Q3 2025 CIO Review and Outlook

by Sean Taylor of Matthews Asia, 10/15/25

Overview

Emerging markets generated robust returns this quarter, gaining 11% overall. Returns were primarily driven by North Asia and Latin America, continuing a trend throughout the year in which emerging markets outperformed developed markets, including the U.S. In contrast, Southeast Asia and India underperformed peers, impacted by political instability and geopolitical tensions respectively.

Our markets performed well against a benign economic backdrop. The U.S. Federal Reserve implemented a rate cut late in the period and though inflation remains above the Fed’s target it seems to be tempered, while U.S. economic growth also recovered. Additionally, a weaker U.S. dollar provided a tailwind for inward investment and debt-servicing costs in emerging markets. Another key driver of returns, particular in China, was positive sentiment building behind the artificial intelligence (AI) boom. It was also a period when investor concerns over U.S. tariff policy subsided as most countries with the notable exceptions of China, India and Brazil made substantial progress toward reaching trade agreements with the U.S.

Key Markets

North Asia

North Asia was a cornerstone of emerging market returns during the quarter, with South Korea and Taiwan posting returns of around 12.8% and 14.7% respectively. Both markets continued to benefit from strong demand for AI-related semiconductors, however, we also identified broader opportunities in South Korea. In addition to positive sentiment toward companies in the computer memory and hardware space, South Korea is experiencing accelerating growth in industrial and defensive sectors. This momentum is partly supported by increased military spending in Europe and the U.S.

South Korea’s ongoing corporate reform initiatives also present potential for more value creation, and the recently-elected president’s pro-business agenda continues to be well received by investors. In contrast, Taiwan has generally higher valuations than South Korean equities, its market is more directly linked to the U.S. economy, and earnings growth rates have been weaker.

China

China was the top-performing major emerging market during the quarter, posting a gain of approximately 21%. While economic growth remains uneven and the property market continues to struggle, investor sentiment improved as U.S.–China political tensions appeared to ease and trade tariff threats moderated. At the same, Chinese authorities have continued to implement targeted stimulus measures, including providing liquidity backup in markets and initiatives to aid consumer spending and stabilize the housing market, and this has improved confidence at the margin. The government’s explicit support for private enterprise and the technology sector has also provided a significant tailwind for large internet platforms and fast-growing tech hardware companies.

In recent weeks, global investor enthusiasm toward AI opportunities has accelerated and China’s equity markets have benefited as domestic hardware and internet platforms have made progress in developing AI-related solutions and committed to large CapEx expenditures. Amid this surge in sentiment, our investment focus remains on the fundamentals of companies and avoiding momentum and market froth. Beyond technology, select insurance companies, industrials and financials also contributed to gains in Chinese equities.

Japan

Japan delivered a robust quarterly performance, generating a return of 8.2%. Market gains were broad-based as a strengthening yen lifted returns in U.S. dollar terms but acted as a headwind locally. Japanese corporates demonstrated earnings resilience although there were less stock-specific opportunities compared to the previous two quarters. Macroeconomic factors also played a role, with investors focused on the government’s fiscal policy and the trajectory of interest rates.

The main style beneficiary in the quarter was momentum, especially within AI segments. We adopted a cautious approach, concentrating on fundamentals. At the portfolio level, corporate governance reforms and rising dividends supported returns.

Domestic politics, we believe, will play a significant role in the market in the months ahead. The election of Sanae Takaichi as leader of the ruling Liberal Democratic Party signals a more reformist and market-friendly agenda—one that may lead to increased fiscal expansion and a slower pace of interest rate hikes.

Southeast Asia

In Association of Southeast Asian Nations (ASEAN) markets, global macro indicators were favorable. However, they were overshadowed by negative sentiment stemming from domestic instability in several countries, most notably political unrest in Indonesia and border conflicts in Thailand. As active managers, we continue to see value in the region but as key markets such as South Korea and China continue to outperform, it will be challenging for investor flows to return to Southeast Asia markets without internal developments that help restore confidence.

An exception to this environment is Vietnam. Our earlier concerns that Vietnam’s growth trajectory could be disrupted by the U.S. government’s tariff policy have eased as the country appears to have successfully negotiated trade terms that are much less restrictive than initially anticipated. After a period of consolidation, the Vietnamese market attracted more positive sentiment and generated a gain of around 30% during the quarter.