EDITORIAL
EMERGING MARKET INVESTMENT PHILOSOPHY & PROCESS
Q&A with John Ewart, Fund Manager at Aubrey Capital Management, the Edinburgh and London-based investment firm, on Aubrey’s unique emerging markets investment philosophy and process that focuses on the consumer sector.
You are significantly overweight Consumer Discretionary (45.8%) and Consumer Staples (24.2%) versus the MSCI EM Index (14.19% and 6.2%). Why did you choose these sectors over Information Technology?
As emerging economies develop, the hard-working populations within them start to prioritise different goods and services on their shopping lists. In the last 20 years, the urbanisation of emerging markets has created sufficient wealth to more than double the ranks of the consuming class, to 2.4 billion people. This makes Emerging Market consumption one of the most exciting secular trends open to investors. The Emerging Market universe has excellent IT companies such as TSMC, but there are also many companies within the industry that are subject to industry cycles and pricing pressure. Investing directly to the consumer opportunity is more predictable.
In addition, our consumer opportunity will be different in countries depending on their level of income and wealth. 65% of the Indian population live in rural areas and the demand for staples products is more basic than that seen in China where the majority of the population lives in urban areas and staples shopping will be done in modern supermarkets and include goods that would be considered a luxury for rural Indians. More income results in more choices, and improving diet and health is an important steppingstone for consumers to continue on.
The reality of our portfolio is that we find company specific opportunities across many sectors and currently invest across eight Emerging Market countries.
Which stocks have you added or increased recently and why?
We recently added to our position in Indonesian Bank Rakyat. BRI is the country’s largest bank by assets and recognised as one of the world’s leading microfinance institutions. The bank operates over 10,000 branches throughout the country and employs over 650K agents, assisting communities with over 30mn customers and over 130mn depositors. The growth outlook is attractive given the stability of the Indonesian economy at present and small business confidence has recovered post Covid and is expected to remain supportive for bank lending ahead of the election next year.
As a portfolio manager, what criteria do you use when investing?
We are growth managers with a focus on cash generation from the business which is then used to fund the expansion of the business. We forecast and model for the next 2 years, as we believe from our extensive experience that it is not possible to predict for longer periods of time. We are typically looking for companies with a competitive market position in their local country, generating a cashflow return on assets of 15% or more and trading on our forecast profit growth to Price/Earnings ratio of less than 1.5X. Our portfolio has typically traded on this PEG ratio of around 1x over the 12 years of existence.
We also attach importance to meeting management, visiting operations and highlighting our longer-term approach as investors. We meet management regularly on our travels across the Emerging Market region, and Edinburgh is also an excellent location for meetings. We will meet over 150 companies per year in our offices and see a similar number on our travels.
2025: AN ALTERNATIVE OUTLOOK
With volatility and uncertainty taken to new levels this year, confidence in US exceptionalism is waning, and market strategists pick Europe for outperformance in H2 2025.
Not so long ago, TINA – There Is No Alternative – was more than just a reference to the idea that investors had no choice but to buy stocks; more accurately, it was that they had no alternative to the US, in any asset class. But following the announcement of the US’s “Liberation Day” tariff policy, a majority of market strategists said they expected other markets to outperform the US.
The midyear outlook survey conducted between 16 May and 4 June encompassed 34 market strategists from across the Natixis Investment Managers family. When asked what they think would be the likelier headline at the end of the year, 74% of strategists selected “other markets outperform” over 26% who chose “US stocks outperform.” And among those “other” markets, Europe is the clear winner, with seven in ten (71%) strategists expecting Europe to outperform the US in 2025.
Is this a new era of European exceptionalism, or is it simply that the US has been comparatively less exceptional than it has been for quite some time, which has allowed Europe and emerging markets to catch up? Only time will tell, but whatever the outcome is, it is likely to be a bumpy ride, as 71% of strategists see volatility remaining elevated in equity markets, while 68% feel the same way for bond markets.
It is telling, too, that the number of factors the strategists class as headwinds – geopolitics (53%), employment (59%), consumer spending (79%) or a trade war (65%) – sharply outweigh those that are expected to be catalysts: central bank policy (62%) and corporate earnings (47%). On the macroeconomic side, strategists continue to place more emphasis on politics than on economic policy, but impacts from both sides remain. This is perhaps most evident in the risk that concerns them the most – US Treasury turmoil.
A little less exceptional, a little more volatile
Given that volatility looks likely to be with us for some time, it is understandable that “Treasury market turmoil” emerged as the top risk for strategists, with 85% ranking it as a medium or high concern.
Top 5 risks
| 1. Treasury market turmoil | 85% |
| 2. Inflation | 79% |
| 3. Consumer confidence | 74% |
| 4. Recession | 62% |
| 5. New geopolitical conflict | 59% |
Combined medium and high risks ranked by their total percentages.
