Market and Performance Overview
Emerging markets delivered a robust third quarter in 2025, rising 10.6% as measured by the MSCI Emerging Markets Index. The rally outpaced developed markets and reinforced the resilience and breadth of opportunities across the asset class. Within this broad backdrop, the ClearBridge Emerging Markets Strategy navigated the quarter with a focus on thematic trades tied to structural growth, particularly in Asia where AI-related beneficiaries began to materialize in earnings and multiples.
Key Drivers: Asia, AI, and Earnings Momentum
One of the standout themes in Q3 was the exposure to artificial intelligence and its downstream beneficiaries. Asian tech ecosystems—especially in China and select Southeast Asian economies—found renewed investor interest as AI adoption accelerated in enterprise software, semiconductors, and services that enable data analytics and automation. For an active EM strategy, this translated into greater stock-level dispersion, with names indirectly linked to AI benefiting from improved demand dynamics and compelling earnings revision trajectories.
China’s equity market experienced meaningful gains, supported by policy signals toward reform, a stabilization in consumer demand, and an accelerated cadence of AI-related investments. Amid these themes, the strategy benefited from stock selection that emphasized higher-quality growth names with earnings visibility and stronger balance sheets. Elsewhere in Asia, India continued to contribute to performance through a mix of resilient domestic demand and tech-driven exposure, aligning with our thematic emphasis on AI-enabled productivity and digital infrastructure.
Beyond Asia, a selective export-oriented stance in parts of Latin America and Europe helped diversify risk while still leaning into the overall EM growth narrative. The quarterly gains were not uniform, but our stock-picking framework—anchored by earnings power, defensible margins, and scalable AI-related franchises—helped the portfolio capture upside while maintaining a disciplined risk posture.
Portfolio Positioning and Stock Highlights
The strategy maintained a constructive tilt toward quality growth and secular demand. Holdings with visible earnings upgrades and robust free cash flow generation outperformed, underscoring the importance of company fundamentals in a market shaped by AI-driven optimism. We also remained vigilant on valuation discipline, ensuring that higher prices were supported by improving profitability and cash generation rather than speculative narratives alone.
Among the notable themes, software-as-a-service and cloud-enabled platforms across emerging markets benefited from ongoing digital transformation in both consumer and enterprise channels. Semiconductors and AI chipmakers—where supply-demand dynamics are increasingly tied to AI deployment—also contributed to positive relative performance.
From a risk management perspective, we preserved flexibility to reduce exposure to areas showing slower earnings momentum or higher sensitivity to policy shifts. The team maintained a balanced hedging stance where appropriate, using selective currency and equity hedges to protect against drawdowns while preserving upside potential in the AI-enabled growth complex.
Outlook and Investment Rationale
The Q3 performance solidifies the case for an EM strategy that prioritizes structural growth narratives underpinned by technology and productivity enhancements. We expect AI-enabled businesses to continue acting as a powerful driver of earnings revision cycles, particularly in economies leveraging data-centric offerings and digital infrastructure investments. Our stance remains rooted in fundamentals: sustainable free cash flow, competitive positioning, and strong balance sheets can help justify premium valuations where warranted by secular growth.
Key risks to monitor include policy shifts affecting capital flows, commodity-price volatility, and potential regime changes that could alter market liquidity. We are prepared to adapt our portfolio by reallocating toward regions and names where the AI-transition aligns with durable competitive advantages and visible earnings progression.
What This Means for Investors
For investors seeking exposure to a diversified, active EM strategy, Q3 2025 highlights the value of a disciplined approach that blends thematic positioning with risk controls. The AI-inspired rally in Asia demonstrates how well-timed security selection can capture upside while maintaining a focus on risk-adjusted returns. As the EM landscape evolves, the ClearBridge Emerging Markets Strategy remains committed to identifying durable growth drivers, managing risk effectively, and delivering compelling long-term outcomes for clients.
