- Date:
Marketing Communication
Executive Summary
Key events in market
November saw markets rally on Trump’s election victory. As anticipated, this was seen as Emerging Market negative. In attribution terms Financials, Real Estate and Energy were the biggest positive contributors to the month; Consumer Staples, Consumer Discretionary and Industrials detracted.
Key performance & positioning updates
The Fund outperformed its benchmark (Solactive Emerging Markets ex China Custom Net Return USD Index) by just over 1%, falling 2.2% vs. -3.3% for the benchmark. MSCI World rose 4.6%, mainly due to US equities with the S&P 500 rising 5.9%. Broad Emerging Markets fell 3.6%.
Market Update
The election of Donald Trump as US President and the Republican Party gaining control of the House of Representatives and the Senate have triggered a strong rally in global equities. The performance, which brought the MSCI All Countries Index to a new record, was driven mainly by the US market, where the S&P500 index rose 5.7%, while most other markets have fallen or risen little since the US election day.
This reflects the expectation that the policies of the new US administration, including the imposition of tariffs on exports to the US, tax cuts, and a fight against illegal immigration, will favour the growth in the US at the expense of its trading partners. A side effect of Trump's announced policies was the increase in inflation expectations in the US and the upward revision of expectations on the Federal Reserve's monetary policy.
The initial rise in US Treasury yields was reversed after the appointment of Scott Bessent as Treasury Secretary, which markets see as a safeguard against unsustainable fiscal policies and aggressive trade policies. In final trading days of November, US government bonds have recovered, and yields have fallen below their level on election day.
In most other major economies, the revision of monetary policy expectations has been less pronounced than in the US or went in the direction of anticipating a more accommodative stance. This caused a widening of the yield spread over US government bonds and boosted the US dollar against other currencies, in particular the euro.
The single currency and European assets were burdened by the threat of US tariffs, increased political uncertainty in Germany and France, and the weakness of the Chinese economy. However, the German general elections in February could improve the growth outlook thanks to a more expansionary fiscal policy and structural reforms under a new government. Furthermore, the expectation of further stimulus in China leaves room for a recovery in demand in 2025, which will benefit the European economy more than other economic areas.
Fund Performance & Positioning
November saw markets rally on Trump’s election victory. As anticipated, this was seen as Emerging Market negative. In attribution terms Financials, Real Estate and Energy were the biggest positive contributors to the month; Consumer Staples, Consumer Discretionary and Industrials detracted.
Within Financials, Abu Dhabi Commercial Bank was again the biggest contributor. The bank continued its rally for two top-down reasons. Firstly, Trump was interpreted as positive for peace processes in the Middle East region – something we have seen translate in a lowering of the cost of capital. Given that the Abraham Accords were almost the most successful example of Middle Eastern diplomacy in the last hundred years (before the process was derailed by Iranian backed groups), this “peace dividend” is warranted. Secondly, the UAE market has a lower beta to the oil price than regional peers and with domestic earnings being sequentially upgraded (for Abu Dhabi Commercial Bank this has been a combination of higher growth and lower costs) the market has been relatively immune from the potential downdraft to oil prices from “Drill Baby Drill”. In Real Estate, Emaar Development was buoyed by essentially the same macro economic environment and a solid operating performance – with strong third quarter results, where profit estimates were beaten by ~45%.
Itau Unibanco – the leading full-service banking franchise in Brazil was the biggest detractor in the sector. This was a result of essentially the last two days of the month’s trading, where the Brazilian real depreciated after Lula’s Fiscal cuts disappointed the market. There was no direct idiosyncratic issue, but of course a bank reflects the macro environment in the country. From our perspective, the outcome was extremely negative for two reasons. Firstly, besides being materially delayed (the original fiscal announcement plans were expected almost a month ago), and disappointing in scope (for example, excluding lower earners from taxation) there was a second, more sinister, implication: the lack of Fiscal responsibility from Congress. There was a perception in 2023 that Lula would be policy constrained by a 'sensible' congress – in the same way that we saw AMLO’s constrained in Mexico. We have, instead, right of centre Congress members likely to block spending cuts. Whilst Itau’s operations remain healthy – and Brazilian economy is performing well – the result, we believe, will be more tightening and a risk of hard landing in the 2025. Itau’s Net Interest Margin sensitivity (they do well in a higher rate environment) and conservative loan book means we believe they are likely to to weather this.
