South Korean equities have been on a rollercoaster over the past few years. In early 2024, we saw exuberance fuelled by the announcement of the Corporate Value-Up program. Many were hoping the country was shaping up to follow in the footsteps of Japan – Super-cheap Korean equities rally on market reform talks

Hopes were shattered by disgraced former president Yoon’s attempt to impose martial law in December – South Korea rocked by president’s attempt to impose martial law

While the situation was precarious, South Korean institutions held firm and Yoon now sits in a Seoul detention centre awaiting trial while Democratic Party leader Lee Jae-Myung decisively won a June snap election on a platform of corporate governance reforms.

South Korean equities rally

Korean equities surged around the election, led by financials and technology stocks. We gradually lifted our underweight exposure to neutral and then a modest overweight through the first half of 2025, leaning into the promise of revisions to the Commercial Law Act and Lee’s support of the Value-Up program.

Source: LSEG Datastream

In our view, a series of policy initiatives pushed by the Lee administration have the potential to lift a host of beaten-down domestically focused names, outlined below.

Supporter of Value-Up

Despite being launched by Lee’s then opposition, his party is a supporter of Value-Up. The initiative, modelled on the Tokyo Stock Exchange reforms aims to narrow the « Korea Discount » by enhancing corporate governance, capital efficiency, and shareholder returns.

By publishing Value-Up plans and following through, Korean companies can access Korean Exchange fee exemptions, gain priority in investor relations events, and other awards to enhance market visibility. Taking these steps will also help to better align South Korean governance standards with global best practice, and in turn attract foreign capital and boost valuations.

Commercial Act revision

The Lee government quicky jumped into action to push through revisions to the Commercial Act, which align with the aims of Value-Up. In early July a revised version of the Commercial Act amendment was passed with support from both the Democratic Party and the conservative opposition as a compromise. This version:

1. mandates that directors balance corporate and shareholder interests;
2. requires electronic shareholder meetings for large listed companies (market cap over 2 trillion won, ~$1.5 billion); and
3. prohibits rejecting cumulative voting requests to empower minority shareholders.

The Cabinet approved these amendments on July 15, 2025, signalling their imminent implementation.

Encouraging more equity investment and less speculative investment in housing

The government is also intent on pushing for a shift in the balance of household wealth (approximately 70% of household assets) from real estate to equities. President Lee’s aim is to channel liquidity away from housing speculation to promote greater stability in the Korean economy, and redirect capital into equities. The idea is that this will fuel investment in more productive sectors such as technology and defence in order to stimulate innovation and economic growth.

Value-Up and revisions to the Commercial Act are key levers to encourage this shift by households into domestic stocks.

Excess liquidity provides fuel for stock market rallies

Source: CLSA

Fiscal loosening

The government is also taking direct action to counter stagnant economic growth. In June the government proposed a KRW30.5 trillion supplementary budget, representing 0.9% of GDP, with KRW10 trillion to be handed out as cash for consumption (equivalent to around USD100-350 per person depending on income).

Portfolio – financials exposure boosted

Our portfolio names in financials and technology in South Korea have rallied this year on hopes for President Lee Jae-Myung’s reform platform. Our position in Samsung Life is a beneficiary of the Value-Up program, and rose 67.7% in USD terms through the second quarter alone on expectations reforms will force the disposal of company holdings in affiliated companies. Samsung Life selling its position in Samsung Electronics would trigger a huge one-off gain which will free up cash to be re-deployed into more productive uses and boost returns on equity. We trimmed Samsung Life to rotate into laggard DB Insurance, which is cheaper and in our view, has greater upside catalysts, being yet to announce Value-Up plans.

Leading bank KB Financial was another strong performer, reporting robust profit growth along with a surprise share buyback and cancellation as well as a higher dividend. The bank trades on a modest 0.7x price to book with a return on equity of 9.7% and rising, as well as a 4% dividend yield.

KB Financial driving ROE higher

Source: KB Financial Q1 2025

… while buybacks continue

Source: KB Financial Q1 2025

… and dividends increase

Source: KB Financial Q1 2025

KB also looks set to benefit from planned fiscal loosening by the Lee government and falling central bank rates boosting loan growth.

More to come?

Shareholder and political pressure on South Korean corporates to address their poor corporate governance records continues to build. Progress will no doubt be slow and incremental, but there is a lot of low hanging fruit the government can pursue including changes to capital, dividend and capital gains taxes to encourage investment and reform simultaneously.

Success in these efforts could well be the basis for a full market re-rating.

We have written extensively in recent months on how monetary and currency signals may be hinting that we are on the cusp of a “virtuous circle” for performance in EM equities. For any who missed it, a few recent pieces below:

Implications of Asian currency tremors

‘Beautiful’ tariffs and the end of exceptionalism

Are emerging markets on the cusp of a ‘virtuous circle’?

This is the most bullish we have been on the outlook for emerging market equities in over a decade.

