Fidelity: How short selling can add value in emerging markets

Emerging markets have delivered strong returns over the last year, supported in part by robust AI infrastructure spending and a favourable environment for commodities. But opportunities extend beyond companies benefiting from these trends. Here, we highlight how short selling offers another way to generate returns, capitalising on businesses facing structural decline, competitive pressures or governance concerns.

By Fidelity International

Key takeaways

• Short selling has made a meaningful contribution to performance of the FAST - Emerging Markets Fund and Fidelity Emerging Markets Ltd investment trust over the last year, demonstrating its potential to generate relative returns even in rising markets.
• Our approach allows us to act on negative investment views while increasing exposure to our highest conviction long positions through leverage.
• We see opportunities to short companies facing competition from Chinese exporters and businesses whose established models are being disrupted by AI.

AI infrastructure and commodities have been important drivers of emerging market performance over the last year, with semiconductor and memory manufacturers in Taiwan and Korea, as well as gold and copper miners, among the key beneficiaries. Strong stock selection within these sectors has been among the key contributors to the strategies’ strong performance over the last year.

Short selling has also made an important contribution to performance, demonstrating how the strategy can generate alpha from both long and short positions, even in a rising market.

More broadly, emerging markets offer considerable scope for short selling, given the wide variation in corporate governance standards and significant dispersion in valuations and returns across the investment universe. This creates opportunities to identify companies facing structural decline, financial weaknesses or increasing competitive pressures.

How short selling adds value

While a traditional long-only strategy is limited to avoiding companies with deteriorating prospects, short selling allows us to take a more active approach by seeking to benefit from falling share prices.

It also enables us to benefit from both sides of an investment thesis. Where we identify a company gaining market share, there is often a competitor losing out. We can therefore invest in the winning business while taking a short position in the company being disrupted.

The strategy’s short book is combined with the use of leverage. Leverage allows us to extend exposure to our highest conviction long positions, increasing gross exposure and putting more of our strongest investment ideas to work, while the short book brings the net exposure back into the 95-110% range.

Identifying attractive shorting opportunities

However, not every company with weak prospects makes an attractive short position. We typically look for two characteristics. First, the business must be facing structural or cyclical decline, such as a retailer losing market share or a manufacturer experiencing pricing pressure as competitors increase capacity. Second, we look for additional warning signs, including excessive borrowing, accounting concerns, weak corporate governance or regulatory issues.

One example of a successful short was a former leading Brazilian ecommerce business that came under increasing pressure as competitors such as Shopee and Amazon entered the market. The company was losing market share, while deteriorating earnings quality and concerns about cash generation raised further questions about its financial position. Significant off-balance sheet debt eventually came to light, and its shares collapsed.

Our ability to uncover such businesses is supported by Fidelity's global research platform, including our team of dedicated shorting analysts.

Managing the risks

Short selling is not without risk. Share prices can rise sharply against a short position, particularly in markets with significant retail investor participation. We therefore maintain a diversified short book, typically spread across 70 to 80 companies, with individual positions limited to 1% and generally much smaller. We also monitor technical factors, including the cost of borrowing shares and how crowded a short position has become.

Importantly, short selling does not necessarily protect the strategy during every market downturn. In March 2026, for example, the short book detracted from performance as a sentiment-driven sell-off hit popular, higher-quality companies harder than the weaker businesses we typically short. This differs from a recessionary sell-off, when companies with weaker balance sheets and higher leverage would generally be more vulnerable.

Where we see opportunities

AI is creating opportunities on both sides of the portfolios. While we have benefited from investing in companies supplying the infrastructure needed for AI, the likes of TSMC, Samsung Electronics and SK Hynix, we are also identifying businesses that could lose out as a result of rising input costs or changing demand.

One example is a pair trade within the printed circuit board (PCB) industry. In the long book, we hold Elite Material, which produces copper clad laminate (CCL) used in PCBs for data centres and is benefiting from growing demand. Conversely, we hold a short position in a PCB manufacturer focused exclusively on smartphones, with no exposure to data centre demand. Despite being perceived by investors as an AI beneficiary, the company is facing weak volumes amid a smartphone downcycle, while AI-driven input cost inflation – including the rising cost of CCL – is putting pressure on profitability. This pair trade allows us to capitalise on the diverging fortunes of companies within the same industry.

