Marchés émergents Archives - Groupe financier Connor, Clark & Lunn ltée

Venezuela and the arrival of the “Donroe Doctrine”

Trump gunboat diplomacy in the Caribbean has culminated in the seizure of Venezuelan leader Nicolás Maduro on January 3, 2026. The move has been widely touted as part of a revived Monroe-style foreign policy doctrine in the United States which aims to assert regional hegemony by shaping political trajectories through the region.

More muscular regional foreign policy from the United States under President Trump reinforces a rightward political shift across the region. Economic instability, corruption and crime have been the fuel for voters to favour conservative and far right candidates in elections across Argentina, Bolivia, Chile, El Salvador and Honduras. The United States has signalled in recent months that it is prepared to strengthen the hand of conservative political actors aligned with its strategic aims (e.g., the US Treasury’s $20 billion currency swap line with Argentina’s central bank).

Maduro’s capture sends a clear message – particularly to Latin America’s left-wing politicians – with respect to the lengths to which Washington will go to protect its economic, geopolitical, security and ideological interests in the region.

The rise of economic conservatism with a backstop from the United States has already stoked optimism in regional equity markets on hopes for pro-business reforms, deregulation and fiscal discipline. While LatAm’s equities markets were buoyant in 2025, we think there is potential for positive momentum to pick up as the continent embraces fiscal conservatism.

As we have written previously, Brazil remains the largest market that can move the dial for EM equities should voters go with an economic moderate over incumbent President Lula in this year’s presidential elections. Below, our LatAm portfolio manager Luis Alves de Lima provides an update on prospects for the market.

Will Brazil be the next domino to fall in LatAm’s shift to the political right?

With the FIFA World Cup and presidential elections looming, 2026 shapes up as a big year for Brazil. While my Brazilian compatriots and I remain as passionate as ever about football, I think that politics is poised to steal the spotlight from the pitch.

In my view, the « Hexa » (Brazil’s longed-for sixth World Cup win) remains a distant national dream reflected in rather long odds among the bookmakers. The better bet is for a market-friendly political shift and subsequent bull market in Brazilian stocks.

However, it would be foolhardy to call time on a political operator as wily as Lula da Silva. We have written in previous commentaries about the potential for a conservative moderate such as Sao Paolo governor Tarcísio de Freitas to win the presidency. He remains the markets’ preferred candidate, being a technical, pro-market leader capable of bridging the gap between the Bolsonarista base and the moderate right. However, recent data from the December 2025 Quaest polls suggests a more complex reality.

Senator Flávio Bolsonaro, the son of the former president Jair Bolsonaro (now in prison for a botched coup attempt), has reached parity with Tarcísio in presidential vote runoff simulations, both trailing President Lula in a 46% to 36% split. This shift has emboldened the Bolsonaro family to prioritize their own political legacy, seeing an opportunity for Flavio to inherit the mantle of right-wing standard-bearer rather than coalesce around a moderate more likely to garner wider public support.

Critically, and much to the consternation of investors, Governor Tarcísio has said he will not run for president if Flávio Bolsonaro maintains his candidacy. Driven by a deeply held sense of loyalty and a desire to avoid fracturing the conservative base, Tarcísio has essentially signalled that he will remain in São Paulo if the « heir apparent » proceeds.

This is the worst-case scenario and would leave voters with a choice between two populists who feed on political polarisation. President Lula would welcome the prospect of Flávio’s candidacy, where he can home his narrative for the candidacy in on the threat to institutions of a Bolsonaro presidency.

Political sands will continue to shift as 2026 unfolds

These recent developments are no doubt a knock to the short-term bull case to Brazilian equities. However, getting overly fixated on this « nightmare scenario » would be a mistake. The field is deeper than current headlines suggest.

Even if Flávio remains the standard-bearer for now, there is potential for alternative candidates to grow in the polls should the electorate favour administrative results over populist chaos.

Figures like Governor Ratinho Júnior (Paraná) and Governor Romeu Zema (Minas Gerais) have built formidable reputations for fiscal discipline and efficiency.

The emergence of Renan Santos and the MBL’s « Missão » party represent a youth-driven movement prioritising fiscal conservatism, anti-corruption and law and order, which could disrupt the duopoly between Lula’s PT party and the Bolsonarismo right as we approach the March 2026 deadline for candidate clarity.

Market implications

There are two primary reasons for constructive optimism in thinking about the outlook for Brazilian stocks:

First, Brazil is not an island; it is part of a decisive continental swing to the right. In December, we saw José Antonio Kast’s victory in Chile, this on the back of President Javier Milei’s strong showing in Argentinian legislative elections, and recent conservative momentum in Ecuador.

This regional « blue tide » creates a powerful tailwind for market-friendly policies, and we argue that this will place some moderating pressure on Brazil’s political elite.

As its neighbours demonstrate the success of radical deregulation, the appetite for a « rational right » candidate in Brazil will only strengthen.

Second, valuations remain exceptionally attractive. Despite the noise, the Brazilian equity market continues to trade at a forward P/E of roughly 10x – well below historical averages and global peers.

EM market valuations vs past 10 years – Brazil the cheapest of the major markets

Source: FTSE Russell, Factset, HSBC

Momentum in earnings revisions ratios is broadly turning higher

Source: FTSE Russell, Factset, HSBC

The « election premium » is already being priced into assets, meaning that any pivot back toward a Tarcísio-led ticket or a credible centrist surge would trigger a massive re-rating.

Historically, when Brazil shifts toward a pro-market administration, the subsequent rallies can exceed 200% in dollar terms.

In summary, while we expect continued volatility through the first half of 2026, the fundamental investment case for Brazil remains intact. We are navigating a period where political pessimism provides a rare window to build positions in high-quality companies at distressed prices.

We remain vigilant but confident that the broader regional trend and the sheer attractiveness of local valuations will ultimately win out over the electoral circus.

Outlook

Emerging market equities have outperformed developed markets for the first time in five years, and by the most since 2017. The backdrop for the asset class is the most positive we have seen for the last decade or more. We expect the monetary backdrop to remain disinflationary for the first half of 2026, with treasury yields and the US dollar expected to continue declining.

Money growth in China is supportive, strong in India, and weak in Brazil, Mexico and South Africa. EM earnings growth is forecast to be 20.5% in 2026, nearly double this year at 10.4% according to Jefferies. On a more cautious note, global money trends suggest an economic slowdown into the end of Q4 and through Q1 2026 making us cautious on cyclical exposure.

Quality investing by first principles

In investing, there is a fine line between discipline and rigidity, or between conviction and stubbornness. Any resilient investment process must be nimble and adaptable enough to weather different market regimes. Investors relying too heavily on static profitability or valuation metrics in their investment process risk getting caught out when structural change takes place.

Screening for returns on equity, low leverage and earnings growth will give you only a very limited snapshot of investment value. Our aim is to paint a far richer picture of the businesses we are analysing.

We are trying to think about value creation in the stock market from first principles. Economic value added (EVA) stock analysis is one of the key tools we use for this. For those who missed it, we wrote about the core elements of EVA investing in a previous monthly, with highlights from that piece below.

Our approach to stock picking – focus on economic value added (EVA)

Made famous by Stern Stewart & Co., the approach homes in on the spread between the rate of return on a company’s invested capital and its cost of capital; economic value added, or EVA for short.

Why? We know that over the medium to long term, EVA is directly tied to the intrinsic value of any company and the fuel that fires up a company’s stock price.

Stock prices reflect how successfully a company has invested capital in the past and how successful it is likely to be at investing new capital in the future. EVA is the best methodology to measure the value that management has added to, or subtracted from, the capital it has employed over time.

How can management create value?