Despite their traditional safe-haven status, US Treasuries investors were spooked following the post–Liberation Day sell-off, sparking worries about demand for US government debt. The decline in the world’s reserve asset during an episode of elevated volatility comes as investors are increasingly focused on the US’s growing debt burden. This concern is underscored by the number of strategists that said one of the key things investors should know about bonds is that US Treasuries are no longer the safe haven they once were (38%) – a sentiment that European strategists (62%) held more strongly than US-based strategists (24%).
Inflation isn’t going away anytime soon but not for the reasons you think
Inflation worries also continue to linger heavily on the minds of strategists: “Inflation” was the second biggest risk, with 79% of respondents scoring it as medium and high. Only one-third (32%) agree that inflation will no longer be a major issue for investors by the end of 2025.
However, in terms of the specific impact of tariffs, three-quarters (76%) of strategists think tariffs will increase inflation only temporarily, vs. 24% who think tariffs will drive persistent reinflation. Likewise, in the face of heightened market volatility, it’s perhaps no surprise that in the minds of strategists, “consumer confidence” also remains shaky: 74% of respondents marked it as a medium or high risk.
Inflation and instability were also highlighted in the everyday concerns of individual investors, according to results from the recently published Natixis Global Survey of Individual Investors. In that survey, inflation topped investors’ lists of financial fears (51%), and two-thirds globally (66%) say they are currently saving less due to rising everyday prices.1 Meanwhile, 70% of individuals are also worried about the impact of instability on their finances. As uncertainty prevails, three-quarters (73%) would now choose safety over performance when it comes to their investments, and 72% are concerned that markets will become more volatile moving forward.1
Strategists anticipate rate cuts by most central banks
Natixis strategists were optimistic on central bank policy, few worried that they will fail to effectively manage rates, as six in ten put a central bank mistake as either no risk (3%) or low risk (59%). Meanwhile, most predict one to two cuts by the Fed, the Bank of England and the European Central Bank (ECB). One-quarter (24%) project three to four cuts from the Fed, while one-fifth (21%) saw the same for the ECB. The view on Japan, where inflation has finally emerged following a decades-long battle against deflation, is significantly different. Overall, 44% say a rate hike is more likely from the Bank of Japan, and 38% see the central bank taking no action.
Number of interest rate moves expected in 2025
| US FED | BoE | ECB | BoJ | |
|---|---|---|---|---|
| 0 | 6% | 9% | 3% | 38% |
| 1–2 cuts | 71% | 79% | 76% | 15% |
| 3–4 cuts | 24% | 12% | 21% | 3% |
| 5 or more cuts | N/A | N/A | N/A | N/A |
| Rate hike is more likely | N/A | N/A | N/A | 44% |
Despite the uncertainty, many see opportunity in volatility
Rather than seeing things getting worse or calming down, 71% of strategists project that volatility will remain elevated in equity markets, and another 68% feel the same way regarding bond markets. Yet, in the face of persistent heightened volatility, beyond those who said they were riding it out (29% in equity markets and 26% in bond markets), 71% revealed that they are actively finding opportunity in volatility in equity markets and 74% said the same for bonds markets.
Given the positive narrative for European equities, it’s not surprising that they’ve selected defense stocks (47%) as offering the greatest potential returns. Likewise, the tech sector remains most popular for potential returns in US equities for the rest of the year, as 35% of strategists saw the potential for a reignition of the tech stocks in H2.
Strategists willing to ride the yield curve
When it comes to understanding what investors should know about fixed income for the second half of 2025, strategists are convinced that active management can add value to bond portfolios (68%) and that bonds can be used to generate both total return and income (44%). There are, however, divergent views on the best way to get there.
Top picks for bond performance across regions
| US | Europe | Asia ex Japan | |
|---|---|---|---|
| Core government bonds (long maturities) | 21% | 29% | 9% |
| Core government bonds (short maturities) | 18% | 6% | 9% |
| Developed market high yield/floating rate debt | 12% | 12% | 3% |
| Developed market investment grade | 35% | 29% | 18% |
| Emerging market debt (hard currency) | 12% | 9% | 18% |
| Emerging market debt (local currency) | 3% | 9% | 38% |
| Green bonds | N/A | N/A | 3% |
| Peripheral bonds | N/A | 6% | 3% |
In terms of the US market, investment grade is more popular among European strategists (54%) than it is among their US counterparts (24%), which tracks with the feeling among 48% of US strategists that credit defaults are likely to rise; for Europeans, just 15% felt that way.
The most popular choice in European fixed income was core government bonds (29%) and investment grade credit (29%). The divergence shows a clear appetite in the US for European long maturity bonds. In Europe, the focus is on shorter duration with 62% overall calling for short duration to outperform.
Overall, the greatest potential negative impacts from a trade war in H2 were seen to be in long maturity, US government bonds (41%) and developed market high yield/floating rate debt in Europe (35%).
