During February, the Strategy performed broadly in line with the MSCI Emerging Markets index.
Positive contributions to performance came from our underweight in India as well as positions in Taiwan, the UAE and some smaller markets like Greece and Thailand. This was offset by a weaker performance in Mexico, Argentina and Indonesia among others. The portfolio in China broadly kept pace with the strong rally during the month as our internet stocks were able to participate in the excitement around Chinese AI and a seemingly friendlier domestic policy environment.
While we have taken partial profits on some of our Chinese positions, we continue to believe that valuations are attractive, and upside risks balance out concerns around tariffs and geopolitics as well as the still anaemic domestic demand situation. We have also been continuing to take profits in the UAE and have re-entered Saudi
Arabia for the first time in some years, after a period of de-rating.
At the start of the year, we wrote it was `likely to be eventful and full of surprises` and so it is. With tariffs being announced and postponed on a daily basis, it certainly seems surprising that US assets, led by the US dollar have been underperforming those in the targeted countries. At time of writing, Chinese stocks in Hong Kong are up by over 20%, while the S&P500 is down for the year. European indices are enjoying a similar outperformance despite the inevitable looming tariff showdown, as is the Euro. This flies in the face of the theory that the US dollar will tend to rally to compensate for tariffs.
The lesson here, once again, is that especially at times when the narrative changes from day to day, it’s investor positioning that determines market moves. Attempting to second guess both the news-flow and the markets’ potential reactions puts one in double jeopardy. When the entire post-WW2 economic and political landscape is being turned on its head, this becomes particularly risky.
Our goal is always to build a portfolio with bottom-up alpha driven by owning high quality but undervalued companies. Any significant market and sector over- or under-weight positions relative to our benchmark are driven by the opportunity set presented through this selection process, rather than grand predictions of how the new world order pans out. Day-to-day volatility driven by contradictory announcements from the White House certainly tests our nerves but, with a diversified portfolio, should make little difference in the long-term. On the one hand this uncertainty risks driving up risk perception and cost of capital globally. If, on the other hand, we are indeed witnessing the decline of US exceptionalism, this may provide a relative tailwind to Emerging Market assets as premium US valuations converge with those in our markets. To reach again for the old Chinese curse, “we are living in interesting times”.
