Global tensions: New opportunities
In this Watchlist...
High market volatility can present investment opportunities - if you know where to look.
n a world where investors remain overweight in US mega-cap stocks and the geopolitical backdrop is increasingly uncertain, small- and mid-cap companies, along with emerging market equities, stand out as compelling opportunities within the global equity universe.
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Over the 25 years to 31 December 2025, developed market mid-caps delivered 107% in excess returns versus their large-cap peers. Meanwhile, emerging market equities are trading at roughly a 60% discount to the US, close to the widest gap on record. In the latest Global Equities Watchlist, we hear from asset managers on how they are using their investment strategies to capitalise on the global opportunities in these two sectors, including:
• Why small- and mid-cap businesses remain one of the least efficiently priced areas of global equity markets • Proven strategies for identifying high-potential companies beyond large caps • How to capitalise on the gap between investor perception of emerging markets and reality
Beyond the large-caps: Identifying tomorrow’s leaders
INSIGHT
The big potential in mid and small caps
Are investors underestimating the emerging markets reform story?
Four reasons to invest in emerging markets
Artificial Intelligence – the environment’s ally
When markets fragment: why stock selection is back at the centre of global equities
WATCHLIST
GLOBAL EQUITIES
APRIL 2026
Beyond the large-caps: Identifying tomorrow’s leaders The big potential in mid and small caps Four reasons to invest in emerging markets Are investors underestimating the emerging markets reform story? When markets fragment: why stock selection is back at the centre of global equities Artificial Intelligence – the environment’s ally
Learn more about the Fidelity Global Future Leaders Fund here
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Important Information This material is for Investment Professionals only and should not be relied upon by private investors. The value of investments can go down as well as up so you may get back less than you invest. This fund invests in overseas markets and so the value of investments can be affected by changes in currency exchange rates. This fund invests in emerging markets which can be more volatile than other more developed markets. This fund invests more heavily than others in small and mid-capitalisation companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities but is included for the purposes of illustration only. The Key Investor Information Document (KIID) is available in English and can be obtained from our website at www.fidelityinternational.com. The Prospectus may also be obtained from Fidelity. Fidelity, Fidelity International, the Fidelity International logo and F symbol are registered trademarks of FIL Limited. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. GCT260120EUR
“Small and mid-cap equities remain one of the least efficiently priced areas of global equity markets. This creates a fertile environment for active investors”
The six stages of the investment process
Source: Fidelity International, 2026. For illustrative purpose only.
e created a firm called Vanguard to build and market these tracker funds directly to the public. Dubbed ′The Vanguard Experiment′, the concept initially flopped. Promising only to match what the broader market index achieved was not thought to be very enticing and was denigrated by critics as ‘a sure path to mediocrity’ and, even, ‘un-American’.
Today, the story is somewhat different. In the US, assets in passive mutual funds and ETFs have surpassed those in active funds and Vanguard is the second largest asset manager in the world.
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Quality: Structural growth businesses with solid management teams, offering one or more of persistent earning streams, favourable market structures, industry leaders and long-term compounders. Value: Strong business models that are currently out of favour but generate high free cash flow yields, potential to unlock undervalued assets through industry changes or shifts in market perception. Transition: Special situations or turnarounds with visible catalysts that can lead to notable upward shifts in earnings, valuations and share price outcomes. Momentum: Cyclical businesses in an upward industry earnings cycle.
While the first tracker funds simply tracked US stock market performance, the market has evolved to offer multi-asset passive investments offering exposure to a wide variety of asset classes. However, multi-asset passive investing is a lot more complex than tracking a single index.
Our investment philosophy is anchored on a belief that markets are semi-efficient and share prices do not always reflect the inherent worth of a business. Within the Global Future Leaders strategy, our fundamentals-led, bottom-up stock picking approach aims to uncover the best opportunities for outperformance in companies that can grow profitability while creating shareholder value sustainably over the long-term. We aim to hold a diversified portfolio of typically 40 to 70 listed global small to mid-cap companies. These are businesses with strong industry positions and the potential for strong relative performance through different market cycles. We seek to identify companies across the four Quality, Value, Transition and Momentum (QVTM) categories:
The hunt for global future leaders
A consistent investment process
The primary source of ideas for the portfolio is Fidelity’s research analysts, as well as our portfolio management team. The starting point for our investment process is a list of approximately 1,000 global small to mid-cap companies. Those with poor ESG ratings are screened out and, in the subsequent stage, stocks that are well-rated by our Fidelity analysts make it to the next level.
Screening and idea generation
Small and mid-cap equities remain one of the least efficiently priced areas of global equity markets. This creates a fertile environment for active investors seeking businesses that can create shareholder value over the long term. Here, the experts behind our Global Future Leaders strategy reveal how they aim to identify such companies - the ‘leaders of tomorrow’.
• • • •
We then conduct more detailed analysis on 150 to 200 investable stocks that are found to have the most promising prospects during the initial screening. We focus on identifying stocks through three pillars of success: Viability, Sustainability, Credibility (VSC - see below), and will test the investment thesis and valuation models on which analysts’ stock recommendations are based.