At a glance: Where will they be at the end of the year?
| Oil prices (WTI) | 50$/barrel to less than 65$/barrel |
| US dollar | Weakens |
| Euro | Strengthens |
| Fed rate cuts | 1–2 |
| US/China deal or no deal | Deal |
| Top US equities | Tech |
| Top Euro equities | Defense |
| Small- vs. large-cap | Large-cap |
| Long vs. short duration | Short |
| 60:40 vs. 60:20:20 | 60:20:20 |
Natixis strategists’ calls on where key market measures and macro factors will be at the end of 2025.
Cash on the sidelines isn’t going anywhere
For the past three years, higher rates have encouraged investors to turn to perceived safety of short-term cash instruments. But Natixis strategists are quick to remind investors that cash isn’t quite all it is cracked up to be, especially as tariff threats put the US dollar under increasing pressure.
When asked for the top risks presented by cash, 41% of those surveyed said “currency depreciation,” echoing the 68% of strategists who predict a weakening US dollar. Meanwhile, 38% saw more attractive returns elsewhere, and 35% said cash rates are not enough to meet long-term goals.
The road ahead
Uncertainty over the next move by the US administration and the potential for further geopolitical disruption may loom over markets in H2, but Natixis strategists are confident that there are opportunities to be found. Inflation remains very much a part of the narrative, and interest rate policy will need to be finely calibrated to thread the needle between inflationary risks and economic growth.
In markets, strategists are focusing on Europe, buoyed by the belief that there is life beyond US exceptionalism. Quality remains the watchword for fixed income, but diversification is becoming increasingly important as is a more active, nimble approach, while in alternatives, strategists suggest that investors will need to play defense and add diversification to address the added uncertainty of H2.
THE REALITY OF RISK: UNEARTHED OPPORTUNITY IN GROWTH EQUITY IMPACT
Concerned about an emerging funding gap, M&G Investments has partnered with Phenix Capital Group, a leading global impact investing consulting group, to explore the reasons this gap exists and the implications.
Impact investing is a powerful force for both profit as well as environmental and societal progress. It is where capital is able to support innovation and technological development with the goal of solving some of our greatest global challenges. For investors we believe the commercialisation of these products and services offers compelling opportunities. Companies creating these solutions, likely the prime beneficiaries of powerful growth trends, offer investors the prospect of highly attractive long term returns. It is this alignment of purpose with opportunity which makes impact investment such a powerful force.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast, nor a recommendation to purchase or sell any particular security. While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them.
The funding gap
Across the wider growth equity impact sector, due to many funds failing to meet their fund raising targets, a clear overall funding gap for the sector has progressively developed, a trend which appears to have accelerated since 2022. Differences between targeted and actual capital raised are not unusual: historically the average growth equity impact fund only raises around 70% of their target⁴. However, the chart below indicates that in 2022 funds only raised 52% of their target and, whilst 2023 and 2024 vintages are likely still in fundraising and funds raised underreported, unquestionably this remains a challenging environment.
Why the under-allocation?
With a clear gap in capital provision at this vital funding stage, the obvious question is ‘why’? At a top-level, one possible view could be that growth equity occupies an awkward space within private equity – the ‘middle child’ – neither venture capital or imminent buyout candidate. Perhaps there is simply a greater understanding among investors of the role of both venture capital (VC) and buyout relative to growth investing. If so, this would be unfortunate and potentially a missed opportunity. Arguably the growth stage offers a more compelling risk / return profile with lower failure rates than VC, but substantial remaining growth potential.
“Growth equity impact has not gone global.”
Regardless, there are likely more specific reasons why growth equity impact in particular is suffering from a relative funding drought with investors hesitant to increase allocations:
Scale-up risk: Early to late stage growth businesses viewed as being at a riskier point in their development. These businesses will continue to mature and likely require further capital support. As the failure rate remains high, some investors may be nervous increasing their capital commitment. In part, this risk can be mitigated by a sufficiently diversified portfolio.
Immature sector: Growth equity impact has a relatively short track record, both as an investment area but also in terms of manager performance. Compounding this is the lack of a universally agreed definition of precisely what ‘growth equity’ actually refers to.
Scepticism: ‘Impact washing’ is a suspicion that impact investing is more marketing than a credible investment strategy. There is a perception that impact cannot be reliably measured, therefore making it difficult to prove that it can enhance returns. This can be addressed via robust due diligence – authentic growth equity impact managers can evidence processes centred on impact screening, assessment, measurement, monitoring and reporting.
Valuation discipline: With fund raising targets for growth equity impact continuing to grow, concern that a larger number of investors chasing the same assets will lead to poor valuation discipline with subsequent value-add diminished. Here, being an established, well-respected manager will help as target companies will favour investors with a long-standing reputation, broad experience and demonstrably in a financial position to follow through and deliver the investment they promise, not just once, but on an ongoing basis.
Constrained opportunity set: Growth equity impact has not ‘gone global’. According to research consultants, Phenix Capital Group⁵, of almost 600 growth equity impact funds researched, almost all have a regional rather than global focus⁶. Indeed, only around 10% of available funds have a true global mandate. This predominantly regional rather than global focus may prove a deterrent for investors seeking to capture the widest opportunity set.