Recent momentum has been positive, with MSCI EM up 9% to the end of May, part of a broader upswing in markets outside of the United States.

MSCI Price Indices
USD Terms, 31 December 2024 = 100

Source: LSEG Datastream

Macquarie Capital investment strategist Viktor Shvets wrote earlier this month that, in May, EM excluding China recorded the largest net inflow since December 2023. India ($2.3 billion), Taiwan ($7.6 billion) and Brazil ($2 billion) received the largest flows, helping to buck a trend of selling through 2024 and early 2025.

EM ex-China Net Foreign Flows (US$ bn) – strong flow reversal

Source: Bloomberg; Macquarie Global Strategy (May 2025)

Persistent negative outflows over the past decade from EM into the United States have driven what by many measures is an unprecedented valuation gap.

US relative to the rest of the world forward PE and dividend yield

Source: CLSA (April 2025)

Some premium is no doubt deserved given stronger US growth versus the rest of the world post-GFC, along with a better environment for capital and innovation. However, such extreme valuations imply lofty relative future growth expectations and leave US equities vulnerable to negative catalysts.

As John Authers wrote in his Points of Return column for Bloomberg:

Ultimately, EMs benefit most from the decline of US exceptionalism, giving central banks room to cut rates, as noted by Points of Return, and letting fiscal authorities spend without worrying about tanking the currency.

In a world where no one is exceptional, as Macquarie’s Shvets puts it, EMs are no longer penalized. At best, he calls the fall of American exceptionalism a process, not a collapse — creating conditions for a gradual rise in US risk premia while avoiding disorderly asset repricing. Investors will continue narrowing spreads between US and non-US assets, supporting EMU and Japan. Ditto for EMs, especially those with stronger secular drivers, with India, Korea, and Taiwan standouts.

Currency tailwind for EM


Source: NS Partners & LSEG

Winners and losers

Despite being caught up in Liberation Day tariff chaos, MSCI China has returned 13.1% over the same period. Since 2023, China has been one of the strongest equity markets in the world. Despite the rally, valuations in many of the high-quality businesses that we like remain modest.

Source: Jefferies (March 2025)

Having led the way for EM over the last few years, Indian stocks returned just 3% as sentiment moderates.

South Korea bounced 18.7% as domestic political risks eased following the impeachment of former president Yoon Suk Yeol following his failed attempt to impose martial law in December 2024. Former opposition leader Lee Jae-myung was elected to the presidency in early June and will immediately grapple with a contracting economy which has been hit further by US tariffs.

Taiwan has been a laggard, its market flat over the period which includes the DeepSeek shock that hit AI supply chain stocks on fears of lower demand for the hardware used to power the technology.

Stocks in Southeast Asia are yet to fire this year despite being beneficiaries of a falling USD and improving global liquidity. Perhaps investors remain fearful that these smaller, open trading economies risk getting trampled at the feet of the two fighting elephants in the United States and China. In a meeting with our CIO Ian Beattie earlier this year in London, Malaysian Prime Minister Anwar explained what a difficult position his country is in. China is Malaysia’s biggest trading partner and second largest investor, while the United States is its largest investor and second largest trading partner! If trade tensions between China and the United States cool, then these markets should soar.

Elsewhere, South African stocks have boomed, rising 24.4% powered in part by the country’s gold miners, along with a tentative improvement in politics under the ruling national ANC/DA coalition.

Brazil and Mexico have largely avoided president Trump’s ire and have rallied despite challenging political and economic backdrops, up 20.0% and 28.3% respectively.

Huge rallies in Greece (47.5%) and Poland (43.3%) have been driven by a powerful cocktail of geopolitical realignment between Europe and the United States and fiscal stimulus combined with cheap valuations. The most notable catalyst has been Germany’s dramatic policy shift under Chancellor Friedrich Merz. His government has proposed a sweeping €500 billion infrastructure investment plan and a major increase in defence spending. Crucially, the proposal includes exempting defence expenditures exceeding 1% of GDP from the constitutional “debt brake,” a move that would allow for significantly more fiscal flexibility.

Turkey bucked the trend (-15%), the market tanking on news President Erdogan jailed a political rival on trumped up corruption charges. The portfolio is zero-weight Turkey, and we are not tempted by ever cheaper valuations while Erdogan threatens the rule of law.

Finally, the GCC was a mixed bag with Saudi Arabia (-5.2%) hit by a weaker oil price, while the UAE (14.9%) was much stronger.

Caveat

Monetary data in the United States had been signalling a slowdown this summer, and this is now likely to be exacerbated by tariffs with a muted recovery in the latter half of 2025. The best-case scenario for EM at present would be contained US economic weakness, a slowdown in underlying inflation and a sustained pace of rate cuts. The story would be one of a late-cycle catch-up in EM performance, as illustrated by the table below.

Stockbuilding cycle & markets: EM, small caps, industrial commodities lagging – catch-up potential?