Stock selection - rigorous assessment and scoring
Viability of returns: pricing power, strong opportunities, and rising return on equity. Sustainability of returns: a strong industry position and the ability to generate cash flow to fund growth and withstand competitive pressures. Credibility: strong conviction in the quality of the business and management.
• • •
A score out of 10 for each of these characteristics is then assigned. The final portfolio is typically overweight companies that demonstrate stronger-than-average viability of returns, sustainability, and credibility.
High VSC companies are more likely to become future leaders.
Source: Fidelity International, 2026.
Companies that pass the VSC criteria are categorised as Quality, Value, Transition or Momentum (QVTM) and accordingly assessed from a valuation perspective. This is an important driver of portfolio construction. QVTM is used both as a risk tool and a portfolio construction tool. The portfolio is guided by the QVTM framework for an aggregated allocation that aims to deliver alpha throughout the economic cycle (see diagram below).
Portfolio construction and risk
Source: Fidelity international, 2026. The asset breakdown above is for illustration purposes only and is based on internal classification at a point in time, and will change over time and in different market conditions. Stock categories are defined as per the portfolio manager’s QVTM investment philosophy. Such reference does not constitute a recommendation to buy, sell or hold assets/securities, nor indicate certain securities or assets are held in the Fund.
At an individual stock level, the highest conviction positions are in the range of 200-300 basis points (bps) overweight, medium conviction holdings are 100-200 bps overweight, and reasonable conviction positions have a 50-100 bps exposure at any given stage. The final portfolio is a blend of fundamentally attractive companies that are clearly identified as Quality, Value, Transition or Momentum at that point in time, trading at valuation levels commensurate with the style. We believe that a balanced portfolio containing stocks across these four segments will deliver more consistent performance through different market cycles, compared to a portfolio focused on only one or two segments. The segment mix is actively managed to avoid style concentration. Furthermore, the fund will typically be overweight companies that demonstrate stronger-than-average Viability, Sustainability and Credibility (VSC) as discussed above.
Information technology, energy, real estate and health care sectors have made a significant contribution to returns since the strategy was launched. This is a testimonial to the investment process’ dynamism and diligence to be able to identify future leaders in both ‘new economy’ and traditional ‘old economy’ sectors.
A proven investment process across sectors
At the individual stock level, one of the largest positive contributors has been AppLovin, a mobile advertising technology company, which deploys artificial intelligence (AI) to place real-time advertisements in mobile games and other applications. Its dual revenue sources include advertisers who pay for the ads viewed and the revenue share from consumers’ in-app purchases. The company listed at the NASDAQ in April 2021. AppLovin was first bought in April 2024 as a holding that was transitioning to Quality. The team were enthused by the success of its AXON 2.0 system, on its way to becoming the industry-leading ad-matching software with its rapid rollout and adoption. We were also encouraged to see the conviction that the founder-CEO retained in the business’ prospects as he continued to drive the growth strategy. The company shifted its strategic focus to its ad-tech business and expanded beyond gaming advertisements to e-commerce and other non-gaming verticals, and saw a significant growth in software revenue, which boosted profit margins and led to multiple broker upgrades. The valuation boost shifted the stock into our Momentum category as its success attracted attention in the investor community. Before long, however, the company faced scrutiny, and its stock fell following multiple short reports questioning the credibility of its digital advertising revenue. Our team relied on fundamental research and retained conviction, ultimately benefiting from the subsequent valuation recovery. Since taking our initial position in the stock, it has increased 866% (as at 31 December 2025. Past performance is not a reliable indicator of future results).
AppLovin
Two other leading contributors have been energy sector holdings, an area traditionally associated with large-cap businesses. These positions are Cheniere Energy and Devon Energy, which aligned with our Value and Transition categories over their holding periods. In late 2020, a position was initiated in Cheniere Energy, the largest liquefied natural gas (LNG) exporter in the US. Given LNG’s cleaner profile compared to coal, the business presented strong structural demand growth prospects and attractive cash flow yields - neither of which were reflected in the share price at the time. Devon Energy was added to the portfolio in early 2021, following a transition-driven restructuring. Its merger with WPX Energy was expected to sharpen its focus on four key basins, creating a compelling opportunity for the exploration and production of oil and natural gas. Early on in our holding periods, these stocks benefited from an uptrend in energy prices and revival of economic activity. Devon Energy delivered strong growth in its production volumes. The company announced a share buyback programme for 2022 and strong dividend growth, which was received well by investors. While the subsequent Ukraine–Russia conflict was an unfortunate event, it drove energy prices higher while European consumers also shifted to US LNG supply to reduce their reliance on Russian oil and gas, which supported Cheniere’s prospects. Our valuation discipline led to profit taking and we eventually exited both stocks from the portfolio. In less efficient small and mid-cap markets, our fundamentals-led, bottom-up investment process aims to uncover the best opportunities for outperformance. In doing so, it enables us to identify companies that can grow profitability while creating long-term shareholder value - the ‘leaders of tomorrow’.
