Emerging Markets Strategy December Commentary

Key Takeaways

• Global markets finished the year mixed in the fourth quarter, following the U.S. presidential election and a third interest rate cut for the year. That said, continued strong economic data began to support the case for a slower easing cycle than had been expected, leading infrastructure to trade down.

• Infrastructure sectors were led by gas utilities and energy infrastructure pipelines, beneficiaries of data centre growth and Trump’s election win, while renewables and communication towers sold off.

• The Strategy is tilted somewhat defensively, toward utilities, though not purely for reasons of defense, as peak bond yields have left utilities undervalued and with very strong growth profiles, particularly in the U.S., driven by AI data centre power demand, industry decarbonization and resiliency spending.

Market Overview

Infrastructure traded down in the fourth quarter following the U.S. presidential election and a third interest rate cut for the year. Strong economic data saw the case for a slower easing cycle from the Federal Reserve than had been expected. This, along with potentially reflationary policy from the Trump administration, such as tariffs, as well as slight upticks in inflation, put some upward pressure on interest rates, causing some market weakness. U.S. equities, in particular growth segments, made gains, while global indexes were generally weaker, as were income-oriented and rate-sensitive sectors across the board.

Infrastructure sectors were led by gas utilities and energy infrastructure pipelines Meanwhile, Trump’s victory put into question the fundamentals of renewables businesses, causing weakness in that sector.

Emerging market equities, amongst the relatively risky asset classes, weakened across the board during the quarter, as the U.S. signalled a slower pace of rate cuts which drove USD strength. Additionally, there are global trade tariff uncertainties after Trump’s election win. Rate hike concerns continued to weigh on Brazilian equity performance, underperforming most emerging market peers. Chinese equities also experienced some profit-taking after the announced stimulus package in late September, as the market waited for more concrete details.

Portfolio Performance

The ClearBridge Emerging Markets Strategy performed in line with relevant infrastructure benchmarks, though underperformed global equities during the quarter.

On a sector-specific basis, ports (+0.19%) were the top contributors for the quarter, with Chinese operator China Merchants Port Holdings (+0.23%) the lead performer. China Merchants Port Holdings is China’s largest port operator across China’s five major port regions, including key hub port assets in the Pearl River Delta and the Yangtze River Delta. The company has also built up a portfolio of overseas ports spread across continents, representing about 20% of its throughput and profit. It aspires to become a leading comprehensive port service provider in the world, with the current global port network covering six continents. A better growth outlook in China from the announced stimulus package and macro easing, along with a favourable port tariff environment due to stronger shipping liner profitability, helped China Merchants share price.

Elsewhere in the Asia Pacific region, Philippines-based electric utility Manila Electric (+0.30%) also performed well during the quarter. Manila Electric is an integrated electric utility in the Philippines and is the largest power distribution company in the country with over 50% market share. It also has a growing power generation business. Manila Electric’s share price rose with solid quarterly results and market expectations that emerging data centre growth will propel power demand in the Philippines.

Indian energy infrastructure company Indraprastha Gas (‑0.92%) and Indian electric utility National Thermal Power Corporation (‑1.25%) were the largest detractors.

Indraprastha Gas Limited (IGL) is a city gas distribution business and one of India’s leading natural gas distribution companies, processing and distributing compressed natural gas and liquified petroleum gas to transport, domestic, commercial and industrial consumers. The unexpected administrative price mechanism gas allocation cut, along with concerns over cost increases, impacted the share price of Indraprastha Gas.

National Thermal Power Corporation Limited (NTPC) is India’s largest power generation company, generating close to 19% of India’s power. NTPC has emerged as a diversified power major with presence in the entire value chain of the power generation business. The IPO of its renewable entity NTPC Green caused some capital outflow from the parent, weighing on shares.

During the quarter, we initiated positions in Hong Kong water company Guangdong Investment, Chinese toll road operator Jiangsu Expressway, Brazilian electric utility Isa Energia Brasil and Indian communications company Indus Towers. We also exited our position in Brazilian toll road operator EcoRodovias.

All returns are in local currency.

Positioning and Outlook

We expect robust global growth in 2025, in particular in the U.S., with moderating inflation through the first part of the year. Uncertainty surrounding Trump policies will affect both the economic and market outlook for the year, however. We have the ability within our portfolios to tilt toward more defensive positioning through our exposures to regulated and contracted utilities, or to take on some more economic sensitivity through exposure to GDP growth and the business cycle, through energy infrastructure, airports, rail and toll roads, for example. Today we are tilted somewhat defensively, toward utilities, though not purely for reasons of defense. We find utilities undervalued at present, as peak bond yields have resulted in multiples coming down in that space, although the utilities themselves have very strong growth profiles, particularly in the U.S., driven by AI data centre power demand, industry decarbonization and resiliency spending. At the same time, European utilities with transmission businesses are getting additional capital expenditure approved by their regulators and are seeing returns tick up as well. We believe there is some upside there, as well as in U.K. water, where a final decision on investments in the next five years from the regulator should be supportive.