Bennett Stewart in his book The Quest for Value boils it down to three drivers:

The rate of return earned on the existing base of capital improves; that is, more operating profits are generated without tying up more funds in the business.
Additional capital is invested in projects that return more than the cost of obtaining new capital.
Capital is liquidated from, or further investment is curtailed in, substandard operations where inadequate returns are being earned.

We are looking for companies that can be expected to generate high or improving returns on the capital employed in their businesses. These are companies run by management teams laser-focused on making investments that earn more than the cost of capital, and undertaking all positive net present value projects, while rejecting or withdrawing from all negative ones.

Source: Bennett Stewart (1991), The Quest for Value

Understand what drives returns

Value creation is not enough for long run success. We need to know whether it can be sustained. Our process is focused on identifying the drivers of these returns and assessing:

whether there are historic changes or potential catalysts for improved value creation that are yet to be reflected in market prices; and
the sustainability of those returns – are there enduring competitive moats that will protect excellent returns on invested capital?

Our approach identifies highly productive and capital-efficient companies pursuing value creation in a variety of ways. It also focuses on whether that value creation is sustained via competitive moats.

Moats can take a number of forms, from differentiation via proprietary tech, brands or prime locations, to high switching costs, network effects, cost leadership, economies of scale or minimum efficient scale.

EVA helps to cut through the noise and home into whether a business is creating real economic value, and whether the trend of that value creation is strengthening or weakening. Crucially for emerging markets with weaker governance and opaque accounting, headline earnings can mask poor capital efficiency or inflated asset values. EVA cuts through these distortions by focusing on true economic profitability, drilling into the underlying economic strength of a business.

By emphasising value creation rather than headline earnings, EVA highlights when incremental investments fail to cover their capital charge – often an early warning sign of eroding competitive advantage. Further, this approach naturally draws attention to cyclical or structural changes impacting margin compression, rising capital intensity or declining asset productivity, which traditional metrics might obscure.

Below is a rough sketch of how EVA can provide a more robust check of company economics than an approach focused on accounting profitability.

Example: EM Real Estate Development Co.

Accounting view (P/E)
Reported net income: $100m
Shares outstanding: 50m
EPS: $2
Current price: $20
P/E ratio: 10x

On the surface, ABC Realty looks attractively valued at 10x earnings, suggesting a cheap stock relative to peers trading at 12–15x.

Economic value added view
NOPAT (Net operating profit after tax): $120m
Invested capital: $1.5bn
Weighted average cost of capital (WACC): 12%
Capital charge: $180m (1.5bn × 12%)
EVA = $120m – $180m = –$60m

Despite positive accounting profits, the company is destroying economic value, earning less than its cost of capital. This signals that growth funded by debt and equity is not creating shareholder wealth, even though the P/E ratio looks attractive.

In this case, the EVA approach provides a better assessment of whether a company’s moat remains intact and whether its strategic positioning continues to justify its valuation.

Below is a brief example of what we love to see from an EVA perspective.

Stock example – Vivara: market leader in Brazil’s jewellery industry, vertically integrated and expanding aggressively

Vivara is the dominant retail jewellery brand in Brazil, controlling more than 20% of the market.

Source: Vivara Investor Relations 2025

The business is improving its returns on capital through new store openings, sweating assets and maintaining cost control through scale as the only domestic player which manufacturers its own products.

Sweating the assets harder than peers
Retail space productivity (EUR 000s for sale/m²) correlates with EBIT margin (%) – Global players

Retail space productivity (R$ 000/sqm) correlates with EBIT margin (%) – Local players

Source: BTG Pactual 2024

Value creation highlights:

Opening 50–70 stores per year, focus on aspirational Life brand, forecast 40% of sales by 2026.
2-year sales CAGR of c.18% and EBITDA CAGR c.19%. Same-store sales growth consistently positive.
E-commerce 23% of total sales, headroom for further growth.
Plans to enter new markets Mexico and Panama, leveraging scalable business model.

Return drivers and competitive advantage:

Vertical integration: Vivara controls the entire value chain from design to production and distribution, enabling cost efficiency and rapid response to market trends.
Brand strength and market position: Strong brand recognition and customer loyalty, 75% retention rate and a broad product range catering to multiple segments.
Scale and retail network: Extensive retail network with 40% penetration in premium malls and significant opportunities for further expansion.

Our kind of business – this all translates into an attractive EVA profile

Vivaras ROIC charts

Source: NS Partners and Bloomberg

As emerging markets show renewed strength, our approach remains rooted in first principles: seeking resilient, capital-efficient companies positioned for long-term value creation that should drive stock prices.

Considering the importance of structural liquidity in emerging market investing

We argue that a narrow focus on company fundamentals leaves investors increasingly exposed to powerful external forces like structural and cyclical liquidity shifts.

These forces influence capital availability, investor behaviour and asset pricing, often overriding fundamentals in the short to medium term.

Below, we run through two EM-specific examples of how we think about structural liquidity, along with a brief comment on market structure globally.

China’s National Team steps in as foreign investors hit eject

The “China is un-investable” doldrums from early 2021 to the beginning of 2024 saw the MSCI China Index drop from a peak to trough by over 50% in USD terms. Haphazard regulatory clampdowns on the technology and education sectors, a collapsing property market, and Sino-US tensions saw foreign investors run for the exits.

At the peak of the revulsion, we saw many liquid and high-quality companies being dumped, seemingly irrespective of fundamentals. For us, this was a painful experience with many of our favourite names caught up in the stampede. It was also a valuable lesson about the impact of what we call structural liquidity in markets and its power to create extended and sharp periods of disequilibrium where prices appear completely detached from fundamentals.

In our process, we define structural liquidity as the long-term, underlying availability of capital within a financial system or market. Unlike short-term liquidity (which can fluctuate daily), structural liquidity is shaped by:

The depth and breadth of financial institutions
The regulatory environment
The savings rate and capital formation
The presence of long-term investors (e.g., pension funds, sovereign wealth funds and other state-linked allocators)
Factors outside of a given country – i.e. pressures on foreign allocators to shift exposure

Our clients are very familiar with our work analysing monetary cycles, with the aim of anticipating economic and market environments over the next year or so. This is a powerful tool for understanding the prevailing investment backdrop and how we expect it to evolve.

Structural liquidity gets less coverage, but understanding this factor can be just as impactful for performance, especially at extremes. Analysing the evolving composition of a country’s financial markets can provide insights into how changes in liquidity flows may be felt across asset classes.

Through the China doldrums, structural liquidity was working against us. Foreign investors were more heavily weighted to higher-quality companies, aligned with our stock picking bias. As these investors yanked funds from the market, we saw favoured names get cut down regardless of the fact that many of these business were fundamentally well positioned to weather China’s weak economy and geopolitical turbulence.

At the same time, state allocators in China (the “National Team”) were instructed to support the market. The reflex for these institutions was to buy ETFs loaded up with state owned enterprises (SOEs). This created an odd dynamic where more economically sensitive, highly indebted and relatively poorly governed companies (including distressed banks and property companies) were dramatically outperforming quality companies in an economic slump.

Investor flows and their composition had a huge impact on returns through much of the 2022–2024 period. In hindsight, the optimal strategy to navigate the volatility would have been to reduce the risk budget for “foreign favourites” while increasing the weighting to select SOEs which fit our stock picking framework. Unfortunately, we were slow to pick up the trend and by the time we had a firm grasp of the situation, valuations of our favourite businesses were starting to look incredibly cheap while already robust fundamentals appeared to be strengthening.

We reviewed China exposure in depth and exited a few positions that were exposed to persistently weak consumer sentiment. We also travelled in China extensively to meet with dozens of companies as soon as the country reopened from the pandemic. This helped to accelerate idea generation and generate more competition for capital within our China exposure. The rest was behavioural, with our iterative process of testing and re-testing stock theses and country views underpinning our conviction to stick with a number of out-of-favour companies.

