During January the fund outperformed the MSCI Emerging Markets index by 3.1%.
Over the month the major contributions came from stock selection in China, especially among internet and consumer stocks, as well as the underweight position in India. Most other markets made smaller positive contributions to relative performance.
We took profits on some of our positions in the UAE as well as in Thailand, while adding to Saudi Arabia for the first time in some years. The Strategy remains marginally overweight in China with a focus on internet and consumer stocks, as well as keeping a significant exposure to the EMEA region.
As expected, President Trump has started his term with a lot of drama, but the impact on markets has been surprising. Since the start of the year, some of the best performing markets are those that have been most threatened by tariffs including Mexico and China. More broadly, last year’s underperformers are staging a remarkable turnaround led by Brazil and Korea with mid-teens returns in US$ terms. US markets as well as other winners from previous years, such as India and Japan, are lagging significantly. Of course, we have barely started the year and there is no doubt that there remains plenty of drama to come, but it is worth examining market dynamics so far.
The question of “why is the market going up?”, has long been met with a traders’ favourite answer of “more buyers than sellers”. This truism reflects how market participants’ positioning and expectations are far more important to short-term moves than the substance of news-flow. Universal pessimism can quickly dissipate on only moderately bad outcomes, which can then generate its own momentum. While it makes no sense to be contrarian just for the sake of it, it is always worth asking what could go right (or wrong) when markets are too pessimistic (or optimistic).
The simple fact is that instead of massive global tariffs on day one, we have only seen moderate and targeted tariffs imposed with a lot of accompanying noise. While this may still change by April, it already implies that the administration is at least thinking about consequences – perhaps a good sign for EM trading partners.
In China, investors have abruptly realised what the major internet companies have been saying for months: a focus on more efficient use of hardware has allowed impressive AI development despite chip restrictions. This has caused a re-evaluation of deep value internet stocks. To top it off, President Xi has been publicly meeting private sector leaders including once disgraced Jack Ma of Alibaba and signalling support for them. With US foreign policy pivoting from human rights and containment towards direct deals with major powers, we may also see geopolitical pressure on China easing.
In Brazil, the ongoing rally in the currency may reduce inflationary pressure and help moderate interest rates which would reduce fiscal stress. Combined with increased speculation that the next President will not be Lula, this has forced investors to reassess their gloomy stance, which is further supporting the currency. A vicious circle might just turn into a virtuous one.
It is likely that 2025 will not be an easy year for active managers with high potential for whiplash. Naturally, this will create opportunities for investors prepared to think longer term. A calm approach focussed on bottom-up stock picking and diversified exposures should be the best way to navigate the coming months.
