MW This top-performing emerging-markets fund manager says his asset class can be an AI play too

By Jules Rimmer

Emerging markets present opportunities beyond Mag 7 for investors looking to exploit the AI bonanza

Emerging markets have delivered a 28% return in dollar terms so far in 2025, roughly double that of the S&P 500

One of the frustrations of emerging markets for investors has been the failure of many of them, over the years, to actually emerge.

However, one emerging-market fund manager, whose small cap fund was the best performer in its asset class between 2014 and 2024 is optimistic because there have been real signs of progress in this last year.

The iShares MSCI emerging-market index ETF EEM has gained 30% this year, vs. 16% for the S&P 500.

Dr. Ivo Kovachev is the senior fund manager at JO Hambro, running around $1.2 billion in an emerging markets growth opportunities fund with annualized returns of 10.34% according to data compiled by MSCI Barra/ Bloomberg and another $200 million in an emerging markets small cap fund JOMMX. This latter was the best-in-class over ten years through last year, returning 133 % compared to a return for the MSCI emerging market small-cap index of 74%, according to MSCI Barra/ Bloomberg.

Dr Ivo Kovachev has been an emerging market fund manager since the mid 1990s, giving him a broad perspective on the asset class through many crises.

Kovachev applauded in particular two examples where a commitment to economic orthodoxy finally created the right conditions for emerging-market outperformance: first, Brazil where high real interest rates have succeeded in getting inflation under control and provided the Bovespa BR:BVSP with a strong impetus; second, South Korea KR:180721, where the corporate value-up program, a government initiative to improve corporate governance and the treatment of shareholders, has finally succeeded in reducing the so-called "Korean discount."

From a technical perspective, Kovachev warns the emerging markets index has clearly made a double top which in chartist terms is a bearish formation, two consecutive peaks at the same level, signaling a potential downtrend.

However, the emerging markets universe in 2025 has been subject to the same primary drivers as those in developed markets, chiefly the AI boom and the trade war, and the outlook for 2026 will probably be dominated by those two themes again. While many investors struggle to think of AI as anything other than simply the Magnificent Seven MAGS, it has been possible to explore that theme in emerging markets too, although many of them are the "pick and shovel plays" on the sector. These are companies that provide the hardware/ software, services and infrastructure to the AI industry.

One example cited by Kovachev, Taiwan Semiconductor $(TSM)$, which makes most of the highly-advanced chips used in AI computing, represents roughly 12% of the MSCI emerging-markets index. He also points to AI plays in South Korea like Samsung Electronics (KR:005930) and SK Hynix (KR:000660), and in China there is a coterie of companies including Alibaba $(BABA)$ , Baidu $(BIDU)$, Tencent $(TME)$ and Xiaomi (HK:1810).

Even Dubai, Kovachev notes, has its own highly successful AI play, Presight AI Holdings (AE:PRESIGHT), with a market capitalization of 16.4 billion United Arab Emirates dirhams (roughly $4.5 billion) that he has owned and enjoyed its 43% year-to-date return.

It's not all high tech, though. JO Hambro's small cap fund benefited this year from its holding in Popmart $(PMRTY)$, the Chinese toy-maker famous for its Labubu dolls. It has an American depositary receipt that has delivered a 150% return so far in 2025.

Heading into 2026, however, Kovachev, a Fulbright scholar who during his academic career researched early versions of AI in the 1990s, thinks AI stocks are now "crazy expensive" and that the exponential stage of growth for the shares might have passed. This may inform his underweight position relative to benchmark in TSMC, for instance.

Looking into 2026, he still favors the picks-and-shovels approach but also identifies the energy demand created by the AI boom as a developing trend for emerging-market funds. Having traditionally been regarded as value or dividend plays, utility stocks are suddenly being treated like growth stocks and fuel cell and hydrogen energy storage.

Having caused much damage to the emerging markets investment case in recent years, will Russia ever be investible? Kovachev thinks that "markets have very short-term memories and it's more than possible at some stage, investors will return to Russian assets, having seen a similar thing happen after the default of 1998. Within five years, Russia was one of the best-performing markets and investors were flocking back.

He sounds a note of caution about the global economy in 2026, though, because the circular model that worked for so long - Russia exporting cheap energy and resources to Germany, which engineered equipment for the Chinese, who in turn manufactured goods for American consumers - is now obsolete.

Kovachev has been in fund management since 1994 and has assembled an experienced team around him consisting of fellow senior fund manager Emery Brewer and analysts Dalibor Kovac and Ladislav Sabo. Because of the inherent volatility of emerging markets, experience is the attribute which Kovachev prizes most highly when it comes to running money in emerging markets. He's managed assets through a number of crises, including the Mexican 'Tequila Crisis' in 1994, the Asian Contagion that began in 1997, the Russian default of 1998 and the global financial crisis of 2008-2009. This perspective is, he reckons, invaluable.

However, he notes it's important to have younger analysts to help with inter-generational thinking about investing and also to protect the long-term future of the fund.

When it comes to his approach to portfolio management, Kovachev splits it into two separate strategies: standard growth investment seeking out secular momentum and what he calls 'recovery growth' where he is looking to capture inflection points, looking at technicals and sequential, rather than year over, growth. He maintains a dynamic balance between these two strategies, usually about 60: 40 in favor of secular growth, but his fund is long-only and does not short stocks.

-Jules Rimmer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

December 02, 2025 08:34 ET (13:34 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.