Valuations and variety: Why investors have not missed the EM revival

By Chris Salih on 17 August 2026 in Asia/Emerging Markets, Investment Trusts

Last year was a big year for emerging markets, with the MSCI Emerging Markets index returning 25%, the best return since 2017*. In fact, the past couple of years have been strong for the region as the US dollar weakened, the AI investment boom generated enormous demand for memory, advanced chips and semiconductor equipment, we saw accelerated earnings growth and China stopped being a drag on the index.

But the returns have been very uneven. Korea/Taiwan’s semiconductor exposure, for example, has been a major part of the recent story, whereas other emerging markets have behaved very differently.

A guide to the Templeton Emerging Markets Investment Trust

More recently, the market has shown some resilience, as the Middle East conflict and the associated surges in commodity prices resulted in greater uncertainty. We’ve seen rising inflation risks, a hawkish approach to monetary policy and a strengthening of the US dollar.

There is an element of recency bias in most things – and investment is no different, as some may fear they have already missed the majority of returns from the asset class. Figures from the Investment Association show flows into the asset class have turned negative in the past three months (April to June 2026), reflecting increased caution**.

While investors might be wary of the increased uncertainty, the opportunity in emerging markets does remain strong. The asset class remains significantly under owned, accounting for 5.8% of global AUM in 2026 (vs. 7.9% in 2017), while emerging market valuations are still trading at a near 40% discount to developed markets***.

That’s the view of Sri Chandran, senior product specialist on the Templeton Emerging Markets Investment Trust (TEMIT).Launched in 1989, TEMIT has built an excellent track record of investing in emerging economies by focusing on high-quality businesses with strong balance sheets, good cash flow generation and attractive valuations. The trust is managed by Chetan Seghal and Andrew Ness and has been a consistent out-performer for many years.

Why now for this portfolio

• Despite stellar returns for the sector in the past couple of years, emerging markets remain on attractive valuations
• Long-term performance of Templeton Emerging Markets Investment Trust has been exceptional – returning 254% over the past decade****
• Quality focus offers a layer of security – with attractive valuation metrics versus its index
• Strong on-the-ground presence with over 70 investment professionals covering 17 countries
• Although it has narrowed, a discount of 6% is still attractive given the focus on quality within the portfolio

Investment Process

One of the benefits for the managers at TEMIT is the support of a huge global research platform at Franklin Templeton, who use their detailed local knowledge to uncover emerging market investment opportunities from around the world, including small and medium-sized companies. The trust is supported by 70 investment professionals across 17 countries, meaning it has a very strong on-the-ground presence.

The managers focus on high-quality businesses with strong balance sheets, good cash flow generation and attractive valuations.

The investment process is geared around three specific areas. These are structural long-term opportunities (such as the rise of technology; growth of consumption and changing demographics); sustainable earnings – finding and investing in companies with sustainable earnings power on attractive valuations; and responsible stewardship – integrating ESG factors within the investment research process and engaging with companies as active owners for their clients.

Stock selection is the primary driver of returns for this style-agnostic portfolio. The result is a high-conviction offering of 70-90 names. The top 10-20 account for the majority of the portfolio, with a long list of tail stocks (see further down for more on this).

The focus on quality is reflected in the chart below – it shows TEMIT trades above the index on most metrics (return on assets, return on invested capital) while also having a lower net debt to equity (ex banks). Importantly from a valuation perspective the trust is also cheaper than the index on price-to-earnings and price to cashflow.

Manager’s View

The past two years have been excellent for emerging markets (up 56.4%), while TEMIT has gone above that by returning 106.8%^. Those returns have been driven by the semiconductor-related names, with Taiwan Semiconductor Manufacturing Company (TSMC), SK Hynix, Samsung Electronics and Mediatek accounting for almost 45% of the portfolio.

