Emerging Markets Strategy January Commentary

Key Takeaways

• Infrastructure made solid gains in January, trailing global equities, which largely shook off the escalating trade and policy uncertainty that has come with the first weeks of U.S. President Trump’s second term.

• On a regional basis, developed markets outperformed EM equities significantly over the month. Within emerging markets, Latin America saw a rebound amid hopes that President Lula would exercise more fiscal discipline, while Asia was generally weaker on the back of Trump’s trade policy uncertainties and USD strength, coupled with concerns of an economic slowdown.

• 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. They are relatively immune from global geopolitical uncertainties such as trade tariffs, or a sharper-than-expected macro slowdown.

Market Overview

Infrastructure in U.S. and Europe made solid gains in January, trailing global equities, which largely shook off the escalating trade and policy uncertainty that has come with the first weeks of U.S. President Trump’s second term.

A cheaper and more efficient AI model named DeepSeek was developed in China. While we are still assessing the ultimate implications of DeepSeek, we think any moderation in energy demand from AI and data centres due to potentially more efficient AI models will likely be minor and temporary, and we see no change in business prospects for companies serving the world’s growing power needs. In Asia, such emerging AI models should also help mitigate impact of U.S. chip export controls.

On a regional basis, developed markets outperformed EM equities significantly over the month. Within emerging markets, Latin America saw a rebound amid hopes that President Lula would exercise more fiscal discipline, while Mexico also rebounded after a weak December. Asia was generally weaker on back of Trump’s trade policy uncertainties and USD strength, coupled with concerns of economic slowdown.

Portfolio Performance

The ClearBridge Emerging Markets Strategy underperformed global equities and relevant infrastructure benchmarks during the month.

On a regional basis, Latin America (+1.87%) was the top contributor for the month, with Brazilian electric utility Equatorial Energia (+0.43%) and Brazilian water company Sabesp (+0.29%) the lead performers.

Equatorial Energia is a Brazilian electric power company that distributes electricity in the Northeast states of Para and Maranhão in Brazil.

Sabesp is the largest regulated water utility company in Latin America and caters to a client base of approximately 26.7 million customers. Based in São Paulo, Sabesp was privatised in 2024 with top-tier operator Equatorial Energia emerging as the acquirer. Under Equatorial’s management, significant improvements in efficiency are expected.

Following months of severe weakness across Brazilian equities, Equatorial Energia and Sabesp saw a share price rebound in January, as there was increased hope that President Lula would exercise more fiscal discipline.

Malaysian electric utility Tenaga (‑0.48%) and Chinese gas utility China Resources Gas (‑0.52%) were the largest detractors.

Tenaga is the largest vertically integrated electric utility in Malaysia, serving a customer base of 10.9 million. Tenaga’s share price pulled back along with the southeast Asian equity market, which saw weakness driven by U.S. dollar strength and uncertainties around Trump’s policies.

China Resources Gas is a gas distribution utility in China whose core business is downstream last-mile city gas distribution, having over 270 projects across the country. It is substantially owned by China Resources Holdings, one of the largest SOE conglomerates in China. China Resources Gas declined with a warmer winter in China, which may have contributed to the weaker-than-normal natural gas consumption.

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 remain topical in driving EM equities and currencies 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 selectively adding certain user-pay infrastructures which may present attractive opportunities amidst any market turbulence, particularly those leveraged to themes of consolidation, restructuring, the rising middle class, or pro-growth stimulus of certain countries.