The slump in quality stocks came to an end as Chinese authorities announced monetary and fiscal loosening in September 2024 to stimulate the economy. This was followed by the Deepseek shock in January 2025, which shone a light on Chinese innovation in AI which was progressing rapidly and at a fraction of the cost in the United States. Suddenly, domestic allocators were rushing into Chinese consumer tech stocks leading China’s AI development. Improving liquidity supported a broadening out of the rally, boosting other innovative companies such as battery leader CATL, drug development company Wuxi Biologics and Hong Kong financials such as Futu Holdings.

Structural liquidity is playing an important role in providing fuel for the rally. With China’s weak housing markets and longer-term bond yields recently moving up from record lows, equities have been the default beneficiary of improving monetary trends which has fuelled a liquidity-driven bull market this year.

China nominal GDP* (% 2q) & money / social financing* (% 6m)
*Own seasonal adjustment

Source: NS Partners and LSEG.

So far it has been domestic money within China participating in the rally, with foreign investors yet to return. Global investors will likely want to see Sino-US tensions cool further following the October APEC summit between Trump and Xi where a temporary truce was announced.

China equities flows: domestic vs. foreign investors

Source: EPFR

While it is pleasing to see our investment style come back into favour, we aren’t falling in love with this rally. Any downturn in liquidity would be a signal to reduce exposure. In addition, while our companies have broadly reported well, much of the wider rally this year has come from re-rating.

Source: Jeffries, October 2025

We are wary of chasing momentum in the China AI thematic without support from fundamentals. This is a fragile trade and vulnerable to a stall in money growth in our view.

Beware relying on mean reversion tables in India

India offers a different perspective on the importance of structural liquidity. Indian equities outperformed for years leading into 2025, and yet most EM investors were underweight the market citing rich valuations.

GEMs active vs. passive country allocations

Source: EPFR

While we were certainly mindful of India’s valuation premium to wider EM, the rise of domestic mutual funds driving flows into equities as Indian workers contribute to their pension accounts is a major structural change. We have seen this before in places like Chile or Australia, and once this trend picks up steam it can be dangerous to rely too heavily on your mean reversion tables!

While we did shift to an underweight in India at the end of 2024, the move was modest and largely based on a view that a deluge of IPOs coming to market was soaking up too much liquidity. This factor, combined with high valuations, supported our view that the market looked to be due a period of consolidation after several years of strong gains.

Model GEM portfolio: India strategy macro ratings and weightings

India	Rating	Exposure	Share of risk	Relative weight
October 2025	3	13%	16.9%	-2.5%
June 2025	3	17%	22%	-1.1%
December 2024	4	19%	20%	-0.5%
June 2024	3	21%	30%	+1.9%
December 2023	2	19%	19.7%	+2.6%
June 2023	1	17%	14.4%	+2.2%

Source: NS Partners

More recently however, agressive central bank rate cuts have fuelled a pick-up in cyclical liquidity, and while it is a near-term headwind, the flurry of IPOs will deepen the market and produce a more vibrant opportunity set. At the company level, earnings growth is set to lead EM for the next few years. While we are happy to wait for the market to come back to us for now, we see no reason to dismantle our India exposure with such a strong structural backdrop and will be ready to add back when the opportunity arises.

Passive dominance and market fragility

Thinking more broadly, we have been reading some eye-opening analysis from market strategist and investor Michael Green on the impact of rising passive dominance in markets. I won’t rehash the whole thesis in detail, but in a nutshell, Green argues that passive investing has fundamentally reshaped market dynamics by inflating valuations of the largest stocks and undermining traditional price discovery.

As index funds allocate capital based on market cap rather than fundamentals, they create a self-reinforcing cycle where rising prices attract more flows, further distorting valuations. This mechanism favours size and trend over intrinsic value and ignores quality companies outside major indices.

Markets become increasingly inelastic as passive share grows and the share of active and valuation-driven investment falls. The outcome is that liquidity no longer scales with market cap. This makes large stocks more vulnerable to outsized price impacts from passive flows.

Therefore, the largest beneficiaries of a constant inflows to passive vehicles could suffer sharp reversals should those flows reverse, exposing the market to volatility and mispricing.

Finally, Green highlights what he sees as an absurdity, being the construction of rigid rule-based investment strategies meant to operate in markets, which are complex adaptive systems. The dominance of this approach to investment is distorting markets and capital allocation which will have negative real-world impacts in magnifying the power of megacap firms and stifling innovation and creative destruction.

Having always considered the impact of structural liquidity in our markets as a part of our process, Green’s work resonates with our team. In our view, it will be crucial going forward for active investors to have an awareness of how rising passive dominance will create distortions in markets and identify the risks and opportunities that will flow from them.

MENA equity markets ended the third quarter of 2025 with returns of 4.6% for the S&P Pan Arab Composite (TR) Index Net versus the MSCI Emerging Markets Index which was up 10.6% in the same period. For the year-to-date end of September 30, MENA markets are up 8.8% compared to 27.5% for emerging markets (EM).

The factors driving the underperformance in MENA that we called out in our second quarter letter remain relevant today:

Relative under-indexation to the AI theme, which explains the majority of returns in global equity markets this year;
Weak USD, reducing the desire for owning USD-pegged risk assets; and,
A low oil price, creating a visible fiscal overhang on most countries in the region.

So long as those factors remain simultaneously in play, it is difficult to imagine a scenario where MENA equities outperform. As a result of the year-to-date underperformance, MENA equities (as measured by the aforementioned S&P index) have lost their four-year premium valuation versus MSCI EM and now trade at a 15% discount on a forward P/E basis (as per Bloomberg data). As discussed before, return dispersion in the region is high and it is important that we single out the Saudi equity market as the main culprit for the regional underperformance; the Tadawul All Share Index is down 4.3% in the year to date ending September 30, 2025 while the S&P regional index is up 9.8% in the same period (we acknowledge the TASI is a price only index so the degree of underperformance is slightly overstated).

In our last letter we argued that Saudi valuations were attractive despite lower growth visibility. This is always an interesting backdrop for equities as diminished growth visibility justifiably lowers investor expectations. This usually results in lighter positioning/ownership as capital seeks out more interesting opportunities elsewhere (e.g., data from Argaam.com showed Saudi investors’ transaction value in US equities increased by 3x year-over-year in H1 2025). For myriad reasons (which we will not get into here), that setup appeared conducive for the Saudi Capital Markets Authority (CMA) to announce (initially via an interview on Bloomberg with a board member) a possible upward revision of foreign ownership limits (FOLs) on Saudi equities from the current 49% levels. While the details are still limited, the expectation is that the limit will be revised to 100% (as is common with most Qatari companies and with companies that are not classified as strategic in the UAE) in the coming few months. The flow implications are straightforward with various estimates putting expected passive and active inflows at $10 billion and $15 billion respectively from investors adjusting to an increase in Saudi’s weight (in a 100% foreign ownership scenario) in the MSCI EM from 3.1% to 3.9%, and FTSE EM from 3.6% to 4.5%. While inflows will be limited to a small group of large cap stocks (mainly in the banking sector) with high free floats (i.e., which have room to absorb foreign ownership), the magnitude of the inflows is substantial relative to the current share liquidity of those stocks. With light positioning and relatively low expectations, the market reacted as one would expect, rising 5.1% on September 24, the strongest one-day gain since March 2020.