Cheniere Energy and Devon Energy
James Abela, Portfolio Manager, Fidelity Global Future Leaders Fund
“IT, energy, real estate and health care sectors have made a significant contribution to returns. This is a testimonial to the investment process’ dynamism and diligence to be able to identify future leaders”
Our investment process is structured and repeatable, aiming to identify and invest in a diversified portfolio of global mid and small-cap companies. The process consists of the following six stages, which we explore in further detail below.
Maroun Younes, Portfolio Manager, Fidelity Global Future Leaders Fund
For illustrative purposes only. Source: Fidelity International, 31 December 2025.
Figure 1: Typical characteristics of large-cap, mid-cap and small-cap segments
Past performance is not a reliable indicator of future performance. Source: Refinitiv DataStream, Data period from 1 January 2000 to 31 December 2025. Total returns in USD. Returns may increase or decrease as a result of currency fluctuations.
Figure 2: Mid-caps have outperformed over the last 25 years
Important Information This material is for Investment Professionals only and should not be relied upon by private investors. The value of investments can go down as well as up so you may get back less than you invest. This fund invests in overseas markets and so the value of investments can be affected by changes in currency exchange rates. This fund invests in emerging markets which can be more volatile than other more developed markets. This fund invests more heavily than others in small and mid-capitalisation companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities but is included for the purposes of illustration only. Fidelity, Fidelity International, the Fidelity International logo and F symbol are registered trademarks of FIL Limited. The Key Investor Information Document (KIID) is available in English and can be obtained from our website at www.fidelityinternational.com. The Prospectus may also be obtained from Fidelity. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. GCT260120EUR
he strong performance of US equities in recent years has been a major driver of global equity returns. On a market-cap weighted basis, US equities now represent 68% of the MSCI ACWI (as at 31 August 2025) and within the MSCI USA Index, the 'Magnificent Seven' tech giants account for more than one-third of the index – a testament to their
T
For investors exploring the opportunity of the global mid- and small-cap segment, there are some key differences to be aware of when compared to large-caps, aside from market capitalisation. These are highlighted in the table below.
Characteristics of the mid and small-cap market segments
While smaller companies are characterised by higher volatility, long-term investors have historically been well compensated for assuming this additional risk. Over the past 25 years, global mid-caps have generated higher returns than large-caps. For the 25 years to 31 December 2025, global developed world mid-caps delivered 107% in excess returns versus their large-cap peers. Similarly, when comparing risk outcomes through Sharpe ratios, we can see that investors have been appropriately rewarded for their investment in global developed-world mid-cap stocks over the long term.
Attractive risk and return outcomes
Given the concentration at the sector and stock level of major global market indices, many investors will look to other asset classes to help diversify portfolios. Global mid-small caps can help to provide this diversification, offering investors exposure to companies across a broad range of sectors and industries, as shown in the chart below. Furthermore, it is important to highlight that there are no single stocks or groups of stocks dominating the developed-world mid-cap market, as is the case for mega-caps. There are also no stocks that comprise more than a small percentage of the overall market, reducing the risk of portfolio concentration.
Diversification benefits
Contrary to popular belief, the average age of a company in the MSCI World Mid Cap Index is 28 years . This provides reassurance about the experience and longevity of businesses within this investment universe. One such example is Moncler, whose high-end outerwear is rapidly becoming familiar to emerging market consumers. The first Moncler down jackets were made in 1954 in France for the company’s own workers, who wore them over their overalls at the small mountain factory. Moncler was listed on the Milan Stock Exchange in December 2013 and has graduated from a small-cap stock at the time of its IPO to an almost US$14.2 billion market-cap stock today . Similarly, Ferrari was founded in 1939 and is a well-recognised brand in the luxury car segment. The company is often assumed to be a large-cap stock, but it remained a mid-cap company with a market capitalisation of US$35 billion until March 2021. Large-cap businesses can also spin off segments of their company to unlock value, presenting the opportunity to invest in small-mid cap companies, with robust DNA and expertise in their industry. For example, Siemens Energy was created as an independent company in April 2020 following restructuring of the Siemens Group. Siemens Energy only very recently graduated from the mid-cap to the large-cap segment in June 2025.
