Archie Hart, co-portfolio manager of the Emerging Markets Equity and Emerging Markets ex-China Equity strategies in the 4Factor team at Ninety One, discusses why emerging markets could offer Local Government Pension Scheme investors an attractive combination of diversification, valuation support and long-term growth potential.
Many LGPS portfolios are heavily concentrated in US equities, particularly large-cap tech. What is the case for looking south and east?
With around half of the average LGPS portfolio invested in equities, there is understandable concern about concentration risk, especially exposure to a small group of hyperscale technology companies. As developed market valuations continue to rise, emerging market equities may provide a compelling alternative. They offer diversification away from those crowded trades, while providing exposure to long-term growth drivers that are distinct from the US market.
You mention diversification from US tech concentration, but AI and semiconductor names have also become a large and rising part of EM benchmarks. Isn’t that a concentration risk too?
It’s a fair question. Asian technology and semiconductor names, driven by AI infrastructure demand, have become a much larger part of the EM opportunity set, and we’ve addressed this in our portfolios. Over the past 18 months, we’ve moved from an active overweight in tech to an active underweight, specifically because we became more cautious about crowding and valuation in the most obvious AI-linked names. Where we do find attractive opportunity related to the AI infrastructure theme, we’ve deliberately looked for less-correlated ways.
The EM universe does have concentration risk, but it’s different to US tech. They are at different points in the AI value chain, different valuation starting points, different regulatory and currency drivers and, importantly, it’s a risk we actively manage rather than passively inherit.
Emerging markets have underperformed developed markets for much of the past 15 years. What has changed?
Three key developments are shifting the investment case. First, corporate quality has improved significantly. Twenty years ago, many of the largest companies in EM indices were state-owned businesses focused on political objectives. Today, nine of the ten largest companies in the EM benchmark are privately owned businesses focused on shareholder returns.
Second, the nature of technology exposure is different. While EM has meaningful tech exposure, it isn’t dominated by the same hyperscaler concentration seen in developed markets. I compare the AI revolution to a mining boom: hyperscalers are the miners, while many Asian technology companies are the suppliers of the “picks and shovels”. Regardless of which AI models ultimately succeed, demand remains strong for semiconductors, circuits, networking equipment and other hardware produced across Asia.
The AI investment boom is also an EM thing
EM dominates the supply chain regardless of which AI model wins
Source: MSCI, Bloomberg. Index weights approximate as at Q1 2026. AI hardware: semiconductors, memory, electronic manufacturing. AI software: cloud platforms & AI-native software.
Third, valuation. Emerging markets currently trade on around 11 times one-year forward earnings, compared with roughly 20 times for the US market. This gap provides investors with a more attractive entry point.
You mention AI infrastructure. Is the EM thesis solely dependent on the AI theme?
Although AI is an important driver, EM is not solely dependent on it. The build-out of AI infrastructure requires data centres, chips, servers, cooling systems and power equipment, much of which is manufactured in Asia. Countries such as Taiwan, South Korea and China are benefiting from this global demand.
However, large parts of the emerging market universe are largely disconnected from the AI trade. Economies such as India, many Middle Eastern markets, South Africa and parts of Latin America have materially different growth drivers. This diversity can provide resilience if enthusiasm around AI eventually cools.
How do you view the risk profile of emerging markets today?
EM has long been associated with political and currency risk. Those risks remain, but uncertainty is no longer confined to emerging economies. Political, economic and fiscal risks have become more prominent across developed markets as well. The difference is that developed market valuations often leave little room for disappointment, whereas emerging markets already trade at significant discounts. In my view, EM is not risk-free, but much of that risk is already reflected in asset prices.
ESG considerations are central to many LGPS mandates. Have standards improved in EM?
Yes, significantly. Stock exchanges have strengthened governance and disclosure requirements. Many company leaders have studied and worked internationally before returning to their home markets. As businesses transition from founder-led organisations to second- and third-generation ownership structures, ESG considerations are becoming increasingly embedded.
Take Grupo Mexico, one of the world’s largest copper miners. The company has produced detailed sustainability reporting for several years, reflecting a growing focus on managing the broader impact of business operations. This level of sophistication is becoming increasingly common across the asset class.
What is the argument for active management in this space?
In many EM countries, retail investors and retail-driven fund flows play a much larger role than institutional investors. These flows can be short term, highly thematic and sometimes disconnected from company fundamentals. Simultaneously, EM generally has fewer hedge funds, quantitative investors and passive assets than developed markets. As a result, market inefficiencies remain more pronounced. For investors willing to allocate an active management budget, EM may offer a greater opportunity to generate excess returns than more heavily researched developed markets.
This is also the theme that came through clearly when we hosted an asset owner panel with two LGPS organisations at our recent EM Perspectives event in June. The consensus was that manager selection should focus on a clear philosophy, a repeatable process, an experienced team, and evidence of consistent execution through difficult periods. That’s consistent with how we think about it; the case for active management in EM isn’t about being tactically right on China or AI in any particular quarter, it’s about having a durable process that keeps working as the investment landscapes changes.
What makes your investment style distinct from others?
Our starting point is that we don’t try to be right about macro issues or any particular style. The 4Factor process is style agnostic by design; we’re not making a call on whether value or growth, or a particular country, is about to outperform. Instead, the majority of portfolio risk is deliberately concentrated in stock selection: idiosyncratic company-level views.
That matters precisely because EM is a cyclical asset class. A process built around finding mispriced companies, wherever they sit in that cycle, doesn’t require the ability to successfully guess which regime comes next.
Why does local expertise matter so much in emerging markets?
Having analysts and investment professionals on the ground provides a significant advantage. Take China as an example. As the largest emerging market, it has unique cultural, social and political dynamics that can be difficult to interpret from abroad. Local teams can engage directly with companies, understand consumer behaviour, monitor social media trends and better assess policy developments. They also benefit from conducting conversations in the local language rather than relying solely on translated information. This local perspective often provides insights that are difficult to replicate from overseas.
You’ve drawn parallels between today’s EM landscape and the post-dot-com era. What is the basis for that comparison?
Investors often become overly focused on recent performance. After a prolonged period of underperformance, many have become sceptical about EM, overlooking its cyclical nature. Over the past four decades, EM has experienced several strong investment cycles. One notable period began at the height of the dot-com bubble. An investor who bought emerging markets at the market peak in March 2000 would have generated returns of around 150% over the following decade, compared with approximately 15% from developed markets.1
I see similarities today. Following years of enthusiasm for a narrow group of technology stocks and elevated developed market valuations, EM is once again offering an attractive entry point. Performance has already begun to improve. Emerging markets outperformed developed markets in 2025 and have continued to deliver stronger returns in the first half of 2026.2
Where do you see the most promising structural opportunities looking ahead?
India offers significant long-term growth potential, supported by its large population and expanding economy. The Middle East is undergoing major social and economic transformation, with increasing workforce participation helping to drive growth. In Latin America, political change in several countries is creating a more business-friendly environment. Meanwhile, China continues to make rapid progress in advanced manufacturing, robotics and AI-related technologies. For LGPS investors seeking diversification away from increasingly concentrated developed markets, I believe emerging markets offer a broad range of opportunities supported by improving fundamentals, attractive valuations and long-term structural growth.
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