While underlying fundamentals will not change with FOLs revised upward, this is yet another signal that regional governments consider their stock markets to be at the centre of their economic agenda and a live barometer of its success. While there are obvious moral hazards associated with regulatory intervention in the stock market, opening the market to foreigners is not one of them. In fact, we see it as a welcome step that should increase the relevance of the Saudi market in global equity allocations and improve transparency and corporate governance standards (which can be superior to other emerging markets we invest in). This episode is also another reminder that expectations embedded in stock prices (i.e., valuations) remain a critical part of the total return formula in stock investing and something we place great emphasis on in our investment process.

We see a more favourable set up for the region as we enter the last quarter of the year. This view is driven by an underlying bid associated with the FOL removal in Saudi (i.e., dips will be bought), a more stable DXY and hopes of a more stable geopolitical environment following the signing of the Trump peace plan in Egypt in October.

The portfolio continues to favour the Saudi and Qatari markets whilst being somewhat neutral on Kuwait and cautious on the UAE. For the latter, we are entering a period of heavy public and secondary issuances (perhaps a signal that insiders find these valuations too good to pass on) and that is likely to put pressure on that market. In addition, 2025 will be a high base for corporate earnings which will make earnings growth in 2026 mathematically lower than the previous three years. That being said, we are finding pockets of interesting opportunities in UAE energy services and infrastructure that we find attractive after a strong correction in valuations in the last month. In the smaller markets, we continue to increase our exposure to Egypt as we see green shoots emerge from subsiding inflationary pressure and the prospect of a lower rate regime in the next six to twelve months. In Morocco, the “Gen-Z” protests highlighted fragilities in the case for Morocco and gave the market reason to undergo a much-needed correction. We continue to like the long-term case for the country and have opportunistically reshuffled the portfolio and net added to our exposure during the recent correction.

We look forward to updating you on the strategy going forward.

Strategy overview

The strategy invests in frontier and emerging market companies that we believe will benefit from demographic trends, changing consumer behaviour, policy and regulatory reform and technological advancement.

Egypt, Vietnam and Poland were the top three country contributors to strategy P&L in the quarter, whereas Indonesia, Lithuania and the Philippines were the worst three country contributors. On a sector basis, banks, non-bank financials and health care were the top three sector contributors to strategy P&L, whereas consumer staples, media and entertainment and consumer services were the worst three sector contributors. Below, we highlight the three best and worst stock performers during the quarter (by USD returns generated to the strategy) and share our latest observations on the portfolio and the broader investment environment.

Top Performers

Integrated Diagnostics Holdings PLC (IDHC LN)

IDHC is a leading laboratory and diagnostics provider in Egypt and Jordan with smaller operations in Nigeria and Saudi. IDHC shares returned 62.8% in during the quarter as investor sentiment turned more constructive toward Egypt and as the market responded positively to the resumption of dividends by the company that was announced with strong second quarter results. The resumption of dividends is a reflection of management’s more assured view on Egypt and signals confidence in the outlook for earnings going forward. We see further upside in the shares as we expect the company can generate nearly half of its market capitalisation in aggregate free cash in 2026 and 2027 and expect discount rates on Egyptian assets to decline as inflationary pressures subside. On the business model side, management continues to execute well by scaling the testing-at-home business (now approximately 20% of revenue), closing a ~$9 million transaction in a leading Cairo-based diagnostic imaging centre and expanding its capex-light lab roll-out via hospital and medical centre partnerships.

Kelington Group BHD (KGRB MK)

KGRB is a Malaysian engineer solutions provider with a core competency in Ultra-High Purity (UHP) gas and chemical delivery systems in the semiconductor, flat-panel display, solar and LED industries. KGRB shares returned 48.3% in the quarter as the market reacted positively to a string of contract awards announced in July and August. The most notable announcement by the company was the signing of a framework agreement with a multinational semiconductor company in Dresden, Germany with a minimum value of $35 million. KGRB is bidding on more than $1.3 billion worth of work, of which 44% is in Europe, so this contract win gives us more confidence in the company’s right-to-win in that market. KGRB’s market capitalisation crossed the $1billion mark in the quarter and its average daily value has quintupled to $5 million compared to its one-year average. While the shares have done very well year to date, the company would have only recently entered the radar screen of a large subset of emerging and global market investors who we believe will appreciate the positioning of the company in the semiconductor value chain. As a result, we see a nice combination of fundamental and technical catalysts for the shares going forward.

Ho Chi Minh City Development JS Commercial Bank (HDB VN)

HDB is a mid-sized private sector Vietnamese bank serving 23 million customers with a strong competitive advantage in the SME and consumer segments of the market. HDB shares returned 39.6% in the quarter as they benefitted from a sector-wide rally in Vietnamese bank stocks in the quarter on account of strong system lending growth, a pro-growth economic policy that appears to have been spurred on by tariff anxiety and a euphoric domestic retail investor base. We like HDB for its sector leading returns (ROE of ~27%) and proactive management which has allowed it to grow its loan book at twice the sector average. However, with the strong share price performance, we deemed the risk-reward setup no longer conducive for continued ownership and decided to exit the stock at the end of the quarter.

Worst performers

Sumber Alfaria Trijaya Tbk (AMRT IJ)
AMRT is the leading mini-market retailer in Indonesia with a network of over 20,000 stores. The company operates in an effective duopoly along with competitor Indomart, which operates around the same number of stores in Indonesia. AMRT shares lost 21.7% in the quarter as sentiment toward Indonesia soured on increased policy uncertainty and weak consumer confidence, culminating in a short period of violent protests in the last week of August. While we reduced the strategy’s exposure to Indonesia in the quarter (including in AMRT), we remain confident in the company’s ability to manage through this period of uncertainty aided by a net cash balance sheet and a defensive business model. We find the valuation appealing here at ~20x 2026 earnings and believe the business can underwrite mid-teens local currency bottom line and free cash flow CAGR for the next three years.

Hikma Pharmaceuticals PLC (HIK LN)
HIK is a Jordan-headquartered, global generic pharmaceutical company listed on the London Stock Exchange. HIK shares lost 19.4% in the quarter as policy uncertainty in the US market (~50% of group sales) and unfavourable currency movements weighed on the stock, despite the company affirming guidance in their latest results. While we see a lot of value in the shares at less than 10x 2026 earnings and think the group’s diverse revenue mix and manufacturing presence in the United States are appealing attributes, we decided to exit the shares for the time being as policy risk continues to supress the multiple and can present a risk to earnings.

Baltic Classifieds Group PLC (BCG LN)
BCG is the dominant online classifieds platform in the Baltic region operating across Lithuania, Latvia and Estonia. BCG shares lost 21.1% in the quarter following a revenue and profit downgrade issued by the company (by only 3–4%) which management attributed entirely to the new vehicle transaction and ownership tax in Estonia. Uncertainty on whether this tax will stay or go is impacting transaction activity on the company’s Auto 24 platform. Estonia has one of the highest motorisation rates in Europe and the Baltics and we believe the profit hit resulting from the tax uncertainty will likely be transitory in nature. We continue to like the pricing power of BCG across several verticals in the three countries it operates, and we see continued support for the share price from the company’s buyback program.

Outlook

Amidst volatile geopolitics and frothy asset markets, we continue to find attractive opportunities to deploy capital in our core markets. While some risks have emerged in the ASEAN region (namely in Indonesia, Philippines and Thailand) from messy politics, we find that valuations of our portfolio companies in those three countries have largely absorbed those risks. In other regions, we believe the Middle East offers good opportunities post the recent correction in Saudi and UAE equities. In Africa, we see green shoots emerge from subsiding inflationary pressure in Egypt, while Morocco’s “Gen-Z” protests offered an opportunity for us to reshuffle and add to favoured stocks on weakness. In Central Eastern Europe, we continue to see a rich opportunity set with our portfolio indexing to small and midcap high growth companies.

