Emerging Markets Strategy February Commentary

Key Takeaways

• Equity markets took a defensive turn in February amid uncertainty over President Trump’s economic and trade policies and strategies on the Russia-Ukraine peace deal; although infrastructure’s defensive nature helped it outperform global equities for the month.

• Utilities across several regions led performance in the ClearBridge infrastructure universe. By contrast, sectors more sensitive to GDP growth were weaker.

• On a regional basis within emerging markets, China and Brazil saw some recovery, while other emerging markets weakened on the back of a strengthening USD.

• The Strategy remains 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. They are relatively immune from global geopolitical uncertainties such as trade tariffs, or sharper-than-expected macro slowdowns.

Market Overview

Equity markets took a defensive turn in February amid uncertainty over President Trump’s economic and trade policies. The unveiling of DeepSeek, a Chinese generative AI model with reportedly lower development costs and less need for computing power of comparable AI tools, sowed some seeds of doubt in the AI trade, further contributing to a market rotation and a welcome broadening of market leadership. Chinese equity indices significantly outperformed other major peers, driven by strength in the Internet sector.

Infrastructure’s defensive nature helped it outperform global equities for the month. Utilities across several regions led performance in the ClearBridge infrastructure universe. These companies were favoured for their lower economic sensitivity as the threat of border taxes hurt investor confidence.

By contrast, most sectors more sensitive to GDP growth were weaker. An increasing likelihood of reciprocal tariffs has weighed broadly on economic growth outlooks, and infrastructure sectors like rails and energy infrastructure were lower as a result.

On a regional basis, we saw strong performance from China and Brazil, driven by encouraging macro data and improved sentiment in Chinese AI/tech-related sectors. Indian and ASEAN markets weakened given the risk-off backdrop, in turn driven by Trump’s trade policy uncertainties, energy price volatility around the Russia-Ukraine peace deal talks, and USD strength against local currencies.

Overall, as the defensive strength of infrastructure was on display in a volatile and uncertain market year-to-date, we expect a continued broadening of market leadership to add further support for our infrastructure portfolios in the coming months.

Portfolio Performance

The ClearBridge Emerging Markets Strategy outperformed relevant infrastructure benchmarks though were outpaced by global emerging market equity indices during the month.

On a stock-specific basis, Philippines based electric utility Manila Electric (+0.28%) was the top contributor for the month. Manila Electric (Meralco) 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. Meralco’s share price gain was driven by record fourth-quarter results, which beat market expectations.

Turning to Latin America, Brazilian electric utility Eletrobras (+0.21%) also performed well during the month.

Centrais Elétricas Brasileiras SA (Eletrobras) is one of Brazil’s largest integrated utilities operating in the generation and transmission segments. Eletrobras was an outperformer in February after finally reaching an agreement surrounding their longstanding voting rights dispute. This considerably de-risks the company and clears a major overhang.

Indian electric utility Power Grid (‑0.57%) and Indonesian toll road operator Jasa Marga (-0.60%) were the largest detractors.

Power Grid is India’s principal electric power transmission company. It has a share of more than 90% of India’s interstate and inter-regional electric power transmission system.

Jasa Marga is Indonesia’s largest toll road operator. The majority of its roads are located in Greater Jakarta, a highly populated area that provides the basis for high traffic volume on Jasa Marga’s toll roads.

Power Grid and Jasa Marga’s share prices fell with the equity markets in Indonesia and India, which were weak on the back of U.S. dollar strength and fears of Trump escalating a global trade war.

During the month, we exited our positions in Chinese electric utility China Power International and Chinese toll road operator Shenzhen Expressway.

All returns are in local currency.

Positioning & Outlook

Looking ahead, we expect some volatility related to U.S. policy uncertainty, as the forward path for bond yields remains highly uncertain. Trump’s trade tariffs on other countries and retaliatory measures will likely remain topical for emerging markets this year. We believe the defensive characteristics of infrastructure will remain valuable in a potentially volatile market.

Opportunities continue to be widespread across the EM infrastructure landscape, with utility fundamentals some of the best we have ever seen. The market is still significantly underestimating the growth in electricity demand driven by AI and data centre growth, along with policy push for decarbonisation. Utilities with exposures to these strong themes, commanding accelerating investments and in turn earnings growth, look well-positioned. They are also largely immune from global geopolitical uncertainties.

Meanwhile, we continuously look for adding certain user-pay GDP-sensitive infrastructures, particularly those leveraged to themes of consolidation, restructuring, rising middle class, or consumption stimulus. After all, most EM economies, particularly China, India, and ASEAN countries, are still expanding at healthy growth rates around mid-single-digit, significantly above Europe or the U.S.