Within the Energy sector, ADNOC Drilling delivered another solid month after announcing results at the end of October. Third quarter numbers showed revenues and profits grew over 30% - topping estimates by mid-single digits – as their fleet continues to expand. Vista Energy – an Argentine company drilling for tight oil in the Vaca Muerta region – also benefitted from the rally in oil, which was somewhat unexpected after Trump’s victory but precipitated by the decision to start refilling the Strategic Petroleum Reserve and increased demand from China (as measured by charter vessel destinations).
On the negative side, both flavours of Consumer sector dragged. The biggest drag was Allegro, the Polish ecommerce leader, which delivered solid results but disappointing profit guidance given more elevated
On the negative side, both flavours of Consumer sector dragged. The biggest drag was Allegro, the Polish ecommerce leader, which delivered solid results but disappointing profit guidance given marketing costs in Poland and ongoing restructuring costs related to their Mall acquisition in Czechia, Hungary, Slovakia. There was much frustration in the way that the company communicates with the market and these sentiments were made clearly to management.
Outlook
So the Trump victory has – in the words of one commentator – 'turned the US stock market into the Developed Markets, Europe into the Emerging Markets and Emerging Markets into the Frontier Markets.' With more clarity on Trump’s team and policies, we have more visibility on how to position. China remains enemy number one from a trading perspective. We remain bearish on the local economy (policy moves in September were inadequate) and their ability to manage a White House administration focused on accelerating the disentanglement of supply chains.
Secondly, Trump’s impact on the dollar is up for debate and the extent that it impacts markets will differ. The weaker dollar rhetoric, which dominated his first term, has been sidelined this time around. The 'USD Wrecking Ball' – visible in November – is a tool he now understands. Indeed, the US does not need a weak USD. Against this, however, tax cuts and trade policies are inflationary (regardless of his deflationary Department of Government Efficiency, DOGE) and the lack of constraint from the Red Sweep potentially renders more risk to the bond market.
Region by region there will be winners and losers. In Latin America, we are quietly confident about Claudia Scheinbaum’s ability to work with Trump. She has selected a cabinet of significantly higher technocratic quality than AMLO’s. If anything, for the US to achieve its goals without importing significant inflation, Mexico must grow its manufacturing presence – in multiple industries. The market has suffered since June and positioning is light. For example, equities fell 3% in November 2024 versus 13.5% in November 2016 (in USD) and absolute valuations are 40% below their 2016 levels. There are also a host of Mexican companies with significant share of revenues and profits from north of the border currently trading at steep discounts to their own and peer multiples. We are acting on this opportunity.
Brazil has been and continues to be the most frustrating of markets for us. We are underweight after going neutral in June and positioned defensively. It is the Brazilians – not Trump – that are the problem. 2025 could see a change in domestic fortunes as rates bite and with it Lula’s popularity rating (~36% currently). Argentina was the big Trump beneficiary. Our exposure performed well but local assets have been incredibly strong on a two year perspective.
In EEMEA, Eastern Europe is oversold but with the EU going backwards and the threat of tariffs lingering, the outlook is mixed. Poland should benefit from a peace dividend. Turkey is another Trump beneficiary (the market rose 8% in November) with the prospect of lower oil and lower rates (eventually) bringing flows and domestic growth (we have seen downgrades in recent months). We added a Turkish industrial position in the month which is seeing a resurgence in operations. Saudi Arabia is more mixed: valuations are sensible but earnings have not been upgraded. Egypt is the potential winner of both 1) peace and 2) lower oil. There are some great companies there and we have done our homework. South Africa has been a winner this year but looks tactically overbought.
In Asia, India and ASEAN stand out. The recent downgrade cycle in India and fresh wave of Adani issues has proved a nice point for us to add to existing positions.
Philippines, Vietnam and Indonesia we have strong domestic growth drivers which should increasingly manifest in higher asset prices. China is obviously in the cross hairs and Korea and Taiwan mixed from a macro perspective.
In any event, volatility is the friend of the emerging market investor. Our process focuses on identifying high quality companies and then taking advantage of volatility to invest at attractive prices. At the moment we are seeing lots of these opportunities.