Taking a wider perspective, another possibility for this under-allocation to growth equity impact could be institutional investor exposure to an under-appreciated but potentially serious risk. Within traditional equity allocations, there likely will be a high exposure to legacy businesses and sectors. However, the pace of technological, climate and societal change is accelerating rapidly: in 2018 only 2% of new cars sold globally were electric vehicles (EVs), today that figure is 18%⁷. The risk that the industry leaders of today become irrelevant tomorrow has never been more real.
“Growth equity impact investment arguably has greater leverage to the most powerful growth dynamics.”
A core attraction of growth equity impact is its natural bias towards companies and sectors which are more likely to sit within strong, long-term secular growth areas of the global economy. The mandate for most growth equity impact funds is to create positive environmental and social impact whilst also delivering attractive financial returns. Such a mandate will gravitate towards investment within sectors focussed on, for example, decarbonisation, energy transition, preventative healthcare, and financial democratisation – all multi-year growth opportunities.
Relative to traditional equity strategies, growth equity impact investment arguably has greater alignment to the most powerful growth dynamics evident across global economies. Potentially this enables growth equity impact to offer investors superior investment returns, over a longer time period, and align to the needs of many institutional and professional investors.
As an illustrative example, Gradiant, an investment within the M&G Catalyst strategy, started as a spinout from the Massachusetts Institute of Technology (MIT). A technology-led business, it seeks to minimise the negative impact of industry, specifically addressing critical water challenges.
The company specialises in advanced water treatment and wastewater solutions providing essential infrastructure addressing challenges such as water scarcity and pollution. Their innovative technologies and dedication to sustainable resource management strategically position them to capitalise on secular growth trends.
Identifying Gradiant as a prospective investment was the result of a positive screening process. For investors seeking long-term resilience and impactful gains, Gradiant serves as an example of the type of investment which can offer a pathway to addressing urgent social needs while accessing significant opportunities for economic growth, driven be enduring market dynamics.
Providing consistent evidence of the relative performance of impact funds versus traditional funds is complicated by the fact that the term ‘impact’ has numerous definitions, making comparisons challenging. However, one of the most comprehensive studies undertaken was conducted by the World Bank in 2020⁸. This study compared a portfolio of impact investments relative to the S&P500 Index between 1956 and 2019. The impact portfolio outperformed the S&P Index by 15%.
Recent analysis by the Global Impact Investing Network (GIIN) further shows that impact private equity has substantially outperformed alternative impact strategies. This analysis is consistent with recent academic research which further indicates that impact funds tend to be more resilient during periods of pronounced market volatility. In one academic study, impact investments were seen to exhibit lower volatility but with equally compelling diversification compared to traditional venture capital investments⁹.
‘It’s all about climate, right?’: The myth of climate exclusivity
While climate-related investments represent a substantial segment of the impact investing domain, the belief that impact is only about climate mitigation overlooks the interdependent nature of impact themes and the considerable capital being directed into other areas. A stringent regulatory environment focusing on mechanisms for capital relief.
Extensive academic research leveraging the UN Sustainable Development Goals (SDGs) framework demonstrates that progress in one goal can instigate improvements in others, whereas deficiencies in one area may impede advancements elsewhere¹⁰.
When looking at specific SDGs targeted by investors, there is a clear difference between the wider impact investment universe and growth equity impact specifically. With the former, a clear bias exists towards energy transition with almost 40% targeting Affordable and Clean Energy (SDG 7), whereas growth equity impact investors predominantly target themes contributing to reducing hunger and promoting responsible consumption.
Highlighting the interdependency of impact themes, M&G Catalyst investment, BioFirst, proves a compelling case study. BioFirst is a global leader in integrated pest management offering customised biostimulant and biopest control solutions. Due to its activities and products, it actively promotes several SDGs: SDG 12 (Responsible Consumption and Production) through sustainable agricultural practices, SDG 13 (Climate Action) and SDG 15 (Life on Land) by reducing CO2 emissions and preserving soil health.
The company advances SDG 4 (Quality Education) via farmer training, and supports SDG 8 (Decent Work and Economic Growth) with its commitment to fair pay. BioFirst bolsters SDG 2 (Zero Hunger) enabling food security and enhancing crop yields.
The breadth of SDGs a single company can align with is evidence of how interconnected many impact themes actually are.
A key takeaway however is that it is both unrealistic and undesirable for growth equity impact portfolios to target a narrow range of impact themes. In practice many impact themes are strongly correlated and inter-dependent. Mitigating concentration risk within a portfolio is also key and being liberated to invest both across geographies and impact categories can achieve this.
Thus, while energy remains a focal point, substantial investments in other sectors underscore the broader scope of growth equity impact investing. The myth of climate exclusivity is thoroughly debunked when considering the interdependency of impact themes. For discerning investors, this comprehensive insight opens up a vast array of high-impact opportunities that transcend climate-centric narratives.
