Q1 2023 – Emerging Markets Quarterly Update

Principal and Portfolio Manager Rakesh Bordia provides an update on the first quarter for our Emerging Markets strategies.


Emerging market bourses were relatively unscathed by concerns over global banking weakness, benefiting instead from China’s reopening and an improvement in semiconductor supply chains (SE Asia is the world’s major chip hub). Similar to European banks and GSIFIs, most EM banks’ securities books are marked to market, so there are no hidden capital holes like at SVB. What’s more, our EMFV banks are mostly industry leaders that benefit from deposit flights to safety; and in general, most EM bank management teams are used to dealing with high and volatile interest rates, so their investment books are managed accordingly.

After a nearly 2-year steady decline driven mostly by Chinese economic malaise, we are starting to see EM stocks regain market leadership, which is what we would expect following a period of especially painful performance.

Average Annualized Alpha of EM Countries Following Steep 12 Month Underperformance¹


Our Emerging Markets portfolio closed the quarter solidly in the black, outperforming both the broad MSCI EM Index as well as the value series². 

Largest Sector Contributions (absolute)

  • Information Technology
  • Consumer Discretionary

Largest Individual Contributors (absolute)

  • Korean steel producer POSCO Holdings
  • Chinese PC-maker Lenovo Group
  • Taiwanese chipmaker TSMC

Largest Sector Detractors (absolute)

  • Real Estate
  • Energy

Largest Individual Detractors (absolute)

  • S. African energy & chemicals company Sasol
  • Chinese real estate company COLI
  • Indian vehicle financing company Shriram Finance

Notable Adds

We added Weichai Power Co., which is China’s leading diesel engine OEM, with a dominant position in heavy-duty trucks with economies of scale, best-in-class technology, and proven pricing power. The Brazilian market weakness and concerns over the new government provided us the opportunity to buy some of the industry leaders in Brazil at attractive valuations, including one of the largest Brazilian banks Banco do Brasil, and Brazilian energy company Petroleo Brasileiro.

Notable Sales

We sold out of Korea Shipbuilding and Offshore Engineering, despite a fairly attractive valuation, as we lost confidence in the company’s long-term capital allocation strategy. At a high level, KSOE’s management planned to IPO a few of its subsidiaries and use the proceeds to make investments in green energy, but wouldn’t provide specifics on said investments. Because we couldn’t determine whether the company would participate in value-destructive M&A, we elected to exit our position.


Ongoing macro and geopolitical concerns, turmoil in the banking sector, and volatility in both the US dollar and interest rates kept the market on edge throughout the quarter. We believe controversy and fear can create opportunities for value investors – especially in developing markets where price dislocations are often magnified – and we continue to be very excited by the cheap company valuations against their fundamentals in emerging markets.

Developed³ and Emerging Markets4 Relative Returns to the Best and Worst Quintiles of Valuation5 Measured over One- to Three-Year Holding Periods6

¹Source: MSCI, Pzena analysis. We looked at significant emerging market country declines, defined as 2,000 basis points or more of underperformance versus the MSCI Emerging Markets Index over the prior 12 months, and then looked at how those countries performed over the next one, three, and five years. The data set is from January 1, 1992 through December 31, 2021 and includes 10 different countries (some did not have data for the full period). The 10 countries chosen were the 10 largest weightings held in the MSCI Emerging Markets Index (as of December 31, 2021) that have at least a 10-year MSCI track record. Data in US dollars.

²Past performance is not indicative of future returns. Past performance is not indicative of future results. Returns could be impacted, positively or negatively, by currency fluctuations, where applicable.

3Proxy for MSCI World universe.

4Proxy for MSCI Emerging Markets universe.

5Developed market returns are USD-hedged from 1987. USD returns for emerging markets from 1992; equal-weighted data.

6Source: Empirical Research Partners. Based on Empirical Research Partners multi-factor model. Best and Worst Quintiles are derived using a combination of valuation factors. Data through March 31, 2023. Does not represent any specific Pzena product or service. Past performance is not indicative of future returns.

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