Broadly, the portfolio is appropriately diverse from a regional and sectoral perspective with 20 countries across 16 GICS industry groups. Within those areas, the portfolio owns a unique combination of companies that exhibit growth, re-rating potential and idiosyncratic catalysts.

We look forward to updating you on the strategy in the next quarter.

We called for a brighter outlook for EM equities over a year ago on the prospect of a USD bear market. This is now starting to play out, led by a liquidity-driven bull market in China.

Over the last three years to the end of the quarter, EM equities have compounded at an annualised rate of 19%.

Our markets remain under-owned and boast cheap valuations relative to US stocks. Easing financial conditions should support a recovery in earnings growth.

We are also believers that you can have too much of a good thing, and that emerging markets are a host to a number of attractive structural thematics outside of the AI fervour that are unique to our investment universe.

The rally this year has been focused on the large cap names. To illustrate, the MSCI EM Small Cap Index has returned 16.67% against 28.16% for the large cap index for the year to date.

This is also reflected in the underperformance of smaller and less liquid markets such as ASEAN. As the bull market matures, we expect liquidity to creep out to markets such as Malaysia, which have been abandoned by foreign investors despite having exciting structural investment opportunities. We know from past experience that when investor flows do return, the upside can be dramatic.

Returns across emerging markets have so far been driven by local allocators, with foreign investors largely sitting on the sidelines – although interactions with attendees on our usual conference circuit suggest that this could be about to change.

Korea Value-Up deep dive: SK Square

Corporate Value-Up catalyst alongside tailwind from SK Hynix’s dominance in high bandwidth memory

South Korean equities have surged by over 57% this year to the end of September. The fuel is a combination of exposure to AI infrastructure mania through the country’s tech giants such as SK Hynix and Samsung rallying, ultra cheap valuations and the prospect of a broader market re-rating courtesy of the Value-Up corporate reform drive that is now underway.

Below we provide a deep dive into recent portfolio addition SK Square, which we think is emblematic of the broader upside potential in Korean equities if the government sticks to its reform ambitions.

Overview

South Korea is home to some of the world’s most innovative companies, and yet it is also arguably one of the cheapest equity markets. The dichotomy is down to a poor history of corporate governance in the country, with the economy dominated by vast family-controlled chaebol conglomerates.

These families have historically been more focused on preserving their business empires than looking out for the interests of minority shareholders. However, following in the footsteps of Japan’s stock exchange reforms, South Korea has launched Value-Up to narrow the “Korea discount” and attract foreign capital.

We think SK Square epitomises the sort of opportunity where Value-Up could be a significant catalyst for re-rating. Spun off from SK Telecom in 2021, the holding company’s investment portfolio includes business across semiconductors (SK Hynix), ICT ventures and digital platforms.

Source: SK Square 2025

Focus on the discount to NAV for this holding company – the discount has widened to 55% following a recent correction. This was an opportunity to buy. Management has levers to pull to narrow the NAV discount via more share buybacks, NAV enhancement and dividend payouts.

SK Square is the best in class among the holding companies and is leading peers in efforts to enhance shareholder value. Management quality is high and the board has a majority of independent directors. They were the first holdco to unveil their Value-Up program and appear to be executing the plan well.

The company is already practising cumulative voting rights – this favours minority shareholders who can pool votes to secure board seats (only 6% of companies in South Korea practice cumulative voting).

The disposal of non-core assets will enable SK Square to focus its energy on its best assets in the IT and Communications sectors.

A brief history of the chaebols

Born out of the interplay of historical, economic and governmental forces following WWI and the Korean War, these family-owned conglomerates filled a significant institutional void post Korea’s liberation from Japanese occupation in 1945.

Chaebols were formed out of the sale of assets previously owned by Japan’s government and firms, which accounted for 30% of the Korean economy. These assets were often sold to families and high-ranking officials at a deep discount, with prices based on outdated book values amidst high inflation. Early chaebols like Hanwha, Doosan, Samsung, SK and Hyundai used these assets as the foundation for growth.

The Korean government played a decisive role in shaping the economy since 1961. Under President Chung Hee Park, economic development became a top priority for legitimacy. The government launched a series of five-year development plans which were based on nationalising banks and channelling foreign loans in capital-intensive heavy industries and chemical industries. It allowed chaebols to acquire or establish non-bank financials to provide capital to their affiliates.

Korea experienced chronic capital shortages throughout its development period, particularly after the Korean war. The chaebols could create value by internalizing resource allocation and replacing poorly performing institutions. The absence of supporting industries meant that chaebols often had to vertically integrate to secure necessary parts and raw materials.

While the chaebols were effective vehicles for kickstarting growth, a host of structural issues emerged.

Vertically integrated suppliers, with captive customers, meant the chaebols lacked incentives to be efficient.

Cross-subsidisation across affiliate businesses led to yet more inefficiencies and wasteful allocation of capital.

Internal subsidies via nonbank financial subsidiaries funded unprofitable ventures bypassing traditional banks. This was identified as one of the causes for the Asian Financial Crisis.

Centralised family control over numerous group affiliates even though their direct equity ownership is often a small percentage. This control allows for decisions that serve personal interests at the expense of minority shareholders.

Cross-shareholding – affiliates within a chaebol group own shares in each other, which inflates the apparent ownership stakes and provides a mechanism for the founding family to control the entire group with minimal actual capital investment.

High debt-equity ratios. Chaebols have historically preferred debt over equity financing to avoid diluting the controlling stakes of their founding families.

Unchecked power of chairmen. Chairmen held absolute power over strategic decisions, leading missteps such as ill-conceived diversification strategies e.g., Samsung’s entry into the auto industry.

Ineffective boards. Typically dominated by executive officers and outside directors with close ties to dominant shareholders. They often serve to provide ex-post factor approval rather than independent oversight.

Value-Up aims to tackle these issues, and it is more than just political rhetoric.

The program is supported by both of South Korea’s major political parties in the DPK and PPP. Real reform is underway, including revisions to the Commercial Act mandating director loyalty to shareholders (instead of to “the company”), electronic shareholder meetings for large firms and cumulative voting rights to empower minority investors.

Corporate governance reform – Japan vs. Korea

	South Korea	Japan
Mandatory vs. voluntary	Voluntary	Mandatory
Incentives	Carrots and sticks	Named and shamed
Targeting companies with price to book ratio <1	Financial Services Commission believes PBR helps assess whether or not the issue arises from a low ROE due to a high cost production structure and decrease in market demand.	The company has not achieved profitability that exceeds its cost of capital, or investors are not seeing its growth potential.
Framework	A Value-Up ETF Index has been created. Value-Up adherents to be rewarded with inclusion. Potentially, a special tax regime will be set up for companies increasing dividends.	Companies complying with the new corporate governance rules were publicly named by TSE in early 2024.

History of SK Square

Founded in November 2021 via a spin-off of SK Telecom, SK Square intended to focus on ICT investments and become a more growth-and-tech-focussed holding company.

The downturn in portfolio company and DRAM giant SK Hynix in 2023 forced SK Square management to sharpen its focus on the underlying portfolio, much of which was loss making.

SK Group chairman Chey does not have a direct stake in SK Square and the independent board of directors makes it more exposed to shareholder activism. It was the subject of shareholder activism in 2023–2024, led by a London hedge fund (1% shareholding), pushing for the business to release an industry-leading value-up plan which was eventually announced in November 2024.

Company overview

Operating income (Q2 2025) of 1.4tn won, of which SK Hynix contributed to 1.84tn (20% stake). The ICT portfolio is generating negative operating income of 28.9tn won.

Source: SK Square company presentation Q2 2025

SK Hynix is 88% of SK Square NAV.

