Given the high valuations in the US and growing concerns about budget deficits, ‘rebalancing’ has become the buzzword of 2025. “As most global portfolios rarely reach double-digit exposure to emerging markets, this trend towards rebalancing is likely to continue, especially for long-term investors,” says Robert Holmes, portfolio manager at emerging markets specialist ‘North of South’.
The most important lesson is to look beyond China, which only contributes five to ten per cent to the overall growth in emerging market profits despite its share of around one third of the index (MSCI Emerging Market Total Return Index), as Holmes explains.
For the British investment company Pacific Asset Management, North of South manages three emerging market funds, which are also authorised for sale in Germany, with around USD 6 billion in assets under management.
Investments in emerging markets “a precautionary measure”
In view of a Shiller P/E ratio of 38 for the S&P 500, which is above the peak of the dotcom bubble, this means a real return of only two to four per cent. “Diversification into other regions is currently less of a contrarian strategy and more of a precautionary measure,” says the emerging markets expert.
Part of the gains in emerging markets can be attributed to improved macroeconomic management. Once synonymous with balance of payments crises, emerging markets now generally have lower budget deficits, sustainable current accounts and lower debt levels than their industrialised peers.
“This is clearly evident in the bond market,” says Holmes, “where the average interest rate on government bonds of the countries in our portfolio has moved closer to that of industrialised countries – a historic milestone.”
But it’s not just about a “top down” approach – emerging market equities are also too cheap.
Where the real drivers are in the emerging markets
The consensus forecasts for 2025 envisage earnings per share growth in the emerging markets in the high single-digit range. In 2026, it should rise to 15 per cent.
“The real drivers in the emerging markets are India, Taiwan and South Korea, which account for around 80 per cent of the forecast growth,” says Holmes with conviction. Half of this is accounted for by information technology and a further quarter by financial stocks.
One focus of the North of South portfolio is currently on hardware for AI and data centres, most of which comes from emerging Asian countries: “TSMC’s foundry produces almost all of Nvidia’s advanced chipsets; Samsung and SK Hynix dominate the high-end memory market. Prices there have risen more dramatically than those of gold,” explains the portfolio manager.
Outside Asia, there are opportunities in the Middle East, where economic and social reforms are expanding activities outside the oil sector. And in Latin America, political changes are leading to more market-friendly and reform-oriented governments.
“This diversifies emerging market investment themes and potential returns – especially for managers like us who dare to deviate from benchmark weightings,” concludes Robert Holmes.
About Pacific Asset Management
Pacific Asset Management (PAM) is an independent asset manager based in London, primarily serving institutional clients. PAM currently offers five active strategies that are not tied to a benchmark or a pre-defined “house view”. All strategies, which are also authorised as UCITS funds in Germany and Austria, are owner-managed and are characterised by three investment features: They have a concentrated portfolio, are customised and result-oriented. PAM was founded in 2017 and currently manages assets of GBP 12.2 billion (approx. EUR 13.9 billion) as at 31 August 2025. Further information can be found on the Pacific AM website: https://www.pacificam.co.uk/
