Fairtree Global Emerging Markets Fund Q2 2026 Commentary

The MSCI Emerging Markets Index surged 24.05% over the quarter, well ahead of the MSCI ACWI, which gained 14.93% (all figures in US dollars).

The quarter was defined by an exceptionally powerful but highly concentrated recovery in emerging market equities, led by a small number of semiconductor and memory names, following the March US-Iran shock and the subsequent ceasefire that unwound the geopolitical risk premium. The momentum factor has continued to post record outperformance versus the market and other factors. This has created a narrow market over the last three-and-a-half years, where only approximately 30% of stocks outperform the S&P 500 and MSCI Emerging Markets Index benchmarks. The Fairtree global funds are always positioned overweight value, growth and quality on an absolute and relative basis, but our exposure to momentum is traditionally only marginally positive, and this has therefore not been a market environment conducive to the Fund’s style. The momentum run has been fuelled by growth in leveraged ETFs crossing US$200bn and same-day expiry option trading going through the 50% mark. The sectors that have benefited from this momentum factor are semiconductors, which grew from around 5% of the S&P 500 a couple of years ago to around 20%, alongside power and infrastructure plays. These picks-and-shovels plays are beneficiaries of the AI capex boom, while hyperscalers, software and platform companies are used as funders.

Global equity markets rebounded strongly over the quarter, recovering from the March sell-off that had followed the outbreak of the US-Iran war. The announcement of a ceasefire on 7 April removed much of the geopolitical risk premium that had built up, and Brent crude fell 38.4% over the quarter as the conflict de-escalated and supply returned to the market. US equities led the recovery, with the S&P 500 rising 15.2% and the Nasdaq 100 gaining 27.7%, driven by renewed optimism around AI-related capital expenditure, stronger-than-expected first-quarter corporate earnings across mega-cap technology, and easing concerns over a broader escalation in the Middle East. The Federal Reserve held its target range at 3.50% to 3.75% throughout the quarter but adopted a more hawkish tone at its June meeting, signalling that a further hike was possible, which supported the US dollar and prompted a pause in the semiconductor rally. The US labour market remained resilient, with unemployment holding at 4.3%, while gold fell 13.2% as safe-haven demand unwound and the dollar strengthened.

Emerging markets delivered the strongest regional returns over the quarter, with the MSCI Emerging Markets Index rising 24.05%, more than reversing the March decline. Performance diverged sharply on a country level. South Korea and Taiwan were the standout performers, surging 64.1% and 48.9%, respectively, driven by an exceptional rally in semiconductor and memory stocks as AI-related demand lifted Samsung, SK Hynix and TSMC. The rally paused in June, however, as profit-taking swept through the semiconductor complex following a sharp single-day sell-off. Indonesia was the weakest market, falling 27%, weighed down by a record low rupiah, persistent foreign outflows, fiscal deficit concerns and MSCI investability concerns, while Brazil declined 8.2% as inflation and restrictive monetary policy weighed on sentiment. China fell 6.6%, pressured by a technology-led sell-off, a weak property market and subdued consumer confidence.

On a sector level, Information Technology was the best-performing sector over the quarter, and the Fund’s underweight was the largest detractor of relative performance. The Fund’s overweight holdings in Materials and Consumer Discretionary were the next biggest detractors from relative performance. The Fund’s underweight position in Energy stocks contributed positively to relative performance, while stock selection in the Financials sector detracted from relative performance over the period.

On a country level, the portfolio’s underweight to South Korea was the largest detractor from relative performance, as the market surged on the back of the semiconductor rally, with Samsung and SK Hynix together accounting for approximately 70% of the MSCI Korea Index and over 15% of the MSCI Emerging Markets Index. Taiwan was a further detractor, with TSMC alone representing around 55% of the MSCI Taiwan Index and over 15% of the MSCI Emerging Markets Index. Given the portfolio’s maximum regulatory position limit of 10% per stock, the Fund is unable to match TSMC’s index weight, resulting in an unavoidable underweight. The strong performance in emerging markets over the quarter was predominantly driven by these three names: Samsung, SK Hynix and TSMC, underscoring how concentrated the rally was in just a few stocks. The Fund’s overweight to South Africa via the resource counters was a further detractor on the back of lower gold and platinum prices.

Notable portfolio activity during the quarter was focused on the technology and AI value chain. On the buy-side, the largest additions were to the Korean memory names Samsung and SK Hynix, which continued to benefit from strong high bandwidth memory demand. The Fund also increased Tencent, Kiwoom Securities, and opened new positions in Kia in South Korea, Chenbro Micom in Taiwan and OTP Bank in Hungary. On the sell-side, the Fund trimmed TSMC to stay within the regulatory position limit and reduced Sasol and MediaTek, while fully exiting Bid Corp, Afya, Hindalco, Piraeus Bank and Truworths. The holding in Naspers was partially switched into a new position in Prosus at attractive levels. Notable contributors to fund performance over the quarter were positions in SK Hynix (+685bps absolute and -444bps relative), Samsung (+355bps absolute and -146bps relative) and TSMC (+321bps absolute and -148bps relative). Notable detractors were Northam Platinum (-38bps absolute and -36bps relative), Impala Platinum (-36bps absolute and -33bps relative) and Sasol (-35bps absolute and -33bps relative).

The Fund remains overweight in South Africa and Kazakhstan, where we continue to identify compelling bottom-up opportunities. Conversely, the Fund remains underweight in India, China and South Korea, with India continuing to trade at elevated valuations relative to broader emerging market peers.

Reflecting on the performance of the Fund over the quarter, the recovery in emerging markets proved exceptionally strong but also extraordinarily narrow, driven predominantly by three momentum-driven semiconductor and memory heavyweights, namely Samsung, SK Hynix and TSMC. Together, these names dominate the Korean, Taiwanese and broader emerging market indices. The UCITS regulatory limit of 10% per position leaves the Fund structurally unable to match the benchmark’s exposure to them. This, combined with the Fund’s tilt towards value, growth and quality rather than momentum, was the primary driver of the Fund’s underperformance over the period. Periods of such narrow leadership have historically been followed by a broadening of returns as fundamentals reassert themselves, and capital that exits quickly in these environments can return just as fast. We believe current conditions present a compelling opportunity set, with valuations across several of our holdings derating faster than underlying business fundamentals would suggest. Our approach remains valuation-disciplined, style-agnostic and highly active, and we continue to adjust positioning as opportunities evolve, focusing on situations where the risk-reward profile has improved meaningfully.