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Marketing Communication
Market Update
The first quarter of 2025 experienced significant market volatility. January 2025 began positively with the MSCI All Country World Index rising 3.4% due to optimism around Trump's proposed policies and strong corporate earnings. However, bond and currency markets faced turbulence, notably in Japan due to its contrasting monetary policy. In February 2025, global stock prices corrected, driven by concerns about Trump's policies potentially impacting US economic growth. Despite this downturn, the bond market rallied, and gold reached a new all-time high. Positive developments included a potential Ukraine ceasefire, German election results, and increased support for the Chinese stock market. March 2025 brought a reversal in market sentiment, with the MSCI World All Countries Index falling 3.9%. US markets saw steeper losses, while European indices curbed theirs. Market concerns were fuelled by potential impacts of US-imposed tariffs, fears of a global trade war, and signs of a slowing US economy. Meanwhile, European bond yields rose, and the euro strengthened due to the prospect of a more expansionary fiscal policy in Europe.
Fund Performance & Positioning
The Fund had a disappointing first quarter of the year, up 0.6% but lagging its benchmark by 3.4%. This was ahead of Global (-1.2%) and US markets (Nasdaq -8.1%, S&P500 -4.3%) but behind broad Global Emerging Markets (+3%) as China enjoyed a strong quarter, rising 15%.
Q1 has been characterised by a major performance reversal. Many of our positions which had performed so well in 2024 lagged their lower quality and cheaper peers. The noise volume was high (mainly from the United States’ President) but the – perhaps unintended – consequence was capital leaving the US, leading to significant selling of the Mag-7 and buying of the rest of the world. What we saw in January – a rally in Q4 ‘24’s weakest markets – continued: Colombia (+35%) rallied on expectations of political change; and Poland (+31%), Czech Republic (+28%) and Greece (+23.4%) benefitted from expectations around core-Europe’s fiscal expansion. Trump will get his wish that Europeans deal with their defence responsibilities in Der Ost. This all happened at the same time as monetary expansion has slowed meaningfully and inflation has remained sticky in the US. Policymakers might be in a tight spot regarding how to manage the conflicting cross currents of policy goals (lower inflation) and a President excited about Liberation Day. CFOs have already frozen much of their decision making and first quarter results are likely to be weak – although jobs data remains robust. The negative impacts of policies have already been seen in the likely bail-out of US farmers, pressured by rising costs and lower exports.
From a sector perspective, Consumer Discretionary, Healthcare and Communications Services were the biggest positive contributors. Financials, Real Estate and IT were the biggest detractors.
Naspers and MercadoLibre both delivered positive returns in Q1. The former has enjoyed a continued virtuous cycle of selling down its stake in Tencent to buy back and cancelling its shares, whilst Tencent itself does the same, monetising its sprawling asset base. The returns here were particularly good given the stock fell sharply on news in early January that Tencent was designated a military company by the outgoing US government. MercadoLibre delivered extremely strong fourth quarter results, buoyed across all business units and surprising particularly on margins, which were ahead of expectations, showing the potential operating leverage in the business. It also contrasted with third quarter results where management chose to suppress profitability with investments in logistics and financial services.
Our underweight in Healthcare drove most of the returns and in Communications Services, Bharti Airtel, the Indian telco, continued to deliver solid results – revenues rising 19% on tariff adjustments and their premiumisation strategy.
Detractors were a combination of style rotation and idiosyncratic company news. In the Financials sector, PB Fintech was the major detractor. This is a fast-growing Indian digital insurance broker and major winner of the previous years. Whilst operations continue to deliver – both in terms of revenue growth and margins – the stock was a victim of sharp outflows from the Indian mid-cap space. In Indonesia our position in Mandiri fell 12% on the back of the government’s decision to restructure State Owned Enterprises to better contribute to the sovereign wealth fund, Danantara. With lower oil, tight liquidity and a growing budget deficit, the bank (and the market in general) reacted negatively. These two companies accounted for almost 1% of the relative underperformance but have started to recover towards the end of March.
