Nonetheless, high-flying large-cap tech darlings dominate in many EM markets, much as they do in the U.S. And that concerns some investors. “Big-tech EM companies give you some diversification with customers, country and currency risk, but not that much,” says John Thorndike, portfolio manager at GMO. “There is a feeling these guys are the only ones who are going to win.”

He adds that investors should think differently from the indexes, particularly if they’re willing to take bigger country and sector bets. “Our forecast for EM value is [performance gains] approaching double digits,” Thorndike says. “They represent 30% of our global portfolios. A passive index-weighted portfolio would have them at 3% to 4%.”

Don’t Forget The Old School
Aditya Kapoor, co-portfolio manager of the Ivy Emerging Markets Equity Fund, waxes enthusiastic about the growth prospects in the consumer discretionary, information technology and communications services sectors that hold the biggest weightings in his fund. But he hasn’t forgotten the old-school commodity plays that formerly played a bigger role in emerging markets.

“We definitely skew toward growth and technology platforms,” Kapoor says. “I’ve never liked the commodity side of emerging markets, but when you look at the valuations there they are super attractive.”

He notes the commodity sector over the past 10 years saw relatively little investment and a lot of consolidation. “Because of that, supply is very constrained in commodities such as gold, copper and iron ore,” Kapoor says. “The balance sheets have repaired, and many of them pay high dividends with a lot of free cash flow. EM still has some of the best commodity producers, and we’re finding opportunities on that front.”

And, of course, he’s also finding opportunities in technology—and not just in China. “China is just one part of the EM technology story,” Kapoor says. “There are some interesting companies in Korea, and a few in Latin America.”

One of the Ivy Emerging Markets Equity Fund’s top 10 holdings is MercadoLibre Inc., an Argentine company that hosts online commerce and payments platforms in Latin America. Another top 10 holding is Yandex N.V., a Russian internet search engine.

“Regarding tech sovereignty, every country wants a national hero when it comes to technology platforms,” Kapoor says. Yandex has government support in Russia, he adds, because the country wants “national heroes that don’t have to depend on the U.S. or China.”

China Is Still The Man
It’s in China, though, where Kapoor sees the most alluring action. China takes up more than 40% of his fund, and he looks for companies that won’t get hit by the ongoing U.S.-China trade war.

“We’re trying to find trends that are more powerful than the externalities that dictate much of what happens in the world,” he says. “We’re trying to find brands in China that could become the next Nike of China.”

He notes that he and his partner at the Ivy Emerging Markets Equity Fund repositioned their thinking—and their portfolio—when the trade war heated up in 2018. “I think this rivalry between China and the U.S. is here to stay,” Kapoor says. “There’s not one trade deal that will make us forget about it, and this rivalry will be fought on the technology front in A.I., cloud computing, quantum computing, advances in biotechnology, etc. It’s an issue you can’t ignore, but we chose to not invest in companies that depend a lot on key U.S. technology.”

He adds that China’s economy is very big, diverse and dynamic. “Its mobile internet economy is more advanced than that of the West. There are a lot of innovative companies able to compete on the world stage despite higher tariffs. That’s because the supply chain is so efficient there. The manufacturing capability of China is unmatched; that’s why we haven’t seen a lot of production move out of China.”