Key Takeaways
- China tech stocks offer selective value, but structural and geopolitical risks justify a persistent discount.
- Despite its popularity among investors, Indian equities carry a significant valuation premium versus EM peers.
- Korea stands out as a high-conviction opportunity with upside beyond its strong 2025 performance.
- Possible spikes in energy prices is the dominant risk for EM investors going forward.
Valerio Baselli: Hello and welcome to Morningstar. With a gain of over 30% in 2025, emerging market stocks are back in the spotlight for investors, driven by dollar weakness, positive earnings and a general renewed appetite for risk.
To explore what this rebound really means, and what comes next, today I’m joined by veteran fund manager Wim-Hein Pals, he’s Head of Emerging Market Equities at Robeco.
First of all, was this recovery broad-based, or concentrated in a few countries and sectors? And do you see this as the start of a multi-year cycle, or more of a tactical rebound?
Wim-Hein Pals: Well, it was pretty broad based. So it was across the continents: Latin America, Asia, Europe, Africa as well. South Africa was one of the star performers, for a change. So, it was really broad based, and it had to do with, you mentioned, the earnings and the weaker dollar, but also with the extreme undervaluation after so many years of underperformance in emerging markets relative to developed markets. Right? So that is also a key trigger, has been a key trigger, in 2025. And the valuations are still very, very attractive. Although we have seen some re-rating in 2025 due to the strong rally. Earnings have been very strong as well. So, we’ve seen a bit of a re-rating, but there’s still a lot of value to be found in emerging markets as a whole.
China: Still Discounted, Still Risky
Baselli: China is still the largest and probably the most controversial part of emerging markets. Chinese tech stocks rebounded sharply, yet they continue to trade at a steep discount to global peers. What risk do you think the market is pricing in?
Pals: Well, there is value in Chinese tech names, still, indeed attractively valued, particularly relative to its Western peers. And there is a lot of cloud business and growth in the cloud business, as you can imagine, with this huge population and an even larger amount of data, among these tech giants in China. And yeah, they are trading at relatively steep discounts to the hyperscalers in the West. So, there is a quite a bit of value, with a future, as that’s our style: value with the future. We see a lot of future earnings in those tech names in China. So, we have overweight positions in there in some of these tech giants, in China as well. And we continue to monitor that valuation, which has come in, the valuation discount. So, they have performed really, really well in ’25. After a, after a difficult year, of course. But they have re-rated substantially. So, they traded at single-digit earnings at one stage in 2025, early 2025. But they’re now trading in the high teens. So, they’ve sort of doubled in share price and also doubled in valuation, almost. So, still value but not a lot. Not as much value as this time last year.
Baselli: And speaking of China, as a fund manager, how has your portfolio allocation to China changed over the last 2-3 years? And what role will the Chinese market play in your strategies in 2026?
Pals: Yeah, that’s a very topical question. Since we have been long underweight allocators in China. In ’24 we were hugely underweight China, which worked well in the majority of 2024, until we saw that massive stimulus package coming in September 2024. And then the market took off. So that was a bit of a tough quarter for us. But ’25 was, the China market was, in line with the MSCI EM average. We still slightly underweight China, although we have been buyers in selective names in China, technology names as mentioned before. So, we have lowered our underweight, as you can say. So, we have been buyers in China. Looking at ’26, we are pretty comfortable with our slight underweight in China since we see headwinds as well. We’ve seen a bit of re-rating. So, the valuation discount is still there, but that’s also for a reason, right? There should be a discount in our approach in China relative to the EM average given its higher risk, geopolitical, overcapacity in so many sectors, not only property but also materials, EVs. So that that is the reason for a bit of a discount in China, which is, which is there to stay. So, we are comfortable with our underweight going into 2026 in China.
Why Robeco Is Avoiding Indian Equities
Baselli: Very interesting. Well, if China is the biggest question mark, India has arguably become the consensus positive story in emerging markets. What is your take on Indian stocks today? Do you see more risks or more opportunities at this stage?
Pals: Yeah, we definitely do not agree with that consensus view, as we are very underweight India, since that has become way too expensive. In the run up to 2026, ’25 was a disappointing year. So, we have been underweighting India for a number of years now, which didn’t work so well in ’24, since India did outperform the market, but ’25 was a very disappointing year from an India context. So, we are very happy with our underweight in India in 2025. Going into ’26, we still see a huge valuation premium of Indian equities over the averages in EM.
Why Korea Could Be the Next Big EM Opportunity
Baselli: Beyond the two giants we mentioned, China and India, are there any emerging markets that you are particularly positive about for 2026?
Pals: Of course. Yeah. We are very, very positive on Korea. Korea was one of the star performances in 2025 for very good reasons. You’ve heard of the corporate value up program, no doubt. And that was a trigger for a strong performance in 2025. But we are not there yet. We still have a Korea discount, for no reasons. So, Korea is cheaper than the averages in the EM, with very strong fundamentals. So, we still see from the current levels after the steep rally in ’25, more upside in IT names for instance or consumer discretionary names. Still very, very attractively valued, single digit P/Es in a lot of cases. So, with global leaderships in some of the consumer discretionary, automobile names, information technology. So, yeah, we still see a lot of room for further performance in the Seoul Stock Exchange. What we also like in the region in Asia, is Vietnam and Indonesia. Vietnam is an off-benchmark position we have there for several years. 2025 was very well for Vietnam equities as well. So that worked out well for our clients. And Indonesia did disappoint in ’25, that really has been a disappointing performer. But the outlook for ’26 as far as Indonesian equities go, is much better than this time last year.
Geopolitics and Energy Prices the Biggest Risks
Baselli: Geopolitics has become impossible to ignore for EM investors, and what happened recently in Venezuela is a strong reminder of that. Do you think geopolitics now matter more for EM returns than traditional macro factors like rates and growth? And how do you incorporate geopolitics tensions in your portfolio construction?
Pals: Yeah, geopolitics continue to be very, very important in EM as well. And that’s not more than in other areas, I would say. As always, it’s been a key risk on top of our mind. In our valuation models for instance, where we do incorporate geopolitical risk on a country level. So, we are top-down investors. So, we start with country allocation, before we dig into the sectors and the stock. So, bottom up. But on a country level, we do look carefully and very thoroughly at the geopolitical situation in some countries. So, we apply an extra risk premium on countries that have higher than average geopolitical risk. And you can imagine that countries, such as Russia in the past, but also, we talked about China, that has higher risk on a geopolitical scale than average. So, we incorporate that in our valuation parameters, both bottom up and top down. So, that’s also a reason for our relative caution position within China.
Baselli: Finally, what are the biggest risks EM investors are facing today in your view?
Pals: Well, it is partly geopolitical related, but exploding energy prices, for instance. They are very, very attractively priced now. Right? Oil, gas, LNG. The Asian countries, China, India, we talked about are massive importers of energy. And you can imagine that if energy prices double, which is a risk, and which could be partly demand-supply and, and thus geopolitical, driven by geopolitics. That could be a major disruption in those economies, right? If they have to import, as they have to import all that energy. Also, Korea, Taiwan. Asia in general is a huge energy-importing continent. Right? So, the flip side is that Latin America continues to perform well with higher energy prices, but that is a main risk, I would say, for, for investments in general, but for EM in particular.
Baselli: Thank you so much for your time. For Morningstar, I’m Valerio Baselli, thanks for watching.