Other than SK Hynix, SK Shieldus (2% NAV) and TMAP Mobility (1%) are the only ventures making meaningful profits.
Management said that they will divest 20 or more ventures this year, and the rest in the next couple of years.

Source: SK Square company presentation Q2 2025

SK Square’s NAV discount is beginning to narrow. A recent market correction has given us an opportunity to buy the stock.

NAV to market cap discount has narrowed significantly from 74% in 2022 to 66% at Q3 2024 since the announcement of its value-up program.
The discount narrowed to a low of 47% in June, before the KOSPI and SK Square correction.
While SK Hynix corrected by c.15% from its July peak, SK Square’s share price fell by c.37% from its June peak, with the NAV discount widening to c.55% at the time we initiated our position.

NAV Discount	28/08/25
NAV	44,198
Market cap	19,828
-55%

Catalysts

There are strong KPI incentives in place for management if the NAV discount gets to 50%, ROE> Cost of equity at 13-14% and over 1x PB by 2027.

Source: SK Square company presentation Q2 2025

The NAV discount has been narrowed by:

1) Aggressive share buybacks (c.9% of total outstanding). Critically, all shares bought back are to be cancelled. At the March AGM, another batch of buyback of 100bn won was announced on top of the 300bn and 200bn buybacks in 2023 and 2024.

Source: SK Square company presentation Q2 2025

2) Non-core divestments by reducing the number of entities from 43 to 20 this year. They are hoping to de-risk the portfolio, boost cash flows and shareholder returns.

Source: SK Square company presentation Q2 2025

3) Payout of at least 50% of recurring portfolio dividend income to investors.

Source: SK Square company presentation Q2 2025

Our base case is for NAV discount to narrow to 40% over medium term, the historic average of holdco discounts in South Korea.

Source: CLSA, DART

Narrowing the discount to this level implies significant upside in the stock.

In addition, dividends from SK Hynix will amount to 3tn won by 2027, which can be deployed.

They have sold an SK Shieldus (Cybersecurity) stake to a PE fund and the cash received in Q3 2025 (510bn won) could be deployed to further boost shareholder returns.

For the remaining unlisted companies, management is yet to outline plans for further asset sales. More clarity here would boost the stock.

Additional tailwinds may come from the next batch of share buybacks to be announced in Q4. The pace and magnitude will be key. SK Hynix coming back in focus as an AI play is an added tailwind.

Risks

The board of directors may not go as far as investors expect to sustainably narrow the NAV discount from 75% in 2022 to 50%.
Disappointment over the cadence and magnitude of share buybacks.
Chairman Myung is trying to turn some portfolio companies around to be EBITDA positive, but the labour union is in the way. (We are still seeing some progress i.e., portfolio company TMAP turned an operating profit in Q2 2025).
The pace of divestments could be slower than anticipated, as assets require proper packaging to sell them at a good valuation.
Volatility in the stock adding to beta to the portfolio.
An SK Hynix downcycle and share price downturn will trigger a bigger correction in SK Square.

Summary

Overall, SK Square is just one example of how South Korea’s Value-Up program can act as a catalyst for managers to sharpen up capital allocation and sweat their assets harder. Much will depend on the government’s willingness to pressure corporates to continue value-enhancing efforts through further legislative and regulatory reform. The momentum is positive, and if sustained could lead to a full market re-rating.

The broad market in China now trades in line with the long-term average valuations. Which begs the question, is there any fuel left in this rally?

Chinese state-owned enterprises have driven market valuations to their long-term average

Note: MSCI weighted. Source: Jeffries, FactSet

Our kind of businesses remain cheap

Note: MSCI weighted. Source: Jeffries, FactSet

MSCI China private sector is trading at just 14x, close to the -1 standard deviation level and c.15% below the long-term average.

Prior to the recent rally, investors had abandoned quality names despite improving profitability, cheap valuations, increasing buybacks and dividends. We are now seeing start to reverse.

China quality now ahead year to date following years of underperformance

Source: NS Partners and LSEG

Improving returns are fuelling the rally

Source: Jeffries, FactSet. Note: Based on current MSCI ex-fin & REITs universe.

China’s electricity demand is scaling up rapidly, driven by AI, EVs, air conditioning and industrial upgrading. Renewables – especially solar and wind – are central to meeting this demand, with China uniquely positioned to scale capacity.

The rise of renewables necessitates a massive build-out of energy storage (30× increase by 2050) and grid infrastructure.

AI is a particularly powerful driver, with data centre electricity demand set to multiply several times over the next few decades. These trends are supported by robust investment and policy momentum, positioning China as the world’s largest “electrostate” by 2050.

Annual power capacity in major countries – China is on track to add over 500 GW of solar and wind capacity this year.

Source: Berstein and government data (2025)

With rising capacity and increasing penetration of renewables, a massive scale-up in energy storage capacity through batteries will be crucial to ensuring grid stability.

Company spotlight: Contemporary Amperex Technology (CATL) – the world’s largest battery maker

Contemporary Amperex Technology (CATL) is a vital player in providing energy storage to address power intermittency issues as China ramps up zero-carbon renewables. The company boasts a number of competitive strengths supporting sustainable earnings growth:

CATL’s efficient production lines and scale enable it to be a cost leader with the highest GPM (20%) vs. peers.
This advantage should be sustained as it continues to expand capacity and grow with its customers (Tesla, Chinese OEMs).
The company is technologically ahead of the market, and its scale allows it to invest much higher absolute dollar into R&D.

You can see this dynamic in the charts below, with increasing scale unlocking a sustainable R&D edge over the competition, while capex intensity falls and free cash flows improve.

Cash generation

Source: NS Partners and Bloomberg

Working capital

Source: NS Partners and Bloomberg

Pricing power and constant technological innovation through scale is becoming a moat that looks increasingly insurmountable for competitors around the world.

In April this year, CATL announced that it was developing fast-charge technology which can deliver 520km range in five minutes.

Source: Financial Times April 2025

This was followed in May by the unveiling of its Freevoy battery which boasts a 1500km range.

Source: Contemporary Amperex Technology Presentation May 2025.

Fears over weak demand for EVs dragging on battery pricing and trade war concerns have hit the stock in recent years. This is a high-quality company trading at a very reasonable valuation, trading at trough 14.6x fwd P/E multiple.

Source: NS Partners and Bloomberg

CATL is just one example of the kinds of opportunities on offer in China. The exodus of foreign investors from the market has left bargains everywhere among well-run, growing companies with lots of cash, next to no debt, with many buying back shares or announcing aggressive dividend plans.

Our portfolio is full of high-quality compounders across sectors trading at very attractive valuations. While it has been the value names, SOEs, small caps and high dividend stocks that have led the first phase of the China bull market, we think that the real gems in this phase on offer for investors remain cheap and look poised to outperform.

In our December 2024 commentary, we framed investing in Brazil as a high-stakes game of Blackjack. We argued that macro uncertainties such as fiscal deficits and political volatility were the low cards (2–6) which favoured the dealer. While these factors make for a daunting investment backdrop, our view was that these “cards” stood a chance of being dealt out as President Lula’s term progressed toward the 2026 elections. As a result, the proportion of high cards (10–Ace), being Brazil’s economic strengths and its reform potential, would start to rise and underpin an increasingly favourable set up for the player (investor).

Since our December post until August 2025, the deck has run down as October 2026 presidential elections in Brazil approach. As anticipated, the stakes are intensifying: Latin America’s 2025 electoral calendar is heating up, with presidential votes scheduled in Bolivia, Chile, Ecuador, and mid-term elections in Argentina, setting the stage for regional sentiment shifts that could influence outcomes in Brazil.