Investing in established businesses with proven management
Despite the scale of the opportunity in this universe, history shows that just a handful of today’s small and mid-caps will emerge as future leaders within their fields. Defining the ingredients to success can be difficult, as it requires understanding companies intricately, and many are not covered by sell-side analysts or third-party research. Herein lies the strong opportunity for the Global Future Leaders strategy. To uncover the best opportunities, investors need extensive research capabilities. Our approach benefits from Fidelity’s large global research platform, which includes a team of analysts dedicated to small-mid cap research across geographies. They can go beyond benchmark limitations to explore the full range of listed investment opportunities, helping to identify those that might be missed by others and providing insights into potential long-term winners. Global mid-small cap investment opportunities are often found in structural winners, technology disruptors, innovators, category leaders and strong brands. Through rigorous research, it is vital to identify these opportunities early, before they are widely recognised, so investors can benefit from both valuation re-ratings and earnings growth. Experience shows that such companies often include unique, niche operators or specialists that dominate their field, while others are part of a large global theme. Recently, sectors including technology, healthcare, and industrials, as well as businesses targeting global consumers, have become home to such businesses. Many of these companies are also founder-led, with management teams that are both innovative and agile, aligning their interests closely with those of external shareholders. Our Global Future Leaders strategy is run by an experienced portfolio management team, possessing deep knowledge of the mid-cap market. This can help us to achieve differentiated outcomes compared to broad index investments over medium and long-term periods. With a structured and repeatable process, we are well-placed to distinguish between short-term euphoria and long-term fundamentals-based expectations, maintain a disciplined focus on valuations, adjust position sizes based on conviction and liquidity, and consistently reassess these convictions to manage portfolio positions effectively.
Deep research and investment discipline are crucial
Global mid- and small-cap stocks offer investors a rich but often overlooked source of diversification and long-term return potential. Learn how rigorous research and a structured investment process can help to uncover tomorrow’s leaders beyond the large-cap universe.
Past performance is not a reliable indicator of future performance. Source: Refinitiv DataStream, Data period from 1 January 2000 to 31 December 2025.
Figure 3: More attractive risk outcomes (Sharpe ratio) over the last 25 years
Source: Fidelity International, MSCI, 31 December 2025. GICS classification.
Figure 4: Sector and stock-level concentration is lower for mid-caps
“Contrary to popular belief, the average age of a company in the MSCI World Mid Cap Index is 28 years”
Maturity level Volatility Potential for high returns Potential for negative returns Liquidity (ease and cost of trading) Availability of company information and detailed research insight
Generally well established Low Low Low Very good Very high
Generally established Medium High Medium Good High
Can be earlier stage High High High Typically low Typically low
Large-cap
Mid-cap
Small-cap
1. Macquarie Research, May 2025.
1
2. Share Information | Moncler Group, 16 December 2026
2
MSCI World Large Cap
MSCI World Mid Cap
27.1
12.0
17.1
11.1
20.2
10.0
9.8
8.8
4.3
6.3
3.3
3.2
7.0
2.6
6.6
1.8
6.0
MSCI World Index
MSCI World Mid Cap Index
MSCI World Large Cap Index
16.1
8.6
5.3
Disclaimer: Approved for issue (May, 2026) in the United Kingdom by Orbis Investments (U.K.) Limited which is incorporated in England & Wales (company number 8138002) and is authorised and regulated by the Financial Conduct Authority. Registered office: 28 Dorset Square, London, NW1 6QG. Capital at risk.
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Emerging market equities trade at roughly a 60% discount to the US, nearly the widest gap on record. Combined with attractive currency valuations, ongoing market and governance reforms, and differentiated returns drivers, we believe emerging markets may be one of the most overlooked opportunities in global equities today.
Valuations are a useful place to start. Using a cyclically adjusted price-to-earnings ratio, US equities currently trade at roughly 38 times earnings, whilst emerging markets change hands at around 16 times earnings. That is a 60% discount to the US, below emerging markets’ own long-term average and near the widest gap on record. The last time valuations diverged this sharply was the late 1990s, when US internet stocks were pricing in a tech revolution and Asian economies were in the grip of financial crisis.
Valuations: the widest discount to the US on record
Historically, when US shares have traded at today's elevated multiples, forward returns have been reliably lacklustre, barely keeping pace with inflation. For emerging markets, the range of outcomes from today's starting point is wider, but the skew looks materially more favourable. Historically, the average investor buying US equities at current valuations did about as well as the unluckiest investor who bought emerging market shares at today's prices. Depressed valuations, however, are not a sufficient investment case on their own. What matters equally is whether the fundamentals are changing and here, the picture is more encouraging than the prevailing narrative reflects.
EMs trade at cheap valuations relative to history and to the US
Reforms: the shift that markets may be underestimating
The perception that emerging market currency exposure is a structural drag on returns no longer reflects the evidence in some cases. Across a broad basket of emerging market currencies, valuations sit well below long-term measures of fair value. Importantly, that undervaluation has arrived alongside stronger fundamentals: improved external balances, more credible monetary frameworks, and flexible exchange rate regimes that now absorb shocks rather than amplify them.
Currencies: a tailwind that most investors have not yet priced
EM currencies remain near multi-decade lows vs the US dollar
At the same time, the US dollar faces headwinds of its own. Elevated valuations, widening fiscal deficits, and rising dependence on foreign capital leave it more sensitive to shifts in confidence than the prevailing consensus assumes. For investors with a long-term horizon, currencies that are already priced for pessimism represent an additional source of potential return, not merely a risk to be managed.
