The opportunity in emerging markets today (Podcast)

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Podcast transcript

John Przygocki: Welcome to Talking Markets with Franklin Templeton. I'm your host John Przygocki from the Franklin Templeton Global Marketing Organization. As a forward-thinking asset manager, Franklin Templeton leverages cutting-edge strategies and deep industry insights to unlock opportunities to help grow wealth. We’re your trusted partner for what's ahead.

I just mentioned deep insights, and today I'm really excited to be in the studio with Brian Freiwald. Brian is the portfolio manager of Putnam's Emerging Market Equity strategies with over two decades of industry experience, the last 15 years at Putnam. Putnam is a diversified equity asset manager of Franklin Templeton, serving investors worldwide, committed to active strategies driven by proprietary research, rigorous risk management, and client-centered innovation. Brian, welcome to the show.

Brian Freiwald: Thank you. Great to be here.

John Przygocki: Thank you, Brian, for spending some time with me today. I've really been looking forward to our conversation. What a unique opportunity to discuss the emerging market landscape on the Talking Markets podcast. Let's start with some background. How did you become a professional investor in the emerging markets?  

Brian Freiwald: I've been obsessed with the stock market since I picked my first stock, Disney, at the age of 12 with the help of my grandfather. I'm so lucky that I knew what I wanted to do from such a young age, and so grateful that I've achieved my dream here at Putnam, and I still can't believe this is what I get to do for a living.

So why EM [emerging markets]? In 2005, I covered the internet sector at William Blair: Google, Yahoo, etc. There was over 40 people on the sell side and thousands on the buy side trying to call the corner. Then I went to University of Chicago for an MBA, where I specialized in analytical finance, where they hammered the message that markets were efficient. I even had lunch with David Booth, who founded DFA and who the school is now named after. He said I was foolish for wanting to pursue a career in fundamental investing. That is why EM. I wanted to find a niche where I could create value.

EM is the most inefficient segment of the marketplace, where hardworking investors can consistently generate alpha. In 2010, I had the opportunity to join the EM team at Putnam, and after dozens of interviews across the landscape, I was just blown away by the investors here. So, over my 15-year career in emerging markets, the team has proven that the market is not efficient.

John Przygocki: That's really interesting, Brian. Let me follow it up with a question about allocation. Why should investors today consider allocating to emerging market equities?

Brian Freiwald: Well, the EM index outperformed in 2025 and is outperforming so far in 2026. But we are just starting an era of EM outperformance in my view. Emerging markets are coming off of a low base. Historically, EM has had these very long, often decade-long cycles of outperformance: 1987 to 1994, 1999 to 2010. For example, from 1999 to 2008, the EM index generated a total return of 300% versus just 15% for the S&P 500 [Index].

I am currently reading The Making of a Permabear by Jeremy Grantham, the founder of GMO and a legendary investor. There is a chapter that walks through their visionary call during this exact time period. Interestingly, today, GMO is making the same call of EM outperformance relative to US equities.

And why is that? Faster EPS growth. Stock prices follow earnings, and earnings are growing faster in emerging markets. The previous decade disappointed because earnings per share in EM didn't grow. EPS for the EM index was about $80 in 2014 and about $80 in 2024. In contrast, the S&P 500 doubled earnings from approximately $110 to $240.

So why was this? There was a perfect storm for EM, a strong dollar, an unwind of China's growth, companies issuing lots of stock and contracting margins. But we believe the future is going to be different than the recent past. Over the next two years, EM EPS is forecasted to grow approximately 60%, while US earnings are forecast to grow approximately 30%.

If faster GDP growth translates to faster EPS growth, we will have another 5-to-10-year period of EM outperformance. In addition, we have supported valuations today. The S&P 500 trades at 21 times earnings with a 1% dividend yield. In contrast, emerging markets trade at 13 times earnings with a 3% dividend yield. So, if multiples are just flat and you get paid on that 60% EPS growth, that's a 60% return plus a 6% dividend yield over the next 24 months. And if EM can re-rate from 13 times earnings, there's upside to that figure.

