The fund started the year positively with a gain of 3.6%. Considering the concern associated with trade tariffs from the new US administration, this probably comes as a pleasant surprise.
As mentioned last month, realised outcomes are rarely as dramatic as extreme hypotheses, and whilst there’s been a clear sea-change in trade and diplomatic relations, so far we’ve only seen relatively moderate tariffs hikes. Of course this can change very quickly, but at least it implies that the administration is considering the inflationary feedback-loop, which is what we anticipated.
Within this discordant backdrop the price discovery process has remained rational and attractively valued companies in under-owned countries have performed rather well. In fact it’s been some of clear laggards from last year such as Mexico and Brazil that have performed best. The latter being ‘bid-up’ on speculation that President Lula would not run for a second term, bringing welcome relief to the Real and potentially flipping the outlook for imported inflation.
The other clear geo-political shift has been in the Ukraine, which has positively reflected on markets such as Poland. Here we’ve increased our exposure through the aluminium profile producer Kety, and by adding to Bank PKO. Financials across Europe have performed well recently as valuations are attractive, margins have remained steady and asset quality shows no signs of deterioration. We’re particularly drawn to Poland which has had near full employment for a while, helping wages keep pace with inflation and resulting in a significant debt deflation. Household debt to GDP has declined to just 23%, which compares to 80% in the UK and 50% in Germany. Banks effectively have a clean slate.
Another significant shift this month has been in the AI ecosystem, which was triggered by Chinese companies revealing remarkable capabilities that rival the established global players. As an unintended consequence of sanctions on high-end chips, Chinese companies have focused on optimising lower spec hardware through skilful coding, the results of which have now lowered the barriers-to-entry for all. China produces around 400,000 computer science graduates every year (twice that of India), which has been an under-appreciated human resource.
Last year’s focus was on the AI supply chain, this year it’s shifting to those developing and utilising AI to boost profitability. It’s a core rationale for holding positions such as MediaTek and the Korean telcos, but this month it caused a rapid re-evaluation of deep value internet stocks such as Alibaba, that has franchise in LLM, cloud and data centers. We have continued to tilt our Chinese exposure to these areas of domestic consumption. Given the advanced state of digitisation in sectors such as e-commerce these companies will be early adopters of AI technologies. In addition, they will be able to make this transition whilst still returning significant amounts of free cash to shareholders through share buy-backs and dividends.