By the second quarter of 2026, we expect to have a good sense of the deck count and our chances of getting a Blackjack. It is likely that the “risk premium” for Brazilian equities has already peaked and will fall as early polls are released, candidates emerge and policy platforms take shape. This creates a unique window now for measured risk-taking as we await further confirmation on the above, selectively allocating chips (capital) to high-conviction hands where the asymmetry of risks favours the upside.

Active equity fund redemptions decelerate

Source: Itau BBA (August 2025)

So far, our approach has been assertive but disciplined: avoiding high-rolling bets on speculative names in favour of quality opportunities. This has paid off handsomely so far, typified by outperformance in portfolio holdings like Vivara (a jewellery retailer) and SABESP (sanitation utility), delivering strong returns amid a resilient economy.

Brazilian water utility SABESP returns improving

Source: SABESP Q2 2025 investor presentation

Recent macro and political developments: Improving outlook, but risks linger

Since December 2024, Brazil’s economic resilience, despite the tension between tight monetary policy and loose fiscal policy, is undoubtedly a high card. GDP growth is moderating from 3.4% in 2024 to around 2.2–2.3% in 2025, as high interest rates start biting into activity. However, positives abound: unemployment hit record lows in mid-2025, inflation is easing (expected at 5.0% year-end) and the economy is positioned to weather Trump’s proposed 50% tariffs on non-US imports, thanks to exemptions for key commodities and diversified exports.

Politically, the deck is shifting favourably for investors seeking change. Lula’s approval rating has dipped amid unease over economic stability, with polls modelling runoffs showing him mostly behind right-wing figures like Tarcísio de Freitas (current governor of Sao Paulo State). Former president Bolsonaro himself is sidelined by legal troubles, reducing « anti-establishment » risks. The 2024 municipal elections saw gains for conservative candidates, signalling a potential 2026 swing toward market-friendly policies if a centre-right candidate consolidates support.

This echoes our original thesis: as Lula’s socialist term winds down, extreme pessimism over the economy should fade, creating a disconnect between strong company fundamentals and cheap equity valuations.

Core positions: Delivering as expected, with Q2 2025 earnings validation

Our core Latin American holdings have performed robustly, showcasing consistent top-line growth, improving returns (ROIC/ROE) and strong moats in defensive sectors. This validates our philosophy of steering clear of higher-risk names (e.g., leveraged cyclicals, where low margins and geopolitical exposure have led to underperformance amid prolonged high rates and global uncertainty). Initial signs of a softer local economy – for example, a Q2 retail slowdown – have hit speculative plays harder, reinforcing our quality focus.

The results from Q2 2025 underscore management prowess and support the view that our Brazilian names should be robust amid a volatile macro backdrop: top-line momentum (avg. +15% YoY) and ROIC/ROE improvements (avg. +2–3 pts). We are also excited about emerging opportunities as a “positive count” in the deck for Brazil, an opportunity to add some new names from our opinion list.

Valuations in Brazil remain attractive

Source: Itau BBA (August 2025)

In a couple of months, our planned trip to the region (with a packed agenda) will allow on-the-ground validation, potentially enhancing conviction in existing and prospective portfolio companies.

Outlook: Calibrating bets as odds shift

As inflation cooling and political fragmentation dissipating act as low cards exiting the deck, the count could tilt toward investors. For now, play smart; global headwinds (Trump tariffs and a US slowdown) and domestic fiscal risks could bust hands. We remain focused on quality amid depressed valuations and are keeping eyes on the 2026 Ace: a conservative presidential win that could unlock multi-baggers. Stay tuned for post-trip updates; this game is far from over.

The strategy focuses on investing in frontier and emerging market companies that our team expects will benefit from demographic trends, changing consumer behaviour, policy and regulatory reform and technological advancements.

Below, we explore several key factors that influenced returns during the second quarter of 2025 and share observations on the portfolio and the markets.

Internet and technology portfolio

The portfolio’s returns in the second quarter and throughout the first half of the year was primarily driven by the internet and technology sector. Key contributors included Fawry for Banking Technology & Payments S.A.E. (FWRY EG), Baltic Classifieds Group PLC (BCG LN) and Allegro.EU SA (ALE PW) which have been discussed in detail in previous letters. It is worth mentioning that Allegro shares benefited from a very strong Polish equity market backdrop this year with the WIG20 Index up ~30% in zloty terms as of end of June 2025. Fortunately, fundamentals have also been very supportive; expectations are for mid-teens EBITDA growth in 2025 and the company has allocated 4% of market capitalisation in share buybacks. The company’s decision to diversify its last-mile logistics (primarily parcel lockers) and reduce reliance on the dominant provider InPost can generate operational efficiencies and support margins if executed properly (for context, Allegro’s shares have outperformed InPost’s by 45% in constant currency since the announcement of Allegro’s new strategy in March this year). We also finally see a path to a clearing of the multi-year share overhang from private equity ownership as share sales are absorbed well by the markets, aided by passive index trackers which systematically react to increases in free float market capitalisation.

One drag in the internet and technology portfolio that is worth mentioning is Talabat Holding Plc (TALABAT AE), the leading food delivery and quick commerce company in the Middle East and Africa region. While we have reservations on the quality of food delivery business models, we found Talabat’s market penetration, diverse geographical dominance and valuation appealing. The company’s monetisation model impressed us; it generates 3.5% of gross merchandise value in advertising income (AdTech) and has built a healthy but competitive take-rate model from restaurant partners and consumers. Additionally, Talabat’s grocery offering (quick commerce) is the most developed we’ve seen among food delivery companies in the region with ~25% revenue contribution. We believe the market is overly concerned with competitive risks arising from the entry of Keeta (a Meituan company) into key Talabat markets like the UAE, Kuwait and Qatar. This has resulted in a fading of Talabat’s forward P/E ratio from ~18x at IPO last year to under 12x. This is a significant discount to domestic and global peers that are inferior on almost every metric. Talabat is a small position for the strategy and we acknowledge that the multiple is likely to be supressed until there is visibility on Keeta’s capabilities in its key markets. That said, we see a favourable risk-reward set up for the shares on the view that Talabat’s margins will exhibit resilience (relative to market expectations) in the next 12-18 months as Keeta enters the market.

Industrials portfolio

The industrials portfolio was a bright spot for the strategy with solid outperformance in the shares of Malaysian companies Westports Holdings Bhd (WPRTS KL) and Kelington Group Bhd (KGB KL).

Westports is a leading Malaysian port operator based in Port Klang, strategically located along the Straits of Malacca. It serves as a major gateway for container and conventional cargo for central Peninsular Malaysia and is one of the region’s key transshipment hubs, competing with the likes of Port of Tanjung Pelepas (PTP) and Port of Singapore. We acquired shares in Westports in the quarter as they came under pressure from concerns on slowing global trade from tariffs. Our thesis on Westports was that the volumes it handles will be relatively resilient given low exposure to Asia-US trade flow and relatively high exposure to gateway traffic (~50% of 2024 revenue are on containers destined to Malaysia as an end market). We also saw option value in the shares as the market was not pricing in a potential regulatory rate hike. Much to our delight, this was gazetted soon after we invested in the company and led to a significant upward revision of earnings across the street that supported the rally in the shares.

Kelington is a founder-led engineering solutions provider with a core competency in Ultra-High Purity (UHP) gas and chemical delivery systems for semiconductor, flat-panel display, solar and LED manufacturers. We purchased Kelington shares in the fourth quarter of 2024 and continued to build a position in the company as we got more familiar with the management team and the business model. We like Kelington for its UHP solutions business in particular; UHP systems are engineered networks that transport and regulate gases and chemicals used in semiconductor fabrication. These systems must maintain purity levels of 99.9999% (6N) or higher, as even microscopic contaminants can ruin wafers or reduce yield. We expect Kelington to be a major beneficiary of the “semiconductor sovereignty” theme and are bullish on its ability to capture that growth over the next few years.