John Przygocki: So, Brian, given what you just went through, it's really surprising to think that emerging markets still seem to be labeled with phrases like “cheap but risky.” It's surprising that that framing, to be quite honest, still exists in 2026. How would you respond to that type of label regarding emerging markets?

Brian Freiwald: Yeah, a few points. So, one: the large allocators run their asset allocation models based on 10-year history. They're overweight private credit and private equity and underweight international equities. As risk-adjusted performance over the trailing 10-year period improves, I think you'll see a shift. And that's not as bad as the market perceives, given all the diversification benefits that an investment in EM provides.

However, I would highlight that it's becoming less understood every day. EM is on track to have its largest annual inflow on record. At Putnam, we're seeing a significant pickup in client interest on the retail and institutional side.

Finally, several countries in emerging markets have a negative correlation with AI [artificial intelligence] and also the S&P 500. China has closed capital markets. India is more driven by domestic flows. And Saudi is also highly correlated to the price of oil. So I believe emerging markets will provide protection when AI and the Mag Seven^[1] trade runs out of steam.

John Przygocki: So, Brian, in that last answer you mentioned “less understood” or “misunderstood.” What do you think is actually the most misunderstood element about the emerging market asset class?

Brian Freiwald: I think points that they're necessarily more risky or more volatile. So, let's look at example at the stock level. So yesterday, Di Yao, a 20-year Putnam veteran who runs our global tech strategy, gave an update on the memory sector. So, there's a shortage of memory globally given the AI boom. And these have been some of the best-performing stocks in the world. And, essentially, there are three companies that make memory: Hynix and Samsung, which are Korean companies, and Micron, which is an American company.

It's a global market. And Micron is trailing from a technological standpoint and not selling into Nvidia's latest products. And yet Micron trades at a 100% premium, double the multiple, simply because it trades on the Nasdaq. I think this is completely unjustified. And I would argue this makes Micron a lot riskier than the similar companies in emerging markets, such as Samsung and Hynix.

John Przygocki: So, Brian, you mentioned a couple of companies there. Were there other companies that you might want to highlight?

Brian Freiwald: Yeah. So, the other big theme that we're seeing driving emerging markets is earnings revisions. And so, revisions is the core to our process. Fundamental momentum is the most powerful factor in emerging markets.

So, to give a couple examples, I was in Brazil a month ago where we're seeing significant upward earnings revisions. The economy is benefiting from strong material prices. But the consumer's under pressure from interest rates of 15%. But these are beginning to fall. And so that's why we're seeing rapid earnings revisions in Brazil today.

One name we like is a 20-billion market cap water utility. Today, 35 million people don't have access to running water in Brazil. And 50% of sewage flows directly into rivers. The government has committed to universal access to water and sewage by 2033 and is investing approximately $125 billion in capex. These are tangible, long-duration infrastructure investments with real social impact, not the speculative creation of tokens for vibe-coding robots. We visited the company’s water treatment plants and met with management.

And management is converting the company from a state-owned enterprise to being a privately run business and rapidly cutting costs. Estimates are up 20% this year for this company, and our modeling suggests an additional 10% upside to estimates. At the aggregate level in emerging markets, the data is showing the fastest earnings growth revisions on record. And we are seeing sharply higher revisions in Brazil, Korea and Taiwan.

John Przygocki: From your point of view, what are the major impacts on emerging markets from the military conflict in the Middle East?

Brian Freiwald: Well, first, I don't think the market has spent any time thinking about the Iran conflict being DCF [discounted cash flow] positive. No one has any idea how it will play out, which has raised the VIX and reduced the market multiple. But fast forward a few years, and it could create positive change for the region.

