TL;DR

1. Emerging markets are entering a new multi-year upcycle after a decade of underperformance driven by a strong USD, weak commodities, and capital outflows
2. Macro tailwinds are turning: weaker USD, rising commodities, and global fiscal expansion are improving growth and liquidity conditionsEM remains cheap, under-owned, and low expectation, creating asymmetric upside if the cycle continues
3. The opportunity is more diversified than past cycles, with less reliance on China and broader drivers across regions
4. Key regional themes: India (private banks as compounding financial plays), Latin America (~50% overweight on valuation + political shift), and Africa (early-stage infrastructure/telecom growth)
5. Main risk is global liquidity tightening, especially rising US bond yields and fiscal deficits, which could trigger volatility or recession but potentially reset the cycle
6. Structural positioning avoids China (structural/regulatory risks) and crowded AI/semiconductor trades in favour of under-owned, mispriced assets.
7. Core strategy is bottom-up stock picking with macro + country risk overlay, focusing on risk-reward, catalysts, and disciplined position sizing across two strategies (long-only + low-net long/short)

The Big Call: A New Emerging Markets Cycle

The discussion provided a comprehensive strategic view of emerging markets, emphasizing their entrance into a long up-cycle fuelled by macroeconomic shifts and valuation opportunities.

The core thesis is that emerging markets are entering the early stages of a multi-year upcycle after more than a decade of underperformance.

From roughly 2010 onwards, the asset class was held back by a combination of a strong US dollar, weak commodity prices, and persistent capital outflows toward developed markets. The result was a prolonged period of weak earnings growth, depressed valuations, and structural under-allocation by global investors.

That backdrop is now beginning to reverse. A weaker US dollar is easing financial conditions, commodity prices are rising, and global fiscal expansion is driving demand for real assets and infrastructure. Unlike the 2002–2009 cycle, which was heavily dependent on China’s commodity demand, the next phase is expected to be broader and more diversified—with growth driven by financials and domestic demand in India, infrastructure and telecom in Africa, and policy-led recoveries across Latin America.

For investors, this shift matters because emerging markets are coming off a low base. Valuations remain discounted relative to developed markets, capital is still under-allocated, and expectations are muted. This creates the conditions for asymmetric upside if the cycle continues to play out.

However, this is unlikely to be a linear recovery. The biggest risk is global liquidity tightening, particularly from rising US bond yields and expanding fiscal deficits, which could slow growth and redirect capital flows. In the near term, this may lead to volatility or even a recession—but it could ultimately reset and extend the cycle, reinforcing the case for long-term outperformance.

Where the Opportunities Are

Lucerna’s portfolio reflects thematic bets on structural shifts and valuation disparities across emerging market regions and sectors.

Despite higher cost of capital and emerging market risks, valuation arbitrage offers long-term upside.

Latin America: The Largest Bet

The portfolio is heavily tilted toward Latin America, making up roughly half of total exposure.

The thesis is driven by two factors:

• Valuations: Among the cheapest across emerging markets
• Politics: A shift toward more investor-friendly and fiscally disciplined regimes

Countries like Brazil, Chile, Colombia, and Argentina are seeing improving policy environments, creating a rare combination of low expectations + positive change.

India: Quiet Compounders in Financials

India remains a long-term structural growth story, but the opportunity is selective.

Instead of chasing expensive consumer names, the focus is on private sector banks:

• Trading at ~1.5–2x forward book
• Delivering sustainable mid-teens loan growth
• The sector benefits from consolidation, improving credit conditions, and supportive fiscal policy. Risks from AI and technological disruption are acknowledged, but banking is favored for relative resilience and growth potential.

Despite short-term noise (currency weakness, foreign outflows), the long-term compounding story remains intact.

Africa: Early-Stage, High Upside

One of the more under-the-radar themes is infrastructure in Africa. Underinvestment in infrastructure present compelling opportunities in Africa

The focus is on wireless tower companies, benefiting from:

• Rising smartphone penetration
• Explosive data consumption

These businesses trade at significant discounts to US peers, despite similar structural growth—creating potential for outsized returns if execution holds.

What’s Being Avoided

Two notable areas of caution:

• China: Structural concerns (demographics, real estate, regulation) weaken the risk-reward
• AI / Semiconductors: Seen as crowded trades with stretched valuations

The broader view is that returns will shift away from narrow tech leadership toward more diversified sectors.

The Biggest Risk: Liquidity

The main threat to this thesis isn’t emerging markets themselves—it’s global liquidity.

Rising US fiscal deficits and higher bond yields could:

• Pull capital back into developed markets
• Tighten financial conditions globally

A recession is likely in that scenario—but paradoxically, it could reset the cycle and set up stronger EM outperformance afterward.

Risk Management and Portfolio Construction

Lucerna employs a disciplined risk assessment and position sizing framework that integrates macro conditions, event predictability, and risk-reward calculations to manage volatility and downside.

• Risk-Reward Framework: Portfolio inclusion decisions balance upside potential against downside risk, conviction level, and timing horizons, emphasising investments with clear catalysts and manageable risks.
• Structural societal and political forces are shaping markets beyond short-term trends.
• Jim stressed the importance of anticipating macro and political risks, such as currency devaluations, using market indicators like black market currency rates in the case of Nigeria.
• Currency Volatility and Outflows: Currency movements, such as the Indian rupee depreciation, are viewed as noise in a longer-term fundamental context.
• Short-term foreign investor outflows driven by currency weakness do not alter the strong underlying growth and valuation support. This perspective enables exploitation of temporary market dislocations.

Performance Targets and Product Strategy

Lucerna aims to deliver attractive returns aligned with current market cycles and investor needs through differentiated product offerings.

• Two Product Lines with Distinct Return Profiles: A concentrated long-only fund and a low net long-short fund that focuses on absolute returns. The long-only strategy benefits from favourable asset class valuation and a growing cycle. The long-short strategy aims to generate positive returns in all market environments, appealing to tax-sensitive investors. Both strategies leverage deep bottom-up analysis and focus on compounders.
• Equities Focus Over Multi-Strategy Expansion : Lucerna currently has no plans to expand beyond equities into multi-strategy funds, given equities’ expected cyclical outperformance relative to fixed income or multi-asset products. Jim also cited his equities expertise and the late cycle in fixed income as rationale. Maintaining focus allows specialization and differentiation in the emerging markets equity space.
• The strategy avoids index hugging, focusing on quality compounders with improving fundamentals.

Bigger Picture: Structural Shifts

Two longer-term ideas stand out:

1. A Move Toward a Multi-Currency World

Geopolitical tensions and over-reliance on the US dollar are pushing countries to diversify reserves—supporting flows into gold and non-USD assets.

2. Technology Is Reshaping Markets (and Politics)

Rapid technological change is driving:

• Economic disruption
• Political backlash: Results in rise of populist movements
• Regulatory responses: Anticipated regulatory responses may dampen returns in growth sectors like tech and AI. These forces are expected to broaden equity market returns beyond narrow sectors.

This could cap returns in crowded growth sectors and broaden opportunities elsewhere.

Final Take

The key insight isn’t just that emerging markets are attractive—it’s why:

• They’re coming off a low base
• Capital is under-allocated
• And the macro backdrop is turning

At the same time, risks remain real. This isn’t a passive allocation story—it requires active positioning, discipline, and strong risk management.