Emerging markets and the value of contrarian investing

When markets turn volatile, investors naturally retreat to what feels safe. The result is often a reliance on top-down narratives to guide investment decisions in the short-term, whilst overlooking pockets of opportunity that necessitate a longer-term view.

This impulse is understandable. Volatility has a way of making stock picking feel harder, not easier. In periods of heightened uncertainty, emerging markets-perceived to be risky--are one of the first areas investors tend to pare back.

This is true of now: roiling fears about higher energy prices and the risk of further inflation shocks have once again placed emerging markets under scrutiny.

But periods like this are precisely when investors need to look more carefully, not less.

That starts with looking through the noise at the underlying businesses themselves. By identifying companies trading at a meaningful discount to long-term intrinsic value, the focus shifts to business quality, management alignment and balance-sheet strength. Importantly, investors must also give those attributes time to assert themselves.

Looking through the macro noise to recognise value

That discipline is especially important in periods like this, when macro fears can quickly overwhelm company-specific fundamentals. But these moments can also offer substantial opportunities for those willing to lean into the pessimism and act with conviction.

Emerging markets have long traded at a discount to developed markets, in part because investors demand compensation for political, regulatory, governance and macroeconomic uncertainty. The current environment has reinforced those concerns, but it has also left many assets priced for a considerable amount of bad news. It is precisely when markets become fixated on a single risk when careful stock selection can reveal where those fears are weighing too heavily.

But being contrarian is not about blindly rushing to buy every dip. Our view is that the most reliable starting point is valuation. By carefully assessing fundamentals relative to the price being offered by the market and having the discipline to wait for those selective opportunities, investors can better distinguish between what is temporary price dislocation and what is genuine value.

Identifying resilient companies requires a bottom-up approach

Broad asset-class views are often too blunt in moments like this. At the index or regional level, emerging markets may appear heavily exposed to oil, geopolitics and shifts in global sentiment. At the company level, however, the picture can look very different. Some of the most compelling businesses in emerging markets have relatively limited direct linkage to an energy shock, whether in the short term or over a full investment cycle.

This is why bottom-up, value-oriented stock picking matters. Even in periods of market stress, there remain high-quality businesses with resilient earnings drivers, strong management and valuations that, over the longer term, compensate investors for the risks they are being asked to bear.

Take NetEase (NTES) - China's second-largest online gaming company. This is not a business whose investment case hinges on oil prices or commodity demand but has grown through its game development capability and strong track record of producing hit games such as Fantasy Westward Journey. Online gaming has attractive economics - it is highly cash generative and requires minimum capital investment. The company, which we believe can grow at more than 10% annually over the long term, also has a strong management team led by founder William Ding. Ding owns 45% of the company and that ownership stake provides a degree of alignment critical in emerging markets, where governance quality can vary widely. NetEase trades at just 13x its expected fiscal 2026 earnings.

Another stock in our Emerging Markets Equity Fund is payments platform Wise (LSE: WISE). The company offers cross-border money movement through a faster, cheaper and more transparent alternative to the traditional banking system. Wise is exposed to the structural growth in cross-border payments, and its earnings power is far less directly linked to disruptions in global energy markets than the broader emerging markets label might suggest. Like NetEase, Wise is run by its CEO who also maintains a material ownership stake. While more expensive than NetEase at a headline 24x, we believe Wise's growth prospects are particularly enduring.

A similar point applies to Kiwoom Securities (KRX: 039490) in South Korea. Korean equities have suffered steep losses in recent trading, following a strong run over the last year. Yet periods of dislocation can also create opportunity, particularly in businesses where fundamentals remain intact but sentiment has deteriorated sharply. Kiwoom is Korea's leading online broker and operates in a market that has long been discounted for governance concerns, but the group has carved out a strong position in a fiercely competitive market, capturing more than 30% of retail inflows into domestic equities over the past five years. Kiwoom trades at just 9x.

So by highlighting three, well-managed businesses trading at what we believe are attractive valuations-with minimal direct exposure to oil price volatility-it's possible to illustrate why emerging markets should not be approached as a single macro trade. They are a collection of businesses, sectors and management teams, each with different exposures, balance sheets and earnings drivers. Some are vulnerable to energy shocks. Others are largely insulated from them. Some will struggle in a more volatile world. Others may prove more resilient than markets currently assume.

When geopolitical stress intensifies, markets often widen valuation gaps faster than underlying business fundamentals change. That is precisely when careful, bottom-up stock picking can matter most.

For investors willing to look past the headline risks, emerging markets still offer a wide and often underappreciated hunting ground for value.