Emerging Markets Resilience: How Candriam's Thematic Focus and Disciplined Risk Management Navigated Q1 Volatility

In the first quarter of 2025, Emerging Markets (EM) equities defied global headwinds, rising +2.4% in USD while Developed Markets (DM) slumped by -2.1%. Amid a landscape of trade tensions, geopolitical uncertainty, and rapid technological change, the NYLI Candriam Emerging Markets Equity Fund positioned itself as a standout performer by leveraging its thematic growth focus and rigorous risk controls. This article examines how the fund's strategy—rooted in fundamental research, ESG integration, and disciplined sector/currency limits—equipped it to capitalize on EM outperformance while navigating risks tied to Fed policy shifts and U.S.-China trade dynamics.

Thematic Growth Drivers: AI in China and Structural Shifts

The fund's Q1 success hinged on its proactive exposure to AI-driven innovation in China, a theme amplified by geopolitical tailwinds. Following the U.S.-China 90-day trade truce—which paused tariffs and eased tech-sector tensions—the fund upgraded its exposure to China, Taiwan, and South Korea, all critical hubs for semiconductor and AI development.

Major Chinese tech firms like Alibaba, which invested heavily in AI during the quarter, provided key catalysts. The fund's focus on companies with sustainable growth drivers—such as robotics, autonomous driving, and cloud computing—aligned with the structural shift toward AI adoption across Asia. DeepSeek's release of its next-generation open-source AI model in May further underscored this theme, positioning EM tech stocks as beneficiaries of a global innovation boom.

Risk Management: Sector Limits and Geopolitical Agility

While thematic growth fueled returns, Candriam's predefined risk parameters ensured the fund avoided overexposure to volatile sectors. For instance:
- Tech Sector Adjustments: The fund downgraded its Technology sector allocation from +2 to neutral post the trade truce, balancing optimism with valuation discipline.
- Geopolitical Diversification: Mexico was downgraded to underweight due to stretched valuations, while cyclicals like Energy and Materials were upgraded to capitalize on improving global growth prospects.
- ESG Integration: The fund maintained strict ESG criteria, avoiding companies with high carbon footprints or governance risks—a differentiator in an era where ESG-aware investors demand accountability.

The team's ability to dynamically adjust allocations—such as shifting toward Taiwan/South Korea and away from overbought markets—highlighted its agility in volatile environments.

Process, People, and Parent: The Pillars of Sustainable Alpha

Candriam's edge stems from three pillars:
1. Process: A bottom-up stock selection framework that combines quantitative filtering (e.g., valuation screens) with qualitative insights on ESG and thematic relevance.
2. People: A team with 30+ years of EM expertise and 15 years in sustainable investing, managing €4bn in assets. Their deep on-the-ground research mitigates information gaps in frontier markets.
3. Parent: Backed by Candriam, a firm renowned for its ESG leadership, the fund benefits from proprietary sustainability metrics and a global research network.

These pillars enabled the fund to outperform peers by avoiding pitfalls such as overexposure to tariff-sensitive sectors or geopolitically exposed countries like Russia.

Investment Outlook: Capitalizing on EM Resilience

Looking ahead, the fund's strategy remains compelling as EM equities face a mix of risks and opportunities:
- Fed Policy: While rate cuts could boost EM liquidity, Candriam's sector limits guard against overexposure to rate-sensitive areas like real estate.
- Trade Dynamics: The U.S.-China truce is fragile, but EM markets like Vietnam and Thailand—less dependent on U.S. trade—offer diversification.
- AI and ESG: Companies leading in AI adoption (e.g., Chinese cloud infrastructure firms) and ESG compliance will likely outperform as global investors prioritize long-term sustainability.

Investment Recommendation: The NYLI Candriam Emerging Markets Equity Fund is well-positioned to capture EM outperformance in 2025. Its blend of thematic growth focus, disciplined risk controls, and institutional backing makes it a core holding for investors seeking exposure to EM equities without excessive volatility. Consider a 5–10% allocation to EM equities via this fund, particularly if you believe in the long-term growth of AI-driven industries and ESG-aware corporate governance.

In a world where macro risks are ever-present, Candriam's ability to marry thematic innovation with rigorous risk management sets a new benchmark for EM equity investing.