Sri says around 45% of the portfolio is AI related (compared to around 48% for the index). The team have been trimming some of their exposure to these names and broadening out to other technology names. A good example is electrification, where he cites some of the names in China, such as BYD – which has overtaken Tesla as the world’s largest EV supplier. Another is Chinese-listed NARI Technology – a power transmissions business set to benefit from the Chinese’s government’s upgrades across the country.

The Big Three

Sri says technology has played a significant role in TEMIT’s recent outperformance – adding that SK Hynix alone contributed 13.8% of the total outperformance relative to the index over the past year, something which he says is a rarity***.

The firm was added in the first quarter of 2024 as part of a theme to add more pure-play memory exposure to the AI cycle. “I would say that SK Hynix is still cheap. While it may be a cyclical name, we are seeing earnings come through in this cycle and the risk of commoditisation in this space is still low. It is also a valuation discipline – SK Hynix is a name that has more than quadrupled in the last year, but is still trading on a single-digit P/E multiple. The asset class is trading at 10.5x and SK Hynix is about half of that,” Sri adds.

He says that names like TSMC, SK Hynix and Samsung are no longer just EM plays, but strong company plays on a global basis – given they are arguably the biggest semiconductor and memory-related names in the market.

However, TEMIT is a relative return mandate set up to outperform the index. They are benchmark aware but not constrained by the benchmark. That is where risk management kicks in.

“We have been taking money off the table throughout the year on a relative basis with SK Hynix’s share price skyrocketing in that time, trimming every time it reaches a 4.5-5% relative overweight. If we did not do that the active weight would be 10% or more – that is the comfort we offer clients; it is not buy and hold with increasing risk in every name. We are aware of relative exposure,” Sri says.

Korea now accounts for more than 30% of the portfolio – with the team citing the strong technology exposure, as well as sustainable earnings power and discounts. The team have looked to broaden their exposure with names like Kakao Bank, LG Corporation and Hammi. They also have names like Neighbor Systems, a tech company providing solutions in the likes of big data, mapping services and intelligent transport systems.

TEMIT’s exposure to Taiwan has also driven its recent outperformance. Holdings in Taiwanese tech and semiconductor leaders, such as MediaTek and TSMC, benefit directly from soaring global demand for artificial intelligence infrastructure and advanced chips.

China, India and LatAm in the portfolio

China has historically been an underweight in the portfolio, but the team have closed this gap recently through pure stock picking. Examples include BYD, one of the leading EV manufacturers globally, as they believe higher oil prices may make EVs more attractive to consumers worldwide. Others include NARI Technology and Weichai Technology, which specialises in high-end equipment manufacturing, powertrains, commercial vehicles and smart mobility technology.

India remains an underweight despite the recent challenges facing the market, with Sri pointing to valuations that remain in line with developed markets. The team do hold ICICI Bank in the top 10 and are also keen to point out that the underweight is partially attributed to Cognizant Technology Solutions and Genpact, two IT Services and outsourcing businesses headquartered and listed in the US but deriving much of their earnings from services provided from India.

Latin American remains an overweight in the portfolio – with the team targeting banks, commodities and, to some extent, software and healthcare.

Brazil is TEMIT’s second largest country overweight relative to the MSCI Emerging Markets index – with Sri citing opportunities coming out of the election later this year as well as the country having some of the highest real rates globally. “We think this offers the country an attractive opportunity to trim those down and capitalise on consumption in the country,” he says.

Banks held in the region include Itau Unibanco (Brazil), Grupo Financiero Banorte (Mexico) and Intercorp Financial Services (Peru).

Petrobras is the biggest commodity name, with the firm a big beneficiary of the higher oil price following the outbreak of war in the Middle East – while they also hold iron ore firm Vale.

Tail stocks

TEMIT currently holds just shy of three quarters of its assets in the top 20 holdings, this means it has a large tail of stocks to build the 70-90 stocks portfolio. These stocks fall into one of three categories: incubator stock identified for future growth (Ahter Energy – an Indian two-wheeler EV business); smaller companies (Netcare – a South African hospital business); and names which are they looking to exit (MR Property – trimming from a risk management perspective following the Iran war).