The strategy experienced some underperformance (relative to the performance of the industrial portfolio) from TAV Havalimanlari Holding AS (TAVHL IS). TAV is a Turkish-listed airport operator and services company with a portfolio of 77 airports in 19 countries which it manages directly or through co-management agreements with industry partners. TAV shares came under pressure following the escalation in the Middle East in June as concerns over air travel and tourism mounted. We saw an opportunity to add to the shares after the US-mediated ceasefire was reached. We are relatively early in our ownership of TAV but are impressed with its track record and exposure to unique airport assets in regions that will experience long-term growth in air travel.

Healthcare and education portfolio

The healthcare and education portfolio had a good quarter led by Benefit Systems SA (BFT WA). BFT provides non-payroll employee benefit solutions with a strong focus on fitness, wellness and lifestyle service in its home market of Poland and several regional markets including Czechia, Slovakia, Bulgaria, Croatia and Türkiye. BFT is a play on the growth in wellness and corporate HR budgets. It dominates the Polish B2B wellness market with a base of ~1.7 million cards (~70% of the market). In addition to being a key customer acquisition channel for third-party fitness clubs, BFT operates its own network of over 240 clubs which helps it maintain healthy site utilisation, good user experience and a strong bargaining position vis-à-vis third-party clubs. BFT’s management has been vocal about its regional ambitions and followed that through this year with a ~USD430 million acquisition of Türkiye’s leading fitness club operator MACFit. BFT is betting that it can leverage MACFit’s 121 club network in Türkiye to build a B2B wellness card business that is similar to the one it built in Poland. While it is early days, the MACFit asset is highly profitable and allows the company time to thoughtfully develop its B2B business in the country. There was some corporate activity on the share registry of BFT in the quarter with the founder (who is no longer involved in the business) exiting his remaining ~14% stake in the company to a very healthy book of mainly local institutional investors. This resulted in improved liquidity on the shares with daily average traded value increasing to over USD3 million a day since the transaction was completed in March from the 2024 average of USD1.4 million.

Outlook

The investment environment continues to be volatile. Erratic policy making, a shifting geopolitical landscape and mixed signals about the health of the global economy still carry a lot of future uncertainty with them. On the other hand, corporate earnings appear healthy.

With the artificial intelligence theme firmly in play, fiscal spending is on the rise across much of the Western world and valuations are buoyed by a weak US dollar and expectations of monetary easing from whoever will be running the US Fed in the next 12 months.

As discussed in our last outlook, a weak US dollar is a net positive for most of our markets as it creates breathing room for central banks to cut rates without importing inflation through currency depreciation. We see that theme intact for the time being and as such, expect a supportive environment for valuations and corporate earnings growth.

At a micro level, we continue to be encouraged by the strong pipeline of ideas that we are generating and believe that signals a healthy environment for the strategy. More importantly, and as demonstrated in some of the company examples we gave earlier, the portfolio comprises unique, high-growth companies that we believe are under-owned in an EM equity context and have the potential to generate significant capital appreciation over time.

We look forward to updating you on the strategy in the next letter.

MENA equity markets ended the second quarter of 2025 with returns of 1.3% for the S&P Pan Arab Composite LargeMidCap Index versus the MSCI Emerging Markets Index which was up 12.0% in the same period. For the year-to-date end of June 30, MENA markets were up 4.0% compared to 15.3% for emerging markets (EM).

The significant underperformance of MENA versus EM in the first half of the year should not come as a surprise. In our last letter, we flagged the risk of regional underperformance in a weak oil/weak USD environment that has characterised much of the first half of 2025. The under-indexation of MENA equities to the AI theme (a similar dynamic to what is observed in the underperformance of India equities this year) is another source of performance drag versus EM in the period.

Return dispersion among MENA equity markets is a desirable feature that we highlighted in previous letters and one that we feel is underappreciated by asset allocators. This dispersion allows us to step in and out of countries (on a relative basis) depending on our assessment of risk-reward in each. The first half provided a particularly good example of dispersion with a performance gap of ~25% between Kuwait (best performing) and Saudi Arabia (worst performing). Kuwait’s strong performance this year is being driven by increasing optimism on policy reform. However, our conversations with Kuwaiti companies in the last two months suggest a slower pace of execution, which is also visible in underwhelming earnings so far this year. Kuwait in 2025 is therefore likely to be a multiples expansion story that we believe has mostly played out. We therefore look for earnings growth in 2026 to support valuations or otherwise see scope for disappointment in the market.

In the interim, the market will still trade the headlines (particularly news on the mortgage law) and as a result we expect valuations to remain underpinned but not necessarily offering much upside.

The UAE also had an exceptional run that is extending into July and continues to stretch the performance gap with Saudi Arabia year-to-date. Fundamentals have largely supported the UAE-Saudi performance differential, as evidenced by comparing their respective banking systems’ loan-to-deposit ratio. UAE banks are leveraging their liquidity advantage to grow in the region, with an increasing share of their loan book growth attributed to Saudi Arabia.

Macro data appears supportive of the UAE and suggests an extension of a very strong three-year cycle well into 2025. While we acknowledge the strengths of the UAE macro story, we are wary of the stretched positioning in certain stocks and, as a result, have been gradually tilting the portfolio to end-of-cycle stocks that appear less crowded and thus offer a more attractive risk-reward. This has so far proven premature as the market continues to be emboldened by solid earnings growth and positive macro data. On the other hand, Saudi valuations present an opportunity to gradually build positions in companies we like with a 12-to-18-month view. We also see Qatar as a dark horse market this year, given relatively low levels of ownership amidst an effort by the regulator to prop up interest in its market.

In our last outlook statement, we discussed the impact of tariffs on the region. The conclusion then and now is that the region’s net import position with the United States will mitigate any direct negative impact, but that the indirect impact through a lower oil price can be significant. While peak tariff noise has largely subsided, we expect it to continue to be an area of tension as the pace of negotiations and deals accelerates. A possible change in strategy by OPEC+ also risks adding more supply to the market and can result in downside pressure on the oil price as we exit the seasonal peak summer demand. Our working assumption is that oil stays in the mid-$60s for the rest of the year; this is a level we consider to be a sweet spot for the region as it secures the funding of key viable projects while acting as a natural mitigant to unproductive capital and operating expenditures. Recent announcements on giga-project scope and feasibility reviews might be taken negatively by the market initially (most recently “The Line” project), but we believe this signals a commonsense approach to spending and resource allocation. Mid-$60s oil might have an impact on equity market sentiment in Saudi Arabia, but the offset to that is the valuation environment appears conducive for good stock pickers.

The primary reason tariffs took a backseat in the headlines in the second quarter was the unprecedented escalation in hostilities between Israel and Iran in June. MENA investors have long grappled with the prospect of direct strikes between the two countries with most (us included) placing this in the “low probability/high impact” risk bucket. As the events played out – and contrary to most expectations – MENA markets proved resilient, ending up at 1.7% over the 12 days of escalation. Brent oil briefly flirted with $82 on June 23 before settling back down to a range of $67-68 hours later. With the benefit of hindsight, markets were quick to recognise that Iran’s capacity to defend itself or launch retaliatory strikes was severely curtailed and as a result, swiftly discounted a prompt resolution to the events (paralleling an even stronger rally in Israeli equities over that period). While we do not rule out further escalation in the future, MENA equity markets passed a major stress test in June. In fact, a strong argument can be made that the political risk premium attached to the region (particularly GCC equity markets) is lower than at any point in their history.

We look forward to updating you on the strategy in the next letter.