Market and Performance Overview
Emerging markets delivered a robust performance in the third quarter of 2025, with a gain of 10.6% as measured by the MSCI Emerging Markets Index. The outperformance versus many developed markets reflected a broad-based rebound in risk assets, supported by improving earnings visibility, policy normalization in key economies, and a favorable stance toward growth-oriented sectors. Within this environment, the ClearBridge Emerging Markets Strategy benefited from a well-positioned portfolio that emphasized exposure to AI-enabled growth themes, particularly in Asia.
Among regions, Asia stood out as a primary driver of performance. China, in particular, showed resilience as policy measures aimed at stabilizing growth and encouraging domestic consumption provided a tailwind for equity markets. Across other parts of Asia, technology-oriented names linked to artificial intelligence, cloud infrastructure, and semiconductors benefited from continued capital expenditure and favorable demand dynamics. The combination of improving macro indicators and strategic stock selection helped push the strategy’s relative returns higher during the quarter.
What Powered the Outperformance?
The strategy’s performance was anchored by three core factors:
- AI Exposure: The portfolio maintained a constructive tilt toward companies involved in AI software, data centers, and automation. As enterprises doubled down on digital transformation, beneficiaries included providers of AI-enabled platforms and related hardware. This focus amplified earnings visibility and reinforced fundamental support for stock selection, especially in regional champions with scalable AI franchises.
- Regional Leadership: While the EM universe benefited broadly, stock selection in China and other Asian markets contributed disproportionately to returns. Policy normalization combined with solid earnings delivery and share buybacks created a favorable setup for active managers who identified durable growth trajectories rather than short-term catalysts.
- Valuation and Risk Management: The team maintained disciplined risk controls and a valuation framework that balanced upside potential with downside protection. This included careful position sizing in volatile sectors, hedging against policy surprises, and an emphasis on high-quality compa nies with resilient balance sheets and cash flow generation.
Portfolio Positioning
Going into Q3, the ClearBridge Emerging Markets Strategy kept a strategic overweight to technology-adjacent names within Asia while ensuring diversification across consumer, financials, and industrials. The AI theme was implemented through a mix of software & services firms, semiconductor suppliers, and data-center technology beneficiaries. The portfolio also sought to avoid pockets of overheating by favoring companies with sustainable earnings growth, solid margins, and strong governance frameworks.
On the country level, the strategy benefited from constructive developments in China’s growth trajectory, including policy support for growth drivers and a gradual improvement in consumer sentiment. Elsewhere in Asia, selective exposure to robust exporters and technology infrastructure players contributed to the quarterly gains. The portfolio team continues to monitor policy signals, capital flows, and earnings revisions to manage cyclical risk and preserve upside optionality.
Risks, Considerations, and the 2025–2026 Outlook
As with all active EM strategies, the path forward involves navigating a range of macro and micro factors. Potential headwinds include policy tightening in some large EM economies, external financing conditions, and heightened political risk in certain regions. The team emphasizes stock-specific catalysts and scenario-based planning to mitigate such risks while seeking to preserve upside potential tied to AI-enabled secular growth trends.
Looking ahead, the strategy aims to maintain exposure to AI-enabled growth while balancing it with defensively positioned names that can weather episodic volatility. A continued focus on high-quality earnings, scalable AI contributors, and prudent risk controls will be central to navigating the evolving investment landscape in 2025 and into 2026.
Bottom Line
Q3 2025 demonstrated the power of AI-driven themes to lift performance within emerging markets, with Asia leading the charge. The ClearBridge Emerging Markets Strategy benefited from a disciplined stock-selection process, prudent risk management, and a clear focus on long-duration growth opportunities in AI-enabled sectors. As markets digest policy developments and corporate earnings trajectories, the team remains vigilant for opportunities that align with a durable growth thesis in emerging economies.
