A sustained emphasis on high-quality growth companies in emerging markets has produced positive returns compared with the MSCI Emerging Markets Index across the past decade, though returns have not been smooth, according to analysis by Rob Brewis, Director and Investment Manager at Aubrey Capital Management.
Brewis sets out a three-part definition of quality: return on equity, cash generation and earnings growth. From a starting universe of several thousand companies, he notes that only a small fraction consistently clear an ROE threshold of around 15%.
Mid-teens earnings growth coupled with internally generated cash flow - rather than reliance on external financing - completes the framework Brewis uses to identify durable compounders. In his view, businesses that depend heavily on borrowing or repeated equity issuance frequently dilute shareholders, while those able to reinvest their own cash flows are better placed to compound returns over time.
"Companies that rely heavily on borrowing or repeated equity issuance often end up diluting shareholders, whereas those that can reinvest their own cash flows tend to compound more effectively," Brewis said.
Brewis highlights the risk of shareholder dilution as particularly visible in China. There, aggregate corporate earnings have advanced strongly over two decades, yet earnings per share have lagged because of new listings, capital raising and state-driven dilution - developments that have reduced gains for minority shareholders.
The analyst warns that outsized returns can attract competitors and pressure margins. Varun Beverages is cited as an example: returns surged after expansion in southern India and improvement of underperforming assets, but the success drew competition, including from Reliance Industries, making the market more challenging and prompting a normalization of returns.
By contrast, some firms have shown sustained strength. Eicher Motors, owner of the Royal Enfield motorcycle brand, has maintained robust returns over time, supported by brand strength despite cyclical headwinds from regulatory changes and pricing dynamics. Taiwan Semiconductor Manufacturing Co. (TSMC) is presented as a clear instance of steady compounding, combining consistent growth with strong cash generation and high returns across cycles.
"Rather than maximising short-term profitability, it has tended to focus on long-term relationships and capacity investment, which in turn has reinforced its competitive advantage," he said.
In China, Brewis points to CATL's role in the electric vehicle battery market. He notes that the companys leadership position, together with strong cash generation, enables heavy reinvestment while preserving a leading competitive stance.
However, the quality-growth strategy has encountered headwinds in recent periods. Over the past year, companies matching these characteristics have underperformed the broader emerging market benchmark, a trend Brewis attributes in part to a difficult spell for India, a prolonged slowdown in China and generally elevated valuations. He notes that similar stretches of underperformance occurred in 2016, 2022 and in parts of 2025.
Despite that, Brewis argues that in many cases valuations have adjusted while core fundamentals remain intact. He observes that returns for many of these businesses remain strong, cash generation is robust and balance sheets are generally sitting on net cash positions rather than carrying leverage.
The makeup of emerging markets has also evolved. South Korea and Taiwan now display traits closer to developed economies, while China and India continue to anchor the growth narrative across the asset class. Performance has shown improvement more recently, but volatility remains an enduring characteristic of emerging markets, Brewis concludes.
Summary
Focusing on companies with sustained returns on equity, strong cash generation and mid-teens earnings growth has outperformed the MSCI Emerging Markets Index over the last ten years. Only a limited number of firms meet a consistent ROE threshold near 15%. Examples range from TSMC and CATL to Eicher Motors and Varun Beverages, illustrating different outcomes when quality meets competition, capital actions or strategic investment choices. The approach has seen episodic underperformance tied to regional slowdowns, competitive pressures and valuation adjustments, but fundamentals in many cases remain solid.
Key points
- Quality is defined by three metrics: return on equity (with a threshold around 15%), cash generation and earnings growth in the mid-teens - a small share of emerging market firms meet these consistently.
- Companies such as TSMC and CATL exemplify steady compounding via consistent growth, high cash generation and reinvestment; Eicher Motors shows brand-driven resilience despite cyclical pressures.
- The strategy has experienced episodic underperformance driven by difficulties in India, a slowdown in China and elevated valuations, yet many firms retain strong returns and net cash balance sheets.
Risks and uncertainties
- Shareholder dilution driven by new listings, capital raising and state-driven dilution - a risk especially noted in China - can suppress earnings per share growth despite rising aggregate earnings.
- Competitive entry following rapid success can erode returns, as illustrated by Varun Beverages facing intensified competition after expansion and improvement of assets.
- Valuation adjustments and regional slowdowns - notably in China and India - can lead to periods of underperformance and sustained volatility for quality growth strategies.
Tags: emerging, equities, semiconductors, autos, batteries