In an increasingly concentrated global equity universe, diversification has become both more difficult and more valuable. US equities now account for roughly two-thirds of global indices, with the ten largest companies representing approximately a quarter of passive index exposure. Emerging markets offer something genuinely scarce: different economic cycles, different policy dynamics and a correlation of just 0.66 with US equities since 1988—lower than any developed market region.
Diversification: genuine and increasingly scarce
Emerging market equities as a diversifier
or the past fifteen years, investors have been rewarded for keeping things simple: owning US equities and mega-cap stocks. That instinct has been understandable. The US market has delivered exceptional returns driven by a narrow group of large companies whose growth, profitability and market dominance have repeatedly justified investor confidence.
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Indices designed to represent global diversification now allocate roughly 65% to the United States—the highest proportion on record. That concentration was reinforced by the other defining story of the period: emerging market underperformance. As capital crowded into the US, emerging markets were left behind, and the case against them—weak governance, prolonged underperformance and volatile currencies—became embedded in investor thinking. That thinking still shapes portfolios today, even if the reality on the ground has changed. While some emerging markets do face challenges, in many cases they are already reflected in the price. What is less well reflected is how much has changed. When we look at valuations, reforms underway, cheap currencies and potential diversification benefits, we believe emerging markets may represent one of the most overlooked opportunities in global equities today.
That said, we are not making the case for broad emerging market exposure. Emerging market indices are themselves concentrated; the pace of change varies from country to country and valuation dispersions remain wide. India, for example, trades at a 100% premium to other emerging markets, on par with shares in the US. This dispersion underscores the limits of treating emerging markets as a monolith. In this context, selectivity is both a risk management tool and a source of alpha. It allows active investors to hunt in markets where reform momentum, governance improvement, and capital discipline are converging, while avoiding areas where growth remains disconnected from shareholder returns.
The investment case for emerging markets today does not rest on a single argument. It rests on a convergence of conditions: cheap valuations with a skew of potential outcomes that we believe are compelling, structural reforms slowly translating into improving shareholder returns, currencies that are cheap by most measures of fair value, and a diversification benefit that has become genuinely scarce in an era of concentrated global portfolios. For those willing to look beyond the outdated narratives, we believe emerging markets are home to some of the most attractive long-term opportunities in global equities today.
Conclusion
Cyclically-adjusted price-to-earnings (CAPE) ratio
BRIC enthusiasm
Asian financial crisis
58% discount today
31 Dec 2025 | Source: Minack Advisors, MSCI, National Bureau for Economic Research. CAPE ratio is based on trailing operational earnings. US$ price indices, with index and cyclically-adjusted earnings deflated by US Consumer Price Index. Data shown for the period available. EM = Emerging Markets. BRIC - Brazil, Russia, India, and China.
Valuation of EM currencies vs. the US$ compared to average historical levels (based on an internal purchasing power parity model since 1996)
30 Nov 2025 | Source: LSEG Datastream, Macrobond, Orbis. Indicated valuations are the deviation from the estimated average real level of the currency over the previous 25 years, estimated by fitting exchange rates to relative consumer prices. Equally-weighted basket of Brazil, China, Indonesia, India, Korea, Malaysia, Mexico, Taiwan and South Africa. Data is monthly and for the period 15 Jan 1996, the common inception date for all currencies, to 15 Nov 2025. EM = Emerging Markets.
Correlation between monthly USD returns, from Jan 1988
31 Dec 2025 | Source: LSEG Datastream, Orbis, ACWI is All Country World Index. EAFE is Europe, Australasia, and Far East.
Andrea Yung, Investment Director
“Macroeconomic policymaking across many emerging economies bears little resemblance to that of earlier cycles. Central banks are more independent, more credible, and more transparent”
Overvalued
Undervalued
Macroeconomic policymaking across many emerging economies bears little resemblance to that of earlier cycles. Central banks are more independent, more credible, and more transparent. Financial systems are better capitalised and less reliant on short-term foreign currency funding. The fiscal prudence of markets scarred by the Asian Financial Crisis now stands in stark contrast to developed economies struggling with mounting debt burdens. At the corporate level, structural reforms are beginning to strengthen governance and shareholder protections. South Korea is a case in point. Parliament has amended Korea's Commercial Act—the laws that govern Korean businesses—multiple times; company managers now owe a fiduciary duty to shareholders, not merely to the firm itself. The results are already visible. KB Financial, the parent of Korea’s largest bank, has curtailed overseas acquisitions and returned capital to its shareholders instead—its share price has more than doubled since the start of 2024. Samsung Electronics, Korea’s largest company by market cap, also announced a buyback of approximately US$7 billion in 2024 in the face of pressure from shareholders. These are early-stage developments and setbacks remain likely, but they are evidence that the mechanics of value creation are changing. The reforms reshaping emerging market policy frameworks and corporate behaviour have a currency dimension that is equally underappreciated.
“For investors focused on fundamentals, Korea offers a compelling case where discounted valuations, improving capital discipline, and potential structural reform combine to tilt long-term risk-reward in their favour”
ne of the most underappreciated changes across some emerging markets over the past decade has been the strengthening of policy frameworks and market institutions. While headlines often focus on episodic crises or geopolitical risks, these reforms materially alter how several of these economies respond to shocks and generate growth. This evolution matters for investors because it reshapes both risk dynamics and long-term return potential.