Another area of opportunity for the short book is the industrials sector, where growing competition from Chinese manufacturers is putting pressure on established players. One example is the battery industry, where leading Chinese manufacturer CATL is gaining market share from Korean competitors, supported by its significant scale and rapid innovation. This creates opportunities to short companies whose competitive positions are coming under increasing pressure.

Beyond these broader themes, our dedicated shorting analysts continue to identify idiosyncratic opportunities in companies facing structural decline and accounting, corporate governance or regulatory concerns. These span a wide range of industries, from e-commerce companies facing intensifying competition and chemical manufacturers at risk of bankruptcy to state-owned infrastructure and utilities companies with weak corporate governance. We aim to maintain a diversified short book across countries and sectors rather than concentrating exposure in any single area.

Looking ahead

We remain positive on emerging markets, supported by robust earnings growth and attractive valuations, combined with several key structural growth drivers – including investment in AI infrastructure, strength in mined commodities, industrial innovation in China and rising financial services penetration.

Nevertheless, risks remain. Geopolitical tensions and higher US bond yields could create further volatility. We remain alert to these developments and the opportunities they may create to reposition the portfolio.

Ultimately, we see short selling as an important part of our investment approach, allowing us to act on both positive and negative views of individual companies. By combining our long positions with a diversified short book, we can seek to generate returns from a broader range of investment opportunities across emerging markets.

12-month rolling returns, FAST - Emerging Markets Fund Y-PF-ACC-USD

Past performance does not predict future returns. The fund’s returns may increase or decrease as a result of currency fluctuations.
Source: Fidelity International, October 31, 2026. Fund performance net of fees in USD terms. Index Name: MSCI Emerging Markets Index (Net)

12-month rolling returns, Fidelity Emerging Markets Limited Participating Preference Shares

Past performance does not predict future returns. The fund’s returns may increase or decrease as a result of currency fluctuations.
Source: Fidelity International, October 31, 2026. Bid-bid basis with income reinvested in GBP, net of fees. Index Name: MSCI Emerging Markets Index (Net). Captures periods under which Genesis was the responsible manager, before transitioning to Fidelity October 4 2021.

Important information

FAST - Emerging Markets Fund
Investment objective and policy

Objective: The fund aims to achieve capital growth over the long term.

Investment Policy: The fund invests at least 70% of its assets in equities of companies that are listed, headquartered or do most of their business in global emerging markets including Latin America, Asia, Africa, Eastern Europe (including Russia) and the Middle East. The fund may also invest up to 20% of its assets in money market instruments on an ancillary basis. The fund may invest less than 50% of its assets (directly and/or indirectly) in China A and B shares (in aggregate).

• The value of investments can go down as well as up so you may get back less than you invest.
• Funds are subject to charges and expenses. Charges and expenses reduce the potential growth of your investment. This means you could get back less than you paid in. The costs may increase or decrease as a result of currency and exchange rate fluctuations. Please note that not all costs are presented, further information on costs can be found in the Prospectus.
• These funds invest in overseas markets and the value of investments can be affected by changes in currency exchange rates.
• These funds invest in emerging markets which can be more volatile than other more developed markets.
• These funds invest more heavily than others in small and mid-capitalisation companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid.
• These funds use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations.
• The fund may make increased and more complicated use of derivatives and this may result in leverage. In such situations performance may rise or fall more than it would have done otherwise. The fund may be exposed to the risk of financial loss if a counterparty used for derivative instruments subsequently defaults.
• These funds have, or are likely to have, high volatility owing to its portfolio composition or the portfolio management techniques.
• These funds do not offer any guarantee or protection with respect to return, capital preservation, stable net asset value or volatility.
• The trust’s shares are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can also gain additional exposure to the market, known as gearing, potentially increasing volatility.
• Past performance does not predict future returns. The funds returns may increase or decrease as a result of currency fluctuations.
• Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.
• Investors should note that the views expressed may no longer be current and may have already been acted upon.
• The fund is subject to the disclosure requirements of Article 6 of the Sustainable Finance Disclosure Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector.
• Please refer to the Prospectus and KID of the fund before making any final investment decisions. The investment which is promoted concerns the acquisition of units or shares in a fund and not in a given underlying asset owned by the fund. Complete information on risks can be found in the Prospectus.