Regarding oil, the futures curve shows a sharp decline. Let's not forget three weeks ago the world had an oversupply of oil, and I believe it will again. That said, higher oil is in general bad for emerging markets. The US is insulated, and EM in general is not. Korea, Taiwan and India are all big importers of LNG [liquefied natural gas] and oil, and EM consumers, like those in Thailand, spend 9% of their consumption budget on gas versus just 3% for wealthy Americans.

Notably, and in contrast to media reports, China has built significant oil reserves and is very resilient to oil shocks today unless things escalate significantly.

Just yesterday, I had a call with the CEO of the largest property developer in Dubai, and his messaging was extremely reassuring in confidence. He said “business as usual” at their malls, although they're seeing an impact, obviously, at their hotel and tourism business. And they did a residential property launch just last week. So that would be March 11th. And it was 75% sold out within one week. So, on-the-ground stories in Saudi and the UAE, are very different than what we're hearing about and seeing in Bloomberg.

John Przygocki: That's terrific. You mentioned Korea, and I saw that you were in Korea last week. What were some of your key takeaways from that trip?

Brian Freiwald: So, last week I caught up with nearly all of our holdings in Seoul and took a 200-mile-per-hour train across the country to visit Korea's shipyards. It was awesome. Seeing the world's largest ships up close and infrastructure required to build them was mind bending, even after visiting over 100 manufacturing facilities over the last 15 years.

It also crystallized my view that the likelihood of the US redeveloping shipbuilding and most heavy industry at true scale appears really low. Today, China produces 70% of the world's container ships, Korea 25%. And China has nearly bankrupt the rest of the world's producers of these ships. In practice, Korea will be a key strategic partner in maritime capacity and in defense industrial resilience. Korea is already taking steps in that direction. They purchased a shipyard in Philadelphia and are conducting some repair work for the Navy.

Korea has been the best performing major market globally, roughly doubling over the last year. Korea now accounts for 15% of the EM benchmark. But the index is increasingly top heavy. Samsung and Hynix, account now for 50% of the benchmark, but performance has been broad-based beyond memory. Regardless of whether oil is $50 or $150, Korea will play a critical role in an evolving geopolitical world with their leading assets in defense, shipbuilding, memory and EV batteries. And outside of these asset-intensive industries, we've also seen hits like K-Pop Demon Hunters on Netflix and Korean beauty being the top selling products on Amazon.

John Przygocki: So, Brian, let's shift gears a little bit. What keeps you up at night?

Brian Freiwald: What keeps me up at night? To be honest, I'm more concerned about the duration of the AI cycle than current geopolitical risks. Historically, geopolitical turbulence have been buying opportunities. In contrast, globally, profit margins are at record levels, and at some point I believe there'll be a rotation from the Mag Seven and AI-related names to less correlated, asset-heavy assets.

But if you have a well-balanced portfolio, I believe it will be worth more five years from now. Regarding the time horizon, the longer the better. I think allocators are making a mistake today by being overweight private equity and underweight international equities.

And I think you just need to find the allocation that gets you to your efficient frontier and stick with it, whether it's a 5% allocation to EM equities or 20%.

John Przygocki: All right, Brian, as we look to bring today's conversation to a close, we have certainly covered quite a bit of ground in the emerging markets landscape. As a final thought for investors considering an allocation, as you just mentioned, to emerging markets, how should they think about time horizon and manager selection?

Brian Freiwald: Regarding time horizon and manager selection, I think you want to look across cycles. I believe that 2019-to-2025 time horizon (or seven years) is a great test. You had growth years followed by COVID, the Russian invasion, an Indian-led market, a China-led market, then a value market. No one style consistently worked over this time period, and a team with great stock picking could shine through. So, there's lots of ways to outperform, and demonstrating it over this period would highlight that the team is an alpha generator.

John Przygocki: Thank you Brian. To all of our listeners, thank you for spending your valuable time with us for today's update. If you'd like to hear more Talking Markets with Franklin Templeton, please visit our archive of previous episodes and subscribe on Apple Podcasts, Google Podcasts, Spotify, or just about any other major podcast provider.