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For decades, Korean companies struggled to turn business growth into shareholder returns, and their shares traded at a persistent ‘Korea discount’ to global peers. Weak governance, limited protection for minority shareholders, and tax policies that discouraged long-term ownership undermined confidence. Domestic savers favoured property over equities, while global investors often treated Korea as a one-stock market. By 2024, capital outflows from Korea into the US had become politically salient, and policymakers responded with a state-backed push to “Value-up” Korean companies. The goal was straightforward: improve capital discipline and reward shareholders more consistently. Early progress was visible, especially in the banking sector, but voluntary participation and weak enforcement limited the programme’s impact. As a result, broader capital market reform became a central issue in the 2025 presidential election, with the new administration promising stronger minority shareholder protections, tax reforms to support equity investment, and a vision of a “Kospi 5000” era – envisioning the country’s main index surpassing the 5,000 mark, a milestone since surpassed in January 2026. Parliament has since amended the country’s Commercial Act—the laws that govern Korean businesses— multiple times, and company managers now owe a fiduciary duty to shareholders, not just to the firm itself. While uncertainty remains around execution, fiscal priorities, and trade policy, the direction of reform has improved sentiment. Importantly, these developments have created fertile ground for bottom-up investors willing to look beyond benchmarks and consensus views.
Case study: South Korea
Macroeconomic policymaking in many emerging economies today bears little resemblance to that of earlier cycles. Central banks have become more independent, more credible, and more transparent, with inflation-focused regimes now firmly established across much of the universe. The result has been lower inflation volatility, fewer balance-of-payments crises, and a diminished tendency for temporary shocks to morph into systemic events. Fiscal policy has also matured, even if challenges remain. Many emerging markets have adopted clearer fiscal frameworks and institutional constraints designed to improve discipline and predictability. While debt levels in some emerging market countries rose following the pandemic, the broader shift toward transparency and rules-based policymaking has improved investor confidence. The fiscal prudence of some emerging markets, particularly those scarred by the Asian Financial Crisis of the late 1990s, now stands in stark contrast to most developed markets, many of which are struggling with mounting levels of debt. Alongside these macro improvements, financial systems have become more resilient. The development of tools to safeguard against financial instability has reduced the vulnerabilities that historically amplified downturns in emerging markets. Domestic banking systems are generally better capitalised, and reliance on short-term foreign currency funding has broadly declined. Beyond macroeconomic stability, structural reforms have started to improve the functioning of markets themselves. Reforms aimed at improving corporate governance, protection for minority shareholders, and broadening and deepening capital markets represent a fundamental shift. For long-term investors, it strengthens the case that emerging markets are no longer a basket of basket cases, but are increasingly able to sustain growth through changing global conditions.
It has been encouraging to see these reforms already translating into cash returns for shareholders. KB Financial, the parent of Korea’s largest bank, has scaled back overseas acquisitions and returned capital instead. In response, its share price has more than doubled since the start of 2024. Even Samsung Electronics, long resistant to shareholder pressure, announced a ₩10 trillion buyback (approx. US$7 billion) to support its valuation. Against this backdrop, there remain plenty of company-level opportunities to be excited about. Kiwoom Securities is a case in point. As Korea’s leading online broker, it has captured more than 30% of retail equity inflows in recent years while generating returns on equity of around 18%, despite intense competition. Yet until recently, its shares have long traded near or below book value. Improved market sentiment, increased trading activity, stronger capital allocation, and potential tax reforms could materially enhance shareholder returns and valuations. Similar dynamics apply to several other Korean companies, where strong businesses trade at deep discounts due to governance concerns rather than weak fundamentals. Korea’s reform journey is still at an early stage, and setbacks are likely. Yet the pressure for change continues to rise. For investors focused on fundamentals, Korea offers a compelling case where discounted valuations, improving capital discipline, and potential structural reform combine to tilt long-term risk-reward in their favour.
Where reforms meet shareholder returns
From fragile to resilient: the macro transformation
Investor perception of emerging markets was forged in an era of weak institutions, poor governance, and recurring crises. Across macroeconomic policy, financial systems, and corporate behaviour, the reality today looks materially different. The gap between the two represents an opportunity that most portfolios have yet to reflect.
