Global Emerging Markets Equity Strategy Commentary

A large rally in Chinese equities underpinned a positive period for EM equities. Quality companies in China made positive contributions, but were offset by Taiwan tech and Indian mid caps giving back performance after a strong 2024. In South East Asia, good stock picking in Malaysia and Thailand was outweighed by underperformance from overweight positioning in Indonesia and Philippines. The portfolio is overweight in Greece and Poland, with both markets surging on excitement over a European defence and infrastructure boom. Stocks and an underweight in South Africa were detractors as that market rallied. In Brazil, strong stock picking offset being underweight a large rally. Turkey reminded us that sound macroanalysis is crucial to avoiding downside shocks that come with investing in emerging markets. The market tanked on news of President Erdogan jailing a political rival on trumped up corruption charges. The portfolio is zero-weight Turkey, and we are not tempted by ever cheaper valuations while Erdogan threatens the rule of law. Portfolio activity included adding to China, GCC and Brazil, while reducing Indonesia, Philippines and trimming Poland.

An overweight to Indonesia was negative as the political backdrop soured on fears President Prabowo (a retired general) may boost the military’s political influence. We cut exposure on this basis, exiting politically and economically sensitive Bank Rakyat, while retaining blue chip Bank of Central Asia. In Malaysia, Public Bank reported solid results and posted a positive return in a down market. One of the most well-run banks in the region, it has been in the portfolio for nearly 25 years and generates a consistent ROE of around 13% on a conservative loan book. We met with General Manager Chin Soo Long in Kuala Lumpur to discuss the bank’s expansion into insurance through the acquisition of LPI. Public Bank paid 1.7x P/B for the insurer, which boasts an ROE of c.20% with room to grow through releasing excess capital buffers. Stocks in Thailand were positive, including global hospitality and restaurant leader Minor International.

The revelation of DeepSeek’s ability to innovate in AI triggered a rally in Chinese tech and selling of Taiwan’s AI supply chain companies. AI supply chain names Lotes and Ememory were hit by the news, while advanced chip monopoly TSMC fared better. We doubt DeepSeek will change demand for the advanced chips running at the lowest possible power. TSMC’s dominance in leading-edge production remains a competitive moat. We think the greater risk for TSMC came with news it will make $100 billion of additional US investments over the decade, responding to threats from the US government to impose 100% tariffs on chips from Taiwan. What we like about TSMC is its ability to expand the moat by reinvesting cash flows into R&D, allowing it to pull away technologically from rivals and stay highly profitable through the cycle. While its technological leadership is likely to remain intact, there is a risk that US investments hamper its ability to maximise returns on capital.

The withdrawal of foreign investors and rotation of domestic allocators in China into SOEs and high dividend stocks has resulted in unusually large and extended underperformance of quality stocks. Our response has been to devote more research hours to the exposure, including time on the ground to re-test investment theses. This validated the conviction that China is home to a host of attractive, growing and cash generative businesses at reasonable prices. A fragile economic recovery should favour companies with strong fundamentals. Portfolio names kept up with the rally set off by DeepSeek. Fuel was added by a speech from President Xi to an audience of tech leaders, declaring it was time for entrepreneurs to “show their talents.” Alibaba’s stock surged as investors seized on its AI models boasting similar performance to DeepSeek. AI revenue from its cloud division is expected to grow at triple digits through monetisation of the technology. Tencent outperformed on excitement over the integration of AI into WeChat, e-payments and online advertising. We kept our China overweight modest on a view this rally risks getting ahead of a subdued earnings season.

Shifting underweight in India was positive but offset by a pullback in mid cap exposure. We have been overweight the market for most of the past three years reflecting India’s strong structural growth story. This remains intact, but a deteriorating monetary backdrop provides less support for lofty valuations. Since September we have gradually downgraded our rating for India, feeding into a reduced risk budget allocated to the country. Varun Beverages underperformed and is one example of a long-term winner where we have taken risk off the table. The PepsiCo bottler reported a fourth quarter earnings beat, although volumes were softening. Guidance for 2025 is for the company’s international expansion to fuel growth and profitability. Consumer holdings in India were broadly weaker including Juniper Hotels, which reported lower occupancy and margins as it renovates Grand Hyatt Mumbai. Food delivery and restaurant aggregator Zomato is undergoing expansion and increasing investment in grocery delivery business Blinkit. Higher advertising and promotional expenses weighed on profitability along with slower than expected growth for food delivery.

Doubts in Europe over the Trump administration’s commitment to NATO was the catalyst for Germany lifting its debt brake, with plans to spend over €1 trillion on defence and infrastructure over the decade. This sparked a rally in European equities, including Greece and Poland where the portfolio is overweight. The portfolio’s heavy underweight to the GCC was positive.

More combative US trade policy is a catalyst for EM countries and trading blocs getting serious about opening up and integrating. We saw the potential for trade opening in EM first hand on a visit to the Johor-Singapore Special Economic Zone in February. Who would have thought we would see the likes of Japan, South Korea and China pledge to pursue deeper trade relations? India committed to cutting tariffs after a visit from the Trump trade team in March. While brutal, President Trump’s carrot and stick approach to trade has the potential to force historically closed economies to open up and compete.

The Composite rose 0.91% (0.70% Net) versus an 2.93% rise for the benchmark.