Returns in GBP.

Emerging markets may not have had their day in the sun recently, but the case for holding them remains as strong as ever. They offer a return premium, diversification benefits, and exposure to the world’s fastest-growing economies. Staying the course is not always easy – but it is often the most rewarding path.

 

Important Notes

This is a purely educational document to discuss some general investment related issues. It does not in any way constitute investment advice or arranging investments. It is for information purposes only; any information contained within them is the opinion of the authors, which can change without notice. Past financial performance is no guarantee of future results.

Products Referred to in this Document

Where specific products are referred to in this document, it is solely to provide educational insight into the topic being discussed. Any analysis undertaken does not represent due diligence on or recommendation of any product under any circumstances and should not be construed as such.

 

[1] Fama/French Emerging Markets Index, Albion World Stock Market Index. Period: 01/07/1989 – 31/05/25.

In Insights, News, Uncategorised

The Price of Innovation

In the ever evolving world of investing, Artificial Intelligence (AI) has become a buzzword synonymous with innovation and the promise of high returns. But its integration into investment portfolios raises important questions: Should investors back companies adopting AI technologies (who isn’t, at this point?) because they might gain an edge? What about firms producing raw materials used to meet the increasing demand for infrastructure to power AI models? The list goes on.

Humans are drawn to good stories, and we’re often willing to pay for the chance to be part of them. This tendency – driven by confirmation bias and optimism toward the familiar – is one reason investors gravitate toward companies with exciting narratives, hence pushing up their price relative to the underlying fundamentals of the company. These so-called ‘growth stocks’ are typically better-known, innovative, and headline-grabbing. In contrast, more traditional or overlooked businesses – perhaps due to the embedded risks inherent, or because they simply offer a less exciting story – are classified as ‘value stocks’ and generally priced more conservatively.

Understanding this dynamic is key to cutting through hype and setting appropriate long-term expectations for any innovative technology. The table below highlights relative pricing across familiar U.S. technology companies – some trading at elevated price-to-fundamental multiples, others appearing significantly cheaper.

Table 1: AI expectations embedded in market prices

Data source: iShares US Technology ETF as at 24/06/2025. Yahoo Finance. Price-to-earnings: The stock price as at the date displayed, relative to the earnings per share (EPS) over the trailing twelve-month period (TTM).

The challenge for investors is that even amazing companies with cutting-edge products don’t always make great long-term investments. Markets are forward-looking – they build in expectations about the future quickly and efficiently. In today’s digital world, where news spreads quickly, stock prices adjust almost instantaneously as new information is released.

Take companies like NVIDIA, Broadcom, and Palantir – much of the excitement around AI is already reflected in their share prices. These stocks trade at high price-to-fundamental multiples, like price-to-earnings or price-to-sales, meaning investors are paying a premium today based on what they expect the companies to earn in the future. The higher the multiple, the more growth and profitability the company must deliver to justify the current price – and the smaller the margin for error. If expectations are already very high, future returns may be limited unless those companies exceed what’s already priced in.

Value stocks, such as Pinterest and HP, trade at lower prices relative to their fundamentals. This discount reflects higher perceived risk, but if the market is pricing that risk correctly, investors should expect higher returns over time to compensate them. Sticking to a disciplined strategy that leans toward these ‘boring’ stocks can be uncomfortable at times, but historically, it has rewarded patient investors willing to look past the hype.

Figure 1: Percentage of the time value stocks have beaten growth stocks, across regions

Source: Ken French Data Library © US (Jul-26), Developed ex-US (Jul-90) and Emerging (Jul-91) – three factor model to Apr-25.

In the end, the goal for systematic investors isn’t to avoid investing in innovative technologies altogether – it’s to benefit from their rise without chasing them at any price. A broadly diversified portfolio such as the one we recommend to you provides exposure to these winners as they grow, while a marginal tilt to value companies gradually reduces that exposure as expectations are lowered. This approach can feel counterintuitive, especially when a company is thriving, but it helps manage risk and stay grounded in long-term discipline. Investors still participate in the journey – just without relying on any single success story to carry their entire outcome.

 

Important Notes

This is a purely educational document to discuss some general investment related issues. It does not in any way constitute investment advice or arranging investments. It is for information purposes only; any information contained within them is the opinion of the authors, which can change without notice. Past financial performance is no guarantee of future results.

Products Referred to in this Document

Where specific products are referred to in this document, it is solely to provide educational insight into the topic being discussed. Any analysis undertaken does not represent due diligence on or recommendation of any product under any circumstances and should not be construed as such.