Investing for people, planet and profit
As an investor seeking to invest for people, planet and profit, the current funding gap for early to late-stage growth businesses is a clear concern. Without adequate funding many truly transformative and innovative businesses will simply not survive their development journey. New technologies capable of providing sustainable and environmentally clean energy will not come to market. Medical diagnostics capable of early detection of disease will not exist and people will needlessly suffer. Products and services capable of spreading the world’s wealth to wider society will falter and unnecessary inequalities will persist and likely widen.
But it is not just people and planet that will be the losers, those seeking profit will also. It is precisely the enterprises innovating and leading transformational change within these sectors that likely offer the greatest prospective returns. The potential for companies sitting within these areas to develop and commercially innovate through revolutionary products and services is unbounded. With the pace of technological and societal change accelerating so rapidly, the opportunity to become a market leader within these areas has never been greater.
As with private equity in general, growth equity impact investment will not be for everyone: risk tolerance, accessibility and investment horizons are investor specific. However, the need for asset managers to provide investment solutions capable of addressing this most serious of funding deficits is indisputable. Success in meeting this challenge will ensure society, the environment and investors emerge as the greatest beneficiaries.
1,2,4 Phenix Capital Group – Impact Database, 2024.
3 Series B funding: the funding stage for private companies at the point where they are typically looking to accelerate growth, expand market reach or scale their operations. Series C funding: a later-stage funding round for established businesses with proven business models, revenue streams and typically seeking to accelerate growth or prepare for an Initial Public Offering (IPO).
5 Phenix Capital Group is a leading impact investing advisory firm established in 2012 with the mission to enable institutional investments towards the Sustainable Development Goals (SDGs), through its impact investing intelligence (digital databases, publications and thought leadership industry events) and tailored advisory services. For more information about Phenix Capital Group please visit phenixcapitalgroup.com and for more information about Phenix’s impact funds database please visit: phenixcapitalgroup.com/impact-fundsdatabase.
6 Phenix Capital Group – Impact Database, 2024.
7 IEA, Global EV Outlook, 2024.
8 World Bank Group, August 2020.
9 Jeffers, Lyu and Posenau, ‘The risk and return of impact investing funds’, November 2024.
10 Laumann, von Kugelgen, Uehara, Barahona, Lancet, May 2022.
11,12 Phenix Capital Group – Impact Database, 2024.
13 Hand, Ulanow, Pan, Xiao, ‘Sizing the Impact Investing Market 2024’, October 2024.
14 Phenix Capital Group – Impact Database, 2024.
15 Rockerfeller Foundation, November 2022.
16 Stanford Social Innovation Review, October 2024.
17 PensionsAge, March 2025.
RETHINKING EMERGING MARKET DEBT: A CHANGING RISK LANDSCAPE
Recent turbulence emanating from the US has demonstrated a change in attitudes. Despite evident volatility, the dollar weakened, contrary to what would typically be expected in times of stress. The perception of risk between emerging markets and developed markets are no longer black and white. So, are investors now rethinking emerging markets?
In reality, emerging markets (EMs) face a legacy of misconceptions. When the EMs universe was first launched, many risks were idiosyncratic, individual country risks, while investors were sanguine about those facing developed markets (DMs). Today, we are experiencing a convergence in perceptions of risk, as DMs grapple with challenges from fiscal, growth and productivity perspectives. DM economies are beginning to be characterised by large fiscal deficits and growing political instability. Meanwhile, EMs profit from low debt-to-GDP ratios, as well as an improved reputation for fiscal discipline. This can be seen in the positive rating migration in 2024, with 14 EM sovereigns receiving upgrades – the most positive year for net upgrades since 20111.
“Emerging markets profit from low debt-to-GDP ratios, as well as an improved reputation for fiscal discipline.”
At a time when investors are growing increasingly concerned about the sustainability of US debt, EM countries benefit from relatively low levels. The average debt-to-GDP ratio of emerging market and middle income economies is 75%, while that of advanced economies is 110%2. Stable debt levels create a buffer to absorb global shocks.
EMs outpace DMs growth
EM economies have been outgrowing developed economies fairly consistently over the last few decades – and this looks set to continue. According to the International Monetary Fund (IMF), emerging and developing economies grew 3.7% in the year to April 2025, while advanced economies grew 1.4%. Even in light of the tariff announcement, the IMF’s April prediction for US growth in 2025 is 1.8%, a -0.9% downgrade since its January prediction. Meanwhile, EM growth was downgraded to a lesser extent, by -0.5%3.
“EM economies have been outgrowing developed economies fairly consistently over the last few decades – and this looks set to continue.”
Growth levels could also experience a boost in the post-tariff paradigm, where manufacturers move to near-shoring or friend-shoring, or buoyed instead by domestic markets or intra-regional trade. Furthermore, the breadth of the accessible EM universe, encompassing nearly 100 countries, ensures that despite country-specific growth risks as a result of tariffs, there is plenty of room for diversification.