In Real Estate, all three companies hurt us (70bps between them). Emaar Development was up almost 100% in 2024 and despite taking profits, we did not cut enough. The subsequent retracement (13% in price terms) has coincided with significant upgrades leaving the company on 5.4x forward price to earnings – cheaper than in Q1 2024. Macrotech, the Indian developer focused on Mumbai, suffered similarly to PB Fintech – from mid-cap outflows – despite delivering solid fundamental growth. Ayala Land is materially outperforming its peers but was a systemic issue with some over-supply in the Philippines market.
Information Technology contained the main idiosyncratic issue: Globant, which cost 59bps. This was a deeply frustrating outcome driven by a small guidance downgrade after their Q4 results (which were fine). We speak to our portfolio companies frequently and in November Globant management assured us that their backlog of business for 2025 looked very solid. When management then downgraded growth in February to high-single digits we were disappointed. The company now trades at its cheapest level since its initial public offering but there is rightfully significant uncertainty over the “E” component given the outlook in the US, where is derives ~60% of its revenues. Taiwanese names also underperformed with a more pessimistic view over artificial intelligence (AI) investment after the DeepSeek launch. We believe this to be unfounded and the world to be in the early stages of AI adoption.
Outlook
After a tough first quarter, we have reviewed our positions and processes. Whilst we positioned ourselves well for the macroeconomic turbulence in our end markets towards the back end of 2024, and closed the underweight to Brazil in December, our stock selection let us down as markets recovered. Essentially we remained too quality biased in a market where the two best performing clusters are 1) most shorted and 2) high beta. Secondly, we did a huge amount of work in Q4 on Chilean and Colombian banks, with clearly identified winners – but did not pull the trigger. These sectors have rallied strongly year to date. And, similarly, we failed to buy some of the more value cyclical ideas we like – particularly in the proteins, gold and platinum group metals sub-sectors. As you can imagine we were as frustrated as any clients about this as small tilts here would have transformed the quarter.
So we continue to review a broad range of high quality businesses in different subsectors and countries and seek to identify clear earnings and valuation catalysts.
Looking forward from here we see policy uncertainty reaching almost peak fear as Trump is supposedly slapping tariffs on the world on 2 April 2025. We shall see if he follows through on the threats: so far the stick has been wielded but no contact has been made. In fact if you look at the performance of markets like Mexico, undoubtedly most at risk from policy changes, it seems to have bottomed in January at Trump’s inauguration and is now moving up. This was similar to 2016. Whilst investing with great conviction can be hard when the top-down is so messy, sticking to the basics is the only way to operate.
Surveying the year-to-date winners, it is hard not to argue that they are tactically over-bought. Eastern Europe has benefitted from 1) core stimulus, 2) hopes for peace in Ukraine and 3) cheap valuations. Whilst the macroeconomic impact of Germany’s policy changes may not be felt this year, and – we would argue – more uncertainty now about peace than three months ago given Putin’s rhetoric, there is an elevated likelihood that the outcome disappoints. In Latin America – Brazil’s rally has been driven by foreigners with locals net sellers. The market is still cheap and Lula’s popularity continues to fall, indicating certain change in leadership in October 2026. The structural case remains compelling with local institutional equity allocations at the lowest since 2018 and real rates ~10%. But there will be stumbling blocks on the way to the sunlight uplands of a fully fledged bull market.
Indeed much of the tactical opportunity we see is in over-sold “EM USD” assets – markets such as the UAE, Saudi Arabia. The main caveat is the oil price, which looks to have troughed in the mid-60s but is equally capped by higher volumes from OPEC. Turkey endured a bout of political turbulence in March which was an opportunity for us to add to a name we have been following for some time.
Stepping back, however, it is important to underline that – whilst messy – what is happening is good for the Emerging Market complex. I thought it would take four years to get to this point (global fatigue with Trump policies) but rambunctious tweeting accelerated the process. It is not that we want the US to go into recession for the rest of the world to outperform; we just need marginal liquidity to flow beyond seven fantastic companies. This is already happening, and the US market looks oversold in the short term. If Trump’s policies have made the US marginally less attractive to capital, stimulus in China and Europe has marginally made them more so. With the Federal Reserve now priced to cut three times this year, the DXY (US Dollar Index) could remain under pressure. With most Emerging Market companies trading cheaply versus their history and developed markets, the outlook is exciting.