Matt Kirby, Fund Manager
“NVIDIA’s ability to out innovate its competitors is not a macro phenomenon; it is a reflection of design leadership, software ecosystem advantages, and investment pace”
Francois de Bruin, Fund Manager
“Investors frequently struggle to assess how durable returns really are, especially when companies are at different stages of their Corporate Life Cycle”
lobal equity markets go through long periods where broad trends dominate. In those phases, characterised by rising tides, falling rates, or powerful thematic currents, owning the right bucket of stocks often matters more than owning the right individual stocks. But when markets fragment, correlations break down, dispersion rises, and the drivers of
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To navigate this complexity, we developed a proprietary tool that tracks correlation and dispersion across industries and regions. This helps us identify when company fundamentals are being overshadowed by external forces, and when stock specific insights are likely to dominate return potential. For instance, the performance of Japanese banks is still strongly tied to external macro signals such as yield curve policy, so the industry tends to move together. On the other hand, the software sector offers a wide range of outcomes: not every company will be disrupted by artificial intelligence, and not every platform will capture its value. Our tool can help direct research efforts toward identifying which companies can harness that disruption and which are most at risk.
As we can see in the above chart, which plots the dispersion and correlation of various global sectors, levels of dispersion and correlations were low in the late 2010s. Both subsequently rose significantly during the period of Covid-induced market stress and uncertainty. Things had settled down again in recent years before the recent bout of geopolitical uncertainty. Bringing this back to our Corporate Life Cycle framework, these observations align with the patterns we see across company maturities. Early Life Cycle companies typically exhibit higher dispersion: their outcomes depend heavily on management execution, product market fit, and investment pace. This is where we believe active stock pickers can really benefit from in-depth company research and getting to know the management plans of the emerging industry leaders. By contrast, late Life Cycle companies often show higher correlation to macro conditions, as their returns are more influenced by industry structure, input costs, and economic cycles. By understanding these distinctions, we can build portfolios that blend exposure across the Life Cycle, structuring style neutral portfolios driven by stock specifics. The key is determining when performance is likely to be shaped by external forces, and when it is driven by internal ones. In our view, that ability, in an increasingly fragmented market, is not just advantageous. It is essential.
Plotting a course
This is often more complex than it seems, as companies are not static. Their competitive positions evolve, management teams shift strategy, and external shocks reshape operating environments. Recent geopolitical events in the Middle East are an instructive example. Rising energy prices have rippled not only through commodities but also fixed income, gold, and global equity markets. Investors have responded by repositioning portfolios with an emphasis on risk management, often before the true implications for company level cash flows are known. When macro shocks collide with shifting fundamentals, the market’s ability to correctly price individual company trajectories become strained. This prompts a central question for investors: how do we distinguish between internal, company specific factors and external, macro driven forces when both are in flux?
Macro meets micro
Important Information For professional investors only. This material is not suitable for a retail audience. This is a marketing communication. Capital at risk. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The views expressed are those of the author at the date of publication and are subject to change without notice. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell. Portfolio holdings are subject to change without notice. Forward looking statements are subject to certain risks and uncertainties, Actual outcomes may be materially different from those expressed or implied. Issued in June 2026 by Royal London Asset Management Limited, 80 Fenchurch Street, London, EC3M 4BY. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
Francois de Bruin, Fund Manager and Matt Kirby, Fund Manager at Royal London Asset Management, examine how corporate life cycles, shifting market regimes and macro uncertainty are reshaping the drivers of equity returns.
returns shift from the general to the specific. Today, we appear to be firmly in such an environment. And for fundamental investors, that creates both challenge and opportunity. Investors frequently struggle to assess how durable returns really are, especially when companies are at different stages of their Corporate Life Cycle. However, if it’s possible to understand where a company sits in that Life Cycle, we believe this can determine which behaviours matter most, whether it is reinvesting for future growth, engaging in disciplined capital allocation, or defending already high returns.
One useful analytical lens is to examine correlation and dispersion patterns within industries. These relationships, like corporate returns on capital, are far from static. In industries where outcomes are largely dictated by external variables, such as oil and gas or commodities, correlations tend to be high, and dispersion low. In other words, macro trends can influence return potential. These businesses move together because their economics are shaped less by managerial skill and more by global supply and demand conditions. By contrast, in industries where companies compete on innovation, product quality, or customer value, semiconductors being a prime example, the internal factors dominate. NVIDIA’s ability to out innovate its competitors is not a macro phenomenon; it is a reflection of design leadership, software ecosystem advantages, and investment pace. In these sorts of industries, we typically observe lower correlations but higher dispersion. The winners and losers diverge meaningfully, and stock selection matters far more than making a simple sector call. Market regimes amplify these dynamics. In stable, trending environments, correlations are typically low across the board, but dispersion is also relatively muted; companies move independently, but not dramatically. In crises, the opposite happens: correlations surge toward one as investors de risk indiscriminately, compressing dispersion. A more recent phenomenon, however, has been the widening of dispersion even outside of crisis periods. Policy volatility, particularly during the Trump administrations, has introduced persistent uncertainty into markets. As regulatory, trade, and industry specific agendas have shifted unpredictably, the market increasingly bifurcated between companies likely to be helped or hindered by potential outcomes. This structural rise in dispersion has pushed stock selection back to the centre of global equity investing.
When uncertainty rises, dispersion matters
Accelerating
Compounding
Slowing & Maturing
Mature
Turnaround
For more information on our Global Equities offering at Royal London Asset Management please email bdsupport@rlam.com
The Corporate Life Cycle
For more information about the Royal London Global Equity Sustainable fund please contact bdsupport@rlam.co.uk or +44 (0)20 32725950
Source: RLAM, for illustrative purposes only.