The EM growth story also benefits from a more positive demographic impulse. 85% of the world population lives in an EM country4, with many EM economies benefitting from ongoing population growth. This creates growth momentum, with a larger working age population, as well as stronger potential for domestic consumption. Meanwhile, DM economies are grappling with the additional strain of a declining workforce and an increased burden of an ageing population on government debt.
EMs looked inflation square in the eye:
The inflation story in EMs has been largely more straightforward than in DMs. Central banks in EMs acted effectively in the wake of the COVID-induced inflationary bout to mitigate the impact of runaway inflation. For example, Brazil’s central bank hiked rate 12 months before the first move by the US Federal Reserve (Fed). By moving so decisively, not only was inflation tamed in most EM countries, but many countries have also benefited from positive real rates, offering attractive opportunities for investors. Far from the material impact created by the swift and decisive action, this episode also allowed EM central banks to demonstrate their credibility which has buoyed investor faith in their debt markets.
Retreat from the US dollar
In recent years dollar strength has been a headwind for emerging market debt, but 2025 has seen the end of the dollar’s hegemony. The dollar has now had the worst start to the year since 1973. This is beneficial to local currency bonds in emerging markets – bonds issued in a country’s respective currency, which have outperformed most parts of fixed-income throughout the first half of the year. Given the debt dynamics facing the US, the move away from the dollar as the world’s reserve currency could be the beginning of a longer-term trend.
Corporate credit quality
The credit quality of the corporate universe has also been steadily improving. The number of EMs issuers rated CCC+ and lower declined to nine at the end of April 2025. This compares to 15 in January5. EM companies can be characterised by more favourable debt metrics with lower net leverage levels and stronger interest coverage ratios. Furthermore, EMs have continued to display a lower default rate compared to developed markets, with the 12-month trailing speculative-grade default rate coming in at 0.9% for EMs, versus 4.3% in the US and 3.8% in Europe6. As investors look to reduce their exposure to US assets, emerging markets debt is proving to be a relatively safe harbour.
1 Fitch Ratings, ‘Emerging market sovereigns benefit from net positive rating actions’, (fitchratings.com), 18 October 2024.
2 International Monetary Fund, ‘Gross debt position’, (imf.org), April 2025.
3 International Monetary Fund, ‘A Critical Juncture Amid Policy Shifts’, (imf.org), April 2025.
4 Financial Times, ‘Emerging markets has become a redundant term’, (ft.com), September 2024.
5 S&P Global, ‘Emerging Markets Monthly Highlights’, (spglobal.com), June 2025.
6 S&P Global, ‘Emerging Market Risky Credits Number Drops Amid Market Slowdown’, (spglobal.com), May 2025.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.
UOB ASSET MANAGEMENT EMBRACES INNOVATION THAT IS REDEFINING INDUSTRY
Looking beyond current investment climate, award-winning regional asset manager focuses on sustainable investing and enabling technology at start of new decade.
UOB Asset Management (UOBAM) kicked off the year’s investing journey with its annual Investment Outlook Seminar where participants gathered to take the pulse of markets and explore trends and big ideas in investment management. As an opener to a new decade, the Seminar took on a future-forward direction with discussions on several key themes that are redefining the industry such as impact investing and technology.
“Embracing innovation, be it in the use of technology or artificial intelligence, and understanding how it is disrupting industries is one area of opportunity,” said UOBAM’s Chief Executive Officer, Mr Thio Boon Kiat in his opening address. “We also increasingly believe that sustainable investing is a key thrust of how we exercise our fiduciary duties to you, our investors. “As we invest for the future, it is imperative to address the social and environmental issues we face in the world today,” Mr Thio added. Held at the Jubilee Ballroom of the Raffles Hotel Singapore on 16 January 2025, the Seminar drew more than 200 clients and partners from both its local and overseas offices across the region. For the first time, the Seminar also featured two post-seminar masterclasses as part of investor education, where experts helped investors to make sense of artificial intelligence (AI) as well as blockchain and cryptocurrency.
Outlook for 2025
Taking investors through his assessment of the economic and market conditions, UOBAM’s Senior Director and Head of Multi-Asset Strategy, Mr Anthony Raza, showed how 2022 was a close call where the economy almost tipped into recession. However, weak business conditions as seen by sharp declines in industrial production, investment, manufacturing and trade did not translate into massive layoffs. The US Federal Reserve’s about-turn in interest rate direction with three rate cuts for a total of 75 basis points managed to cushion the impact.
With employment remaining stable, consumers which make up 70 per cent of developed market economies, continued to keep the economic engine humming. By the end of 2023, leading indicators appeared to be stabilising and recovering with the economic expansion likely to continue after an unprecedented 11 years. Geopolitical risks, such as a resurgence of Middle East conflicts, North Korea’s refusal to de-nuclearise, the shape of European politics after Brexit and the potential flare-up of trade tensions were all event risks that could haunt markets. Add to that, uncertainty in the lead-up to the US presidential election in November this year. However, Mr Raza thought there was no need to over-react to geopolitics. Markets tend to vacillate about these issues but rarely do they have a lasting material impact. Overall, his expectations were for muted growth amid improving economic conditions, though most asset classes were unlikely to replicate 2019’s strong performance. Hence he advocated that investors adopt a risk-based balanced income strategy to preserve and grow capital through bond yields and stock dividends.
