For investors, AI enablers have important implications for market volatility. Recently, concerns about software disruptions, monetization of escalating capex intensity and a possible AI bubble have buffeted flagship US AI megacaps. At the same time, hardware and component suppliers in the developing world were largely spared.
But even the strongest companies need stable backdrops in which to operate. Fortunately, corporate governance across the developing world is undergoing a quiet revolution with profound implications for investors. A case in point is South Korea’s “value-up” initiative, which just marked its second anniversary. While Japan’s corporate governance transformation unfolded over a decade, South Korea is still at the beginning of its journey, leaving significant room for improvement and a narrowing of the long-standing “Korean discount.”
South Korean financials are at the forefront of corporate governance reforms, while the country’s conglomerates, including world-leading franchises in memory, autos and defense, are just starting their value-up journey. Efforts to improve shareholder value are afoot in other regions as well. China has encouraged state-owned enterprises to prioritize valuations and shareholder returns, signaling a shift toward more market-friendly practices. As part of this initiative, record-high buybacks and dividends have driven shareholder returns.
Global Polarization Is Creating New Opportunities
Emerging markets are no stranger to geopolitical risk. Trade tensions, policy uncertainty and currency volatility can all weigh on investor confidence. But polarization is reshaping global supply chains in ways that create new opportunities for EM companies. Many countries are rerouting trade, diversifying production and building new linkages—reflecting a world in which growth drivers are becoming less synchronized.
Energy is a good example. The surge in global demand for liquified natural gas (LNG) is creating more demand for LNG carriers, one of the most technically demanding categories in shipbuilding. Historically, Chinese and Korean shipyards have dominated this space, but shifting trade relationships are changing market-share patterns. As US–China tensions have intensified, many western companies have become more cautious about placing orders with Chinese yards involved in sensitive energy routes. Korean shipbuilders, with a long track record of strong safety credentials and established relationships, have been clear beneficiaries of this shift—an example of how trade tensions can create new opportunities.
Because the developing world is so immense, we believe it’s best navigated through skilled active management. Active, bottom-up investors can tap into a wide range of attractive investment opportunities at compelling valuations. EM have seen fits and starts before, but we see a clear difference between past short-cycle rebounds and what’s transpiring now—an increasingly earnings-based recovery that could have plenty of room to run.