George Crowdy, Senior Fund Manager
“No technology is perfect and AI’s own environmental impact is a real consideration. Training a single advanced AI model involves immense computing power”
“Even the electric power grid is getting an upgrade: AI systems can now balance energy supply and demand by predicting output from solar panels and wind turbines”
AI’s ability to process vast amounts of data makes it a powerful tool to help solve complex environmental problems. Take climate modelling, for example. Traditional climate forecasts required supercomputers churning through equations for days; now AI-driven models can forecast weather faster and potentially more accurately by learning patterns from decades of climate data. The UK’s weather service and tech companies are testing AI systems that produce rapid, high-resolution predictions of storms and heatwaves – a potential gamechanger for disaster preparedness. AI’s pattern-spotting skills are also saving energy: Google has been able to achieve more than six times more computing power per unit of energy versus five years ago through various efficiency measures. In wildlife conservation, AI is an impressive forest guardian. Autonomous drones and acoustic sensors can listen for chainsaws in protected rainforests, instantly alerting rangers to illegal logging. In Africa, camera traps armed with AI software distinguish endangered animals from poachers, enabling quicker interventions to protect species. Smart agriculture has also seen success: Farmers now deploy AI-powered apps and sensors to monitor soil moisture and pest outbreaks in real time. This means using less water, fewer chemicals, and boosting crop yields through precision farming. Even the electric power grid is getting an upgrade. In renewable energy, unpredictable sun and wind pose a challenge. AI systems can now balance energy supply and demand by predicting output from solar panels and wind turbines, helping utilities store energy when it is plentiful and distribute it efficiently when it is needed. By some estimates, smarter grids could deliver double-digit percentage energy waste reduction, highlighting what a greener future might look like.
AI grappling climate change issues
No technology is perfect and AI’s own environmental impact is a real consideration. Those algorithms run on physical hardware – thousands of servers humming away in data centres worldwide, consuming electricity and generating heat. Training a single advanced AI model involves immense computing power. Data centres often rely on energy-intensive air conditioning and vast amounts of water for cooling. Collectively, all data centres according to the International Energy Agency (IEA) – including those for AI – consume over 1% of global electricity and emit roughly 0.5% of worldwide greenhouse gases.
The invisible footprint
The good news is that tech companies and scientists are acutely aware of this challenge – and they’re innovating at breakneck speed to make AI hardware more energy-efficient. One big trend is specialised semiconductor chips designed just for AI tasks. Unlike general-purpose computer processors, these chips can perform the necessary calculations with far less waste. Each new generation of chip – now built with transistors just a few billionths of a metre wide – typically packs more computing punch per watt. There are even experimental analogue and photonic chips that process data using electrical impulses or light instead of traditional transistors, promising leaps in efficiency. Simultaneously, engineers are reimagining how big data centres get cooled and powered. Smarter cooling systems, often themselves guided by AI, dynamically adjust cooling loads and even use outside air or liquid cooling to curb power use. Companies are also investing in renewable energy and planning new data centres near wind and solar farms to ensure the juice powering our AI helpers is as clean as possible.
Greener computing
We have always focused on identifying compelling long-term investment themes and seeking effective ways to benefit from them. On this basis, we have identified attractive investment opportunities in semiconductors. In our view, this sector is the backbone of all digitalisation and in the enterprise software space which is characterised by very high recurring revenues. We have also identified opportunities in companies exposed to the data centre build out, which is where the lines between our ‘atoms’ and ‘bytes’ approach start to blur. We believe that AI is undergoing a multi-decade investment boom and presents a wide range of investment opportunities for our sustainable fund range. As with all new trends or technological developments, there will be winners and losers, making a targeted approach essential.
How can investors benefit?
rom predicting extreme weather to optimising energy use, AI is tackling various environmental challenges. But behind AI’s eco-heroics lies a concern: AI craves a lot of energy. So, is AI an environmental boon or a burden? The answer is a bit of both – but there’s plenty of reason for optimism.
AI’s prowess is being used to address the major issues that have hindered our planet for decades. As semiconductor technology continues to squeeze more "power per watt," is the environmental cost of AI likely to be outweighed by the "green dividend" it pays back to earth? George Crowdy, Senior Fund Manager at Royal London Asset Management explores AI's impact on the environment and what that means for investors.
1. Sustainabilitymag.com
2. Carbonbrief.org
3. Iea.org
Ultimately, making AI environmentally friendly is about balance and ingenuity. If we do it right, AI stands to save far more emissions than it produces. According to the IEA, by 2035, AI-driven improvements in energy, transport, and agriculture could help slash global carbon pollution by billions of tonnes – potentially dwarfing the extra emissions from data centres themselves. In other words, if AI’s superpower is solving complex problems, one of the biggest problems it may solve is its own carbon footprint.
Can AI solve its own carbon footprint?
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