After years in the shadows, here's where to find future long-term winners

When speaking about developed markets vs emerging markets, it often conjures up the image of an adult talking about a teenager - lots to learn and hard to take seriously. A figurative pat on the head and then it’s back to business as usual.

So are emerging markets coming out of their adolescence? After years in the shadows of developed markets, emerging markets are beginning to outperform. Dr Joseph Lai from Ox Capital Management believes the shift isn’t just a phase. 

For the full picture, watch the interview below.

Please note, this interview was filmed 11 June, 2025.

The tide is turning

“The most significant change is that some of these emerging markets are actually starting to outperform developed markets, which hasn't been the case for a long time,” says Lai.

The two main drivers of this have been a growing awareness of the surprisingly robust macro resilience of emerging markets, along with the unexpected development of a falling US dollar.

“The amount of national debt is much lower than developed markets. The institutions within these countries are improving as they want to catch up to the wealth level of developed countries.” Lai explains.

The US dollar has historically been a bit of a headwind, and a problem for emerging market valuations, Lai adds. “A falling US dollar is good for emerging markets.”

The market always finds a work-around

Global headlines might be dominated by tariffs and trade wars, but Lai sees a lot of smoke but not fire.

“In a world of multipolarity in which no particular country holds all the cards, it's very hard to actually force other countries to do what you want,” he says.

Referencing Australia’s past standoff with China over barley and wine, Lai points to the adaptability of modern economies.

“There’s more than one country you can sell the products to. Be it technology restrictions – there’s ways around various things… Entrepreneurs and capitalists find a way.”

More similarities than differences

When investors think of emerging markets, Lai says many still picture low-tech, commodity-heavy, low-GDP economies. But that view is outdated.

“Maybe that was true 20 years ago,” he says. “Today, when we look at a lot of these emerging countries…production is not a big part of the economy anymore. In fact, a lot of them don't even export that much anymore. They've got a large domestic economy.”

Lai says that the exciting stories in a lot of emerging countries are of industries, especially to do with AI, that are not that different to those of developed economies. Particularly in countries like China and parts of Asia, “we can find very similar exposures.”

China’s AI advantage

While US tech giants get the headlines, Lai believes China is set to benefit from a more cost-efficient model.

“The cost of DeepSeek and some of these cheaper Chinese models is literally a few percent of that over ChatGPT,” Lai says, and that makes it far easier for businesses across Asia to adopt AI.

“It’s like having access to a cheaper source of electricity…the diffusion of AI will be very rapid…in e-commerce, white collar work, robotics – it’s rather exciting.”

Local brands, local identity

With rising wealth and aspirations, Lai sees massive opportunity in domestically driven consumption stories, where the base is still very low, and what he sees as growth of five to ten fold, in some cases, over the next decade.

“We are seeing the rise of domestic brands…Eventually people will want to have their own national brands,” he says.

And while global luxury and sporting labels still dominate, Lai says local brands in healthcare, internet, and consumer products are increasingly competitive.

Valuation discipline is critical

For OxCap, valuation discipline is critical. “We look for future winners in growing economies,” says Lai. That is, companies with quality franchises, strong moats, and the ability to grow earnings in line with revenue.

“Simply, we do not pay up,” Lai says. “An example would be quick delivery companies in India – very good, very quick growth dynamic, but very, very expensive. So we just don't even look at it.”

Instead, they focus on value backed by fundamentals - like strong private sector banks in India trading at reasonable valuations.

What’s flying under the radar?

One name Lai is particularly excited about is Kuaishou Technology (HKG: 1024), a Chinese short video platform listed in Hong Kong.

“It’s like the TikTok of China,” he says. “More than half a billion users…just starting to monetise effectively. They’re selling advertising, running e-commerce through the platform.”

Despite the user growth and monetisation upside, the stock trades at a bargain.

“Earnings growth is likely to be around 20% a year… But the PE ratio is about 10 times. So it's actually very cheap.”

Portfolio positioning

“We’ve been a bit cautious on China exposure probably 18 months ago,” says Lai. “But as the valuation came off…we actually increased our exposure.”

The team added positions in names like BYD (SHE: 002594), Tencent (HKG: 0700), and AIA Group (HKG: 1299), businesses they view as world-class, bought at a discount, and also increased their exposure to Hong Kong in particular in December last year.

Their approach remains consistent: quality first, value a close second.

From a risk perspective, “the focus on quality businesses means that we are not taking a lot of the idiosyncratic risks in the business. Even in a difficult environment, the earnings should be able to prevail to a large degree.” Lai explains, adding, “one can never be a hundred percent sure, but at least those are more resilient businesses.”

The second layer to their risk approach is to be macro aware. Lai explains how a core model they use allows them to take evasive actions when needed.

“We don't do that often, but we did it straight after Liberation Day and also before COVID, which actually saved a lot of the downside and reduced a lot of the downside problems that the market experienced during those times.”

Access for Australian investors

Lai’s message to investors considering emerging markets is to be selective.

“One has to be quite selective in what [one] chooses to own,” he says. “I would recommend the stuff we do – the OxCap Emerging Market Fund – because of the focus on quality, valuation discipline, and the toolkit available to reduce downside risks.”

And perhaps more importantly, experience matters.

“There aren't actually a lot of people with long-term history in this market,” Lai notes. “It’s a part of the world that a lot of investors have taken their eyes off.”

Take advantage of the rapid growth in Asia and emerging markets

Ox Capital's investment approach is to identify the immense changes taking place in Asia and other key emerging markets to find investment opportunities. To learn more, visit their website, or the Fund Profile below.

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