The Seminar was held before the outbreak of the novel coronavirus that has since seen cases in other parts of the world and caused markets to fluctuate. UOBAM’s current assessment of the situation is that the risk to economic fundamentals may be significant though markets will likely treat the weakness as transitory once the number of new cases peaks and starts to decline. Psychologically, investors’ fear of a potential pandemic has caused knee-jerk selling but as in previous outbreaks, markets are expected to fully recover their losses once the outbreak is on a downtrend. Hence UOBAM retains its asset allocation recommendation to stay neutral in equities with a slight overweight in fixed income.
Doing well while doing good
Looking beyond the near-term outlook on investment markets, UOBAM’s Senior Director and Head of Asia ex-Japan ESG, Mr Victor Wong, turned the spotlight on sustainable investing, where investors are increasingly striving for purpose along with profit. Starting a carbon counter as he began his presentation, Mr Wong showed in concrete terms how much carbon dioxide was being emitted globally as he detailed the destruction wrought by climate change – from the floods in Jakarta to wildfires in Australia and California. At the end of his speech, he showed that in the span of 45 minutes, the world would have emitted more than three million tons of carbon dioxide – equivalent to what 100 million trees absorb in a year, given that each tree takes in about 25 kg of carbon dioxide a year. Environmental, social and governance (ESG) considerations are now one of the top three priorities1 ranked by both retail and institutional investors when considering companies to invest in, said Mr Wong, highlighting the growing emphasis given to this area.
Global sustainable investment assets have doubled in size and proportion in the recent six years, from US$13.3 trillion or 22 per cent of global assets under management (AUM) in 2012 to US$30.7 trillion or 41 per cent of global AUM in 20242. Debunking the notion that financial returns will need to be sacrificed, Mr Wong showed that sustainable investing in fact enhances returns. The MSCI Emerging Markets (EM) ESG Leaders index consistently outperformed the broader MSCI EM index since the global financial crisis in September 20073. Its Asia Pacific equivalent showed similar results. As one of the first regional asset management firms in Singapore to sign on to the United Nations-supported Principles for Responsible Investment (PRI) on 2 January 2020, UOBAM is part of an international network of investors who work to incorporate ESG considerations into its investment decisions. Mr Wong took investors through the various strategies that UOBAM offers to enable investors to do good while doing well financially.
Global property on cusp of rebound
Turning to bricks and mortar, UOBAM partner Wellington Management’s Managing Director and Global Industry Analyst, Ms Sara Carpi, made a strong case for investing in global properties and real estate investment trusts (REITs) now, detailing the fundamental and valuation reasons for it. Given global REITs’ attractive risk-return profile and relatively low correlation with stocks and bonds, the addition of REITs into portfolios have been shown to improve returns over a 20-year period4. In fact, over the last 40 years, there have only been seven years when REITs registered negative returns, as measured by the FTSE NAREIT Equity REITs index5. Notably, global REITs have outperformed the broad equity index in the last 30 years, while they have lagged in the last three years6. This is a good set-up for outperformance of REITs henceforth as studies7 have shown that when REITs underperformed the broad equity market in the past three years, they tended to turn around and outperform for the next three years, according to Ms Carpi. The fundamentals such as REIT asset values remaining supported by a robust private market and aging demographics and accommodative central bank policies that will likely cap interest rates in the medium term also supported such a re-rating. Valuations of REITs were at moderate levels relative to history and the broad equities market. REITs’ dividend yields are also attractive relative to bonds with the current low interest rate environment expected to persist.
Digital disruption holds lessons
Amid the clamour to get into digital banking with Singapore regulators having received 21 applicants for up to five digital banking licences, UOB’s TMRW Digital Group Managing Director and Regional Head, Dr Dennis Khoo, gave investors a peek into his fascinating journey of setting up a digital bank from scratch. UOB’s digital bank, TMRW (pronounced “tomorrow”), was launched in Thailand in March 2019. The kingdom was chosen as a beachhead for the bank’s digital foray due to its big and youthful addressable market with high mobile penetration and usage rate. Claiming that not having much prior knowledge about the Thai market was a “blessing”, Dr Khoo said: “It forced the team to understand the customer.” If it had been a familiar home market, they would have zoomed straight into offering products and cross-selling from a product-first approach – a common strategy of traditional banks. The lessons learned from transforming retail banking for the future, such as creating a new business model focused on customer engagement instead of pushing products, to making banking simple, engaging and transparent could potentially also apply to asset management.
