The ClearBridge Emerging Markets Strategy achieved significant outperformance against its MSCI Emerging Markets benchmark during the second quarter of 2026. This success was primarily fueled by the accelerating artificial intelligence (AI) momentum within leading technology companies, particularly those located in South Korea and Taiwan, which saw substantial earnings growth. While the information technology sector exhibited remarkable gains, other sectors such as consumer discretionary and energy experienced underperformance. The strategy's proactive portfolio adjustments included establishing new positions in critical network infrastructure, advanced circuit board materials, and the oil and gas sector. This dynamic approach aims to capitalize on AI-driven growth trends while meticulously managing market concentration risk through a diversified allocation across various countries.
Looking forward, the long-term outlook for the portfolio remains positive, with promising drivers identified in China, India, and the broader information technology landscape. China's macroeconomic conditions are stabilizing, and its market valuations continue to offer compelling opportunities compared to global peers. India presents attractive long-term prospects, especially within high-quality, domestically focused enterprises that have been historically overlooked. The IT hardware sector is poised for sustained growth, supported by a combination of increasing global demand and persistent supply constraints. The strategy is committed to balancing high-beta AI-driven companies with lower-beta holdings in sectors such as healthcare and consumer goods, ensuring a robust and diversified investment profile.
Emerging Markets Soar on AI-Driven Tech Rally
In the second quarter of 2026, emerging markets experienced a robust surge, largely propelled by the escalating AI advancements within prominent technology companies and their exceptional earnings reports. The MSCI Emerging Markets Index recorded an impressive 24.1% increase, surpassing most global equity markets. This remarkable growth was predominantly driven by the outstanding performance of South Korea, which skyrocketed by 87.6%, and Taiwan, which saw a significant jump of 48.9%. In a positive indication of broadening market strength beyond AI, India also climbed by 10.1%. However, some of the largest emerging markets, such as China and Brazil, lagged, with China's economy being hampered by a stagnant property sector and subdued consumer spending, while Brazil contended with a weakening currency and pre-election uncertainties.
Sector-wise, the index's performance was notably concentrated, with information technology (IT) soaring by 73.3% and industrials advancing by 18.2%, while other sectors underperformed. Consumer discretionary emerged as the weakest sector, declining by 10.0% due to reduced consumer spending in China and negative sentiment surrounding increased AI capital expenditure by Chinese e-commerce firms. Energy also lagged with a 9.9% decrease, as commodity prices softened amid expectations of a resolution to the Middle East conflict. Despite this concentrated performance, the largest share price movements were fundamentally driven by earnings, and valuations remain reasonable. For instance, SK Hynix and Samsung Electronics traded at attractive next-12-month earnings multiples of 6.8x and 6.2x, respectively, while Taiwan Semiconductor was at 21.2x, all notably lower than the MSCI Emerging Markets Index's forward P/E of 12.2x.
Strategic Portfolio Adjustments and Outlook
The ClearBridge Emerging Markets Strategy's outperformance during the second quarter was significantly enhanced by strong stock selection and an overweight position in South Korea, primarily due to its semiconductor exposure. Companies like SK Hynix and Samsung continued to benefit from favorable market conditions for DRAM and NAND, particularly high-bandwidth memory, where supply constraints and high AI demand drove higher prices. SK Square, with a substantial holding in SK Hynix, also benefited from these memory market trends. Taiwan Semiconductor saw gains from its pricing power and robust order backlog, solidifying its position as a dominant foundry for leading-edge chips. MediaTek's emerging AI accelerator chip business, with clients like Alphabet, and Delta Electronics' strong demand for power supply and thermal management products amid AI server buildouts, further contributed to positive performance.
During the quarter, the strategy strategically added four new positions and exited one. In Taiwan, Accton Technology and Elite Material were acquired. Accton, a high-quality network switch provider, is crucial for data centers as AI drives traffic growth, with strong customer relationships and an asset-light model. Elite Material, transitioning from a cyclical supplier to a structural enabler of AI infrastructure, offers competitive advantages in circuit board materials, which are essential for complex AI systems. The strategy also invested in Prio, a Brazilian oil and gas company, anticipating continued oil market volatility and attractive free cash flow yields despite a Middle East ceasefire. Furthermore, SK Square was added to diversify South Korea exposure, valued for its significant holding in SK Hynix and potential for reducing its holding company discount. Conversely, the strategy exited Tata Consultancy Services, opting for other Indian franchises with higher conviction in recovery, such as banks, which offered more attractive valuations.
