During the first quarter of 2025 the Pacific North of South EM All Cap Equity Fund (USD I
Distributing share class) outperformed the MSCI Emerging Markets index by +2.2%. In what marked a
fairly dramatic reversal from years of underperformance, EM equities had a strong start to the year
with positive returns against a falling US market. Key contributions to relative outperformance in
the portfolio came from a recovery in Brazilian holdings, a weak Indian market where we are still
underweight, as well as European and Middle Eastern positions, especially in Financials. There was
some drag from other Latin American and some South African holdings. During the quarter we
continued taking profits on Taiwanese and UAE holdings that had performed well over the past years,
as well as exiting Thailand and reducing Indonesia. We continued adding to Chinese domestic
exposure and re-entered the Saudi market following a de-rating over recent years. In total,
however, we have been avoiding making big calls on prospective US policy. We remain slightly
overweight on China, with an emphasis on domestic consumption and fairly light on Southeast Asian
exposure, while cautiously overweight on Latin America. Our Taiwanese exposure has been reduced but
remains marginally overweight given the market’s strong balance sheets and structural competitive
advantages combined with modest valuations. Our continuing significant underweight on India remains
balanced with Middle Eastern and selective Emerging European exposure, where valuations and
fundamentals remain relatively good.
Although we focus on the bottom-up, there are occasions when the big picture has to be addressed.
The truth is that even after “Liberation Day”, nothing is certain. We doubt that we are anywhere
close to the final word on tariff levels, with the launch representing more of an invitation to
countries for presenting their best “offers”. Many countries will be unable or unwilling to deliver
“phenomenal” in the first instance, but the definition of that is sure to change over time,
especially as the costs of the policy start to become apparent to the US electorate. Still, global
policymakers largely remain bystanders to the moods in the White House.
It is extremely unlikely that the status quo results in any visible economic benefits to the US
prior to the next mid-term or even Presidential elections. Inflation and weaker growth are almost
mathematically certain while a putative manufacturing boom cannot happen immediately.
Reconstructing wrecked supply chains domestically is going to take years, while ongoing uncertainty
will limit corporates’ ability to fully commit to the necessary investments. Paradoxically, the
more successful tariffs are at making imports unaffordable, the more likely we are to see a
crumbling of support for them and eventual likelihood of reversals at the ballot box. This risks
making such domestic capacity investments redundant. Already, we are seeing buyers’ remorse from
certain noisy hedge fund MAGA supporters and even Elon Musk is mumbling about zero tariffs. The
broader electorate will not feel the effects immediately as companies will only reluctantly raise
prices while they have un-tariffed inventories. The next few months are therefore likely to see
more tariff bravado than deals being struck.
Taking a longer view, much like we did during the early days of the Covid pandemic, we are looking
for countries and businesses that can weather a potentially difficult few months and years but
thrive as things eventually settle. That is not to say we expect everything to revert – it is
highly unlikely that global trade recovers fully and international relationships will be redefined
permanently. A new world order is already upon us, but the pressure to remove the most damaging
policy elements will eventually prevail.
As always, we have an eye on valuations and the cost of capital. While share prices are clearly
lower across the board, EM bond yields have largely been stable or declining. Outside the US we are
less likely to see inflationary pressures – in fact there is potential for deflation as surplus
capacity looks for new homes. This ought to allow for lower rates, which could eventually become
supportive for equities, although clearly concerns about earnings will dominate in the near-term.