Portfolio activity

In keeping with the quality focus, portfolio turnover is relatively low at around 20% per annum. Recent additions include KakaoBank Corp, which Sri describes as one of the leading mobile-only banks in the country which is starting to move into other Asian markets. Another is South African-based Harmony Gold Mining, which has already produced strong returns. Henan Pinggao Electric rounds off three additions. Sales include Hemisphere Properties, pharma business Hypera and automobile firm Nemak in Mexico.

Performance

TEMIT is comfortably the best-performing portfolio in the IT Global Emerging Markets sector over 10 years, returning 251.7% on a share price basis (vs. 186.0% average for the sector). The NAV return stands at 223.7% over the same period (162.3% for the sector)^^.

The trust has benefitted strongly in the past 12 months due to its exposure to technology stocks as well as an underweight to India, returning 63.7% (vs. 47.9% for the sector average)^^. You would expect the trust to lag when more cyclically sensitive stocks outperform but the quality elements should always give investors a degree of protection.

Contributors and Detractors to performance

The chart above shows the importance of technology stocks to the portfolio in the past year as TSMC, SK Hynix, Samsung Electronics, and MediaTek, have all benefited from strong demand linked to the build-out of AI infrastructure. Zhen Ding Technology rounds off the top five – it is the world’s leading maker of printed circuit boards for major global tech, automotive and server applications. Performance attribution by country is dominated by South Korea, with almost 16% outperformance versus the index***.

Some of the detractors are businesses which the team believe retain those quality features which are undervalued by the market. For example, they have added to BYD in the past 12 months, while Sri says both Cognizant and Genpact have been hit hard by poor sentiment over the unknown impact AI will have on IT services.

What else do investors need to know?

• Gearing: The trust may borrow up to 20% of net assets measured at the time of borrowing – however, the managers typically use much lower levels (currently 3%)^^.
• Discount/Premium: The discount on the trust has narrowed from around 15% to 6%^^ following a period of strongperformance and improved emerging market sentiment. The board has also been actively using share buybacks as one mechanism for addressing the discount.
• TEMIT primarily aims to deliver capital growth. That said, the board introduced a series of measures in 2024 to improve the rating of its shares, including a commitment to maintaining a minimum annual dividend of 5p per share for five years. Last financial year it paid a 2p interim and a 3p final dividend. However, the trust subsequently proposed a 3.25p final dividend, meaning the total dividend attributable to the 2024/25 year was 5.25p per share.
• TEMIT currently has an ongoing charge of 0.86%^^.

More to come from the EM rally?

Sri says the characteristics of the portfolio have not really changed, but the valuation of the asset class remains undervalued (almost 40% versus developed markets). It also remains under-allocated versus its own recent history.

He says: “The asset class has had a stellar year and we’ve had a stellar year with additional alpha on top. We’ve done this by investing in quality and we continue to do that. Our quality statistics are higher than the benchmark and we have lower leverage (net debt to leverage). We are also doing this without compromising the attractive growth in emerging markets. We don’t take huge valuation risks – with our price to earnings, price to cash flow and price to book, and even our dividend yield – more attractive than the index.”

With the support of a market-leading, on-the-ground team, Chetan Seghal and Andrew Ness have built an excellent track record through a core, bottom-up approach. Importantly, this success has come in several varied market environments, reflecting the flexibility of the portfolio. We think this trust is a strong candidate for any investor looking for a core emerging markets offering.

*Source: index factsheet, 31 July 2026
**Source: IA full sector statistics, 30 June 2026
***Source: trust presentation, July 2026
****Source: FE Analytics, total returns in pounds sterling, 13 August 2016 to 13 August 2026
^Source: FE Analytics, total returns in pounds sterling, 13 August 2014 to 13 August 2026
^^Source: AIC, performance at 13 August 2026