In October the fund lost 2.3%. Performance was led by the UAE and dragged lower by China.
It was only mildly surprising that the Chinese bazooka did not live up to expectations. The main feature was a debt swap, replacing local government debt and the like (LGFVs), with government bonds that will save an estimated Rmb600bn in interest payments. Theoretically this could be considered stimulus-in-kind, but there was nothing explicitly aimed at the consumer.
Given the level of expectation and the prospect of 60% import tariffs from the newly elected President Trump, the market could have corrected further. However to many people, especially domestically, it’s become clear that the central government has decided to concentrate on stabilising asset prices, whether it be residential property or indeed the stock market. Whilst you can’t ‘buck the market’ it won’t stop them trying and it’s possibly the best strategy to encourage Chinese households to spend some of the $9tn of increased bank deposits accumulated since Covid. As such, we can expect more measures to be drip-fed into the market whenever needed.
The consensus is this will most likely be triggered by a more combative US administration, but a more notable threat to markets is coming from the strengthening dollar and the U-turn in many long-dated government bond yields, with the US 10-year yield now 70bp higher than when the Fed started easing last month.
This has taken a new dimension given Trump’s stated policies, be they tariffs, reshoring of production, or a clampdown on immigration, all of which are fundamentally pro-US-growth and inflationary. Although Elon Musk’s stated willingness to cut US$2tn from the federal budget is clearly the opposite.
Such a dispersion of factors comes at the time of year when it’s ‘en-vogue’ to start making predictions for the year ahead. With more moving geopolitical parts than there’s been for some time, the error factor will probably be even higher than usual. The consensus is that de-globalisation, primarily through tariffs and regulation, is negative for global growth.
However, we have a healthy degree of skepticism that the proposed aggressive tariff regime will be applied as described, and for some may even provide opportunities. Amongst others, a clear policy objective is deregulation and US growth, which if achieved is a rising tide that likely floats all boats.
What is clear is that there will be countries that are winners and those that are losers, which makes it more of an allocation issue. Our job is to identify who will be ‘inside the tent’ and to allocate accordingly. This is made considerably easier in this strategy as we pay no attention to the typical emerging market benchmark.
Broadly we see this as a further step in the direction of ‘rebalancing’ of emerging markets as they move from a homogenous asset class centered on China, to a heterogenous investment better represented by a broader array of countries moving up the investment ladder.
Looking across the portfolio, the majority of our investment cases are either domestically orientated or where cross boarder trade is increasingly ‘intra-EM’, which provides a higher degree of ‘idiosyncratic’ investment factors and should insulate the portfolio from some of these trade tensions.
We’re always looking to add to such positions and this last month we’ve had fascinating interludes with companies in Peru, South Africa and policy makers from Malaysia, just to give a sense of some of the alternatives that also offer strong investment opportunities, and some of which will be appearing in the portfolio.
