In February the fund returned -1.0%. Positive performance came from China and Eastern Europe, the detractors were South Africa and South Korea.
Normally our ‘world view’ tends to evolve at a pretty sedate pace but the winds of change are currently blowing through geo-political, technological and economic dogma, so there’s a lot more to consider than usual.
Setting aside the diplomatic fireworks that attract most of the most attention, there’s also flux in recent economic data where there appears to be a relative trend reversal between the US and China. Evidence of a slowing US economy has come from the Atlanta Fed GDPNow index (which collapsed into recession territory), weak consumer sentiment and ISM surveys. This is all before the full DOGE effect is evident and has taken a clear toll on the on the US dollar, the reversal of which is beginning to look like a trend.
Meanwhile on the other side of the Pacific, there’s further signs that the Chinese economy could finally be bottoming out. The latest PMI index was above 50 and the new orders sub-index is at its highest point in the past year. The real estate market is showing some signs of life with a 20% yoy increase in sales so far this year, whilst in tier one cities prices have risen for four consecutive months. CPI is still weak but at this time of year the Chinese New Year distortions undermine their relevance.
In the equity market the ‘Mag 7’ is being eclipsed by the ‘Fab Four’ (Baidu, Alibaba, Tencent, Xiaomi), spurred on by AI/DeepSeek enthusiasm and some solid Q4 results in the bellwether e-commerce sector. For example, JD.com (a fund holding) reported Q4 profits up 34% yoy and 20% above consensus. There’s also a genuine shift in policy towards supporting the private sector, coming now from President Xi (who’s friendly again with Jack Ma) and the economic policy committees. These are becoming increasingly assertive in trying to improve sentiment and profitability of the private sector by reigning-in excess capacity and competition, otherwise known as ‘neijuan’ and recently highlighted by Premier Li Qiang.
This mix of a weaker dollar and at worst a more balanced economic outlook should be supportive for the EM asset class, at least on a relative basis. However, over the short term we’re in an environment where there is a lot of established mainstream beliefs that are being either challenged or thrown in the bin. This brings uncertainty, and with uncertainty comes volatility.
At its simplest, the Trump team’s focus on the fiscal position means that this administration will be more bond-friendly than under Biden. As our focus is on generating real yields and total shareholder returns, we are therefore minded to tilt our exposure back towards the more interest rate sensitive holdings whilst keeping optionality on a Chinese recovery.
We also prefer, where possible, to side-step those markets or sectors where the trade and tariff negotiations are in play. This means a preference towards domestically orientated companies and/or some of the smaller markets which are not in scope. Last year this mantle was held by the UAE, but given the strong performance we are increasingly drawn to other markets in the Mediterranean as well as other parts of South America and Southeast Asia, into which we are likely to see some reallocation of exposure.