Artificial Intelligence and Blockchain technology
At the first post-seminar masterclasses, UOB’s Executive Director and Head of Group Enterprise AI, data management office, Mr Johnson Poh, gave participants an in-depth look at the use of AI, machine learning (ML) and data science, and how they can be applied to investment management. Elucidating the issues relating to this area of computer science Mr Poh quipped that the “ability to write AI programmes is like magic… but instead of spells, you use code, libraries and functions”. Professor David Lee of the Singapore University of Social Sciences next took participants on a deep dive into blockchain and cryptocurrency. Showing how the distributed ledger technology that formed the basis of blockchain could decentralise the monetary system, Dr Lee pointed to how it has the potential to democratise finance and do good, akin to impact investing.
THE HYBRID FUND SOLUTION: RETHINKING REAL ESTATE INVESTMENT
Discover how hybrid real estate funds are reshaping access, liquidity, and opportunity.
Bryn Frost, Aberdeen Investments, Fund Strategist – Real Estate
The UK real estate investment market is at an intriguing turning point for investors. In recent years, this asset class has faced various challenges, which have dampened investors’ enthusiasm. As a result, many portfolios have reduced their allocations to real estate.
Despite these challenges, the fundamentals of real estate are showing signs of improvement. Strong demand from occupiers, better lending conditions, limited supply, and a growing yield premium compared with government bonds are driving renewed interest in the sector. Taking a hybrid approach may be an appealing option for investors who are returning to the market.
Our latest paper ‘The case for hybrid real estate funds: a blended approach‘ is now available. This paper aims to highlight the key considerations for investors evaluating whether hybrid real estate funds should play a role in their portfolio strategy.
The liquidity mismatch
Direct real estate funds have long faced challenges related to liquidity, particularly in managing investors’ expectations for redemption flexibility against the inherently illiquid nature of the asset class. To mitigate liquidity risks, daily traded direct real estate funds typically maintain high cash positions (10%-20%). However, this approach results in diluted real estate performance and inefficient capital deployment. The liquidity mismatch between investors’ redemption demands and the illiquidity of direct real estate assets became particularly apparent during events like the EU referendum, which led to forced fund suspensions or deferrals of withdrawal requests.
A hybrid fund solution
A hybrid real estate fund offers a compelling solution, by combining direct real estate’s attractive risk-adjusted returns with the liquidity, diversification, and access to a broader range of real estate opportunities offered by global listed real estate. This hybrid structure addresses the evolving needs of investors who seek stability and flexibility. It’s particularly useful for UK investors who want international exposure and for global investors who are looking for enhanced diversification.
The proposed hybrid fund structure compared with a standard global or UK real estate fund structure highlights how the hybrid model rebalances exposure to enhance liquidity, without significantly reducing the real estate allocation.
Key benefits of hybrid funds
- Liquidity and stabilityDirect real estate provides stability by shielding against short-term market fluctuations, while listed real estate offers liquidity without triggering forced asset sales. This balance ensures portfolio resilience during market volatility
- Diversification and flexibility
- The hybrid fund offers broad diversification, spanning direct and listed real estate across various regions, sectors, and market types. Listed real estate provides access to global real estate markets, including high-growth sectors.
The hybrid model is adaptable, allowing the fund to adjust its exposure based on market conditions. During market distress, the fund can increase cash and listed allocations for liquidity; and in more favourable conditions, it can lean into direct real estate for growth. The fund can capitalise on arbitrage opportunities and tactically adjust allocations. - Faster investment deploymentListed real estate allows for quicker deployment of capital into the real estate market.
- Thematic and niche investment exposureThe hybrid approach opens the door to niche real estate sectors and thematic investment opportunities. These may be challenging to access through direct real estate alone as opportunities may be scarce, such as life sciences.
The listed real estate market offers investors exposure to sectors that are likely to benefit from structural trends and niche markets. While there are sector-specific direct real estate funds, these are typically available to institutional investors. For retail investors, direct real estate options generally remain diversified or balanced. In contrast, listed real estate platforms allow for more targeted sector exposure, supported by specialised expertise and scalable operating models. These offer a competitive advantage that is difficult for many direct strategies to replicate. - Reduced volatility through diversificationWhile listed real estate tends to exhibit higher volatility in the short term, it correlates more closely with the performance of direct real estate over the long term. This long-term alignment of returns makes the hybrid structure a powerful tool for reducing volatility, while still providing attractive risk-adjusted returns.
Why is this the right time?
For decades, investors and regulators have bemoaned the lack of liquidity offered by real estate strategies. But there is a new solution that could finally give investors an opportunity for scale. Investors can now access more liquid real estate using hybrid funds, while taking on just a small increase in portfolio volatility to achieve the desired liquidity.
Furthermore, over the long term, listed real estate returns have been shown to deliver similar returns to direct real estate, meaning investors are not diluting their overall return ambitions, either.
So why now? The hybrid real estate fund model presents a timely opportunity for investors as they look to diversify their portfolios in a dynamic market environment. The world is changing and investors need to recalibrate their strategies to ensure they are capturing the best risk-adjusted returns available to them.