Emerging Markets Strategy October Commentary

Key Takeaways

• Listed infrastructure outpaced global equities in October.

• Higher bond yields pressured rate-sensitive sectors such as renewables and communications, while energy infrastructure performed well, driven by the need to ensure power grid stability and meet growing energy demand from a variety of sources, such as AI and data centres.

• Given the prospect of slowing growth from elevated levels as well as declining interest rates, we believe the defensive and income-producing qualities of infrastructure will become more apparent, as was evident in the third quarter.

Market Overview

Listed infrastructure outpaced global equities in October. Risk assets across the board were lower for the month as large tech company earnings disappointed on the whole and economic resilient and strong labour data supported the case for higher bond yields.

Concerns of economic slowdown in India, rate hikes in Brazil, and Trump’s tariff risks on China caused emerging markets equities to have generally underperformed their developed markets counterparts.

From a sector perspective, higher bond yields pressured rate-sensitive sectors such as renewables and communications, while raised expectations of a Trump win in the U.S. presidential election, which might lead to a repeal of, or changes to, the Inflation Reduction Act, also weighed on renewables. Investors remained positive on the growth outlook for energy infrastructure, which performed well, driven by the need to ensure power grid stability and meet growing energy demand from a variety of sources, such as AI and data centres.  

Portfolio Performance

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

On a stock-specific basis, Philippines-based electric utility Manila Electric Company (+0.32%) was the lead performer for the month. 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 reported a solid result, beating market expectations, and is being supported by emerging data centre demand for power in the Philippines. Its distribution license is also expected to be approved for extension beyond 2028.

Indian energy infrastructure company Indraprastha Gas (‑0.87%) was the largest detractor.

Indraprastha Gas Limited (IGL) is a city gas distribution business. It is 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. A quarterly result miss and a margin guidance cut on higher gas sourcing costs caused share price weakness.

During the month, we initiated a position in Chinese toll road operator Jiangsu Expressway.

All returns are in local currency.

Positioning and Outlook

The start of Fed rate cuts and USD weakness should provide an increasingly supportive backdrop for emerging markets equity performance, particularly after a U.S. election certainty. We remain defensively positioned as impacts of tightened financial conditions continue to impact the economy and ultimately corporate earnings, but we have added some select GDP-sensitive exposure as an easing cycle now appears to be underway. We are expecting bond volatility to reduce and market breadth to continue to broaden — as that occurs, we expect that the market will increasingly recognise the strong fundamentals and long-term themes of infrastructure.

Utilities should continue to benefit from themes of electrification, renewables growth and more recently higher electricity demand from data centres, and we remain constructive on the sector in Asia. Given the prospect of slowing growth from elevated levels as well as declining interest rates, we believe the defensive and income-producing qualities of infrastructure will become more apparent, as was evident in the third quarter.