Source: LSEG Datastream, own calculations / dating, as at 2 June 2025

We would expect EM to underperform in a hard-landing scenario, although this might be temporary given the lack of prior outperformance, followed by a strong early cycle phase. The chart from CLSA below shows prior phases of early cycle outperformance.

Emerging equities are an early cycle play: EM equity outperformance phases post US recessions

Source: CLAS, MSCI, NBER

Mexico’s scorching rally belies deteriorating institutional quality

Ducking US tariffs and in prime position to benefit from US friendshoring, Mexico has been one of the top performing emerging markets this year. Strong stock picking in our portfolio allowed us to keep up despite an underweight to the country. However, we have used the rally as an opportunity to take profits and increase our underweight on a view that investors underestimate the impact of recent judicial elections.

In June last year we flagged the potential for Morena’s dominance in congressional and presidential elections to expose investors to rising institutional risks – Political risks in EM spike as Indian, South African and Mexican elections surprise:

Crucially for investors, AMLO and Morena are pursuing policies that could threaten Mexico’s institutions. Institutional quality is a key factor in determining whether a country moves up the economic development ladder. …

Investors fear that a strengthened mandate will allow Sheinbaum (or even an outgoing AMLO) to undermine judicial independence,and pursue plans to eliminate autonomous government agencies overseeing telecoms, energy and access to information, as well as weaken electoral supervisory bodies.

Morena under president Sheinbaum pushed ahead with an unprecedented judicial overhaul, with Mexican citizens voting in early June to elect judges including for the Supreme Court. As reported by Bloomberg on the 2nd of June – Mexico Judicial Election Sees 13% Turnout in Historic Vote:

The controversial election asked voters to pick judges among several thousand hopefuls which marked a first of its kind experiment for a large democracy. The judicial overhaul could give Sheinbaum broad influence over a revamped judiciary, the only branch of government the leftist Morena party does not control.

Critics of the process argue that this will undermine the rule of law by injecting more politics into legal and constitutional disputes.

Only 13% of registered voters turned out to participate, tasked with choosing between thousands of candidates, while accounting for specialties while selecting an equal number of men and women.

Politicising the selection of the judicial officers compromises Mexico’s separation of powers between the executive, congress and judiciary. This is a step backward as it undermines the institutional pluralism within the country’s system of government, where different power centres provide checks and balances and ways for the system to self-correct.

Regressive judicial reform coupled with a fragile economy hit by tariff uncertainty, falling remittances from a deteriorating US labour market and deportation fears is the basis for added caution.

Risks are to the downside for Mexico’s industrial production in 2025

Source: GBM (June 2025)

Exposure to Mexico in our portfolio is now c. 1% versus c. 2% for the benchmark.

Given the direction of travel in macro risk, we will debate whether to downgrade our country rating for Mexico further in the coming weeks. We are always seeking competition for capital in the portfolio, and in LatAm we are seeing interesting opportunities emerge in places like Argentina, Peru and Brazil, all competing for risk budget.

Currency intervention across Asia in recent weeks may be yet another signal that we are entering a new investment order. We have written to clients previously that a secular peak in the USD likely occurred at the end of 2022.

Looking back to previous peaks in the 1970s and 1980s under Nixon and Reagan respectively, the dollar provided a powerful signal to investors that the US economy was experiencing major distortions that would force policy intervention.

President Trump’s Liberation Day tariff shock is part of a broader play to reinvigorate the competitiveness of American manufacturing. Another key pillar of the strategy is the desire for a weaker dollar. We are now starting to see this play out in Asian currency markets.

The most dramatic moves were in the Taiwan dollar, which surged by 9% over two trading days, reaching three-year highs and logging its sharpest daily gains since at least 1981.

East Asia currencies vs US dollar
31 December 2024 = 100
Source: NS Partners and LSEG (May 2025)

Currency tremors may signal the start of a broader shift in global capital that could have big implications for which markets out- or underperform going forward. As the Financial Times reported in “The Coming Asian FX ‘avalanche’” (7th of May 2025) quoting Eurizon’s Stephen Jen:

“We have long warned about the ‘Avalanche’ risk for the dollar. There could be USD2.5 trillion worth of ‘snow’ in China and more from the likes of Taiwan, Malaysia and Korea, rising at a pace of USD500 billion a year – we conservatively guesstimate. Only a modest proportion of the very large trade surpluses these countries have earned have been repatriated back home, with the bulk of the export earnings being hoarded by exporters in USD deposits.

“Like in actual avalanches, ex-ante, many might dismiss the warnings, but ex-post, all would admit that it was an obvious risk. We are still waiting for more triggers, but we see the sharp sell-off in USDTWD this week from this Avalanche perspective. We predict there will likely be other sudden lurches lower in USDAsia in the coming quarters. Corrections in USDAsia could pacify the US, as Asia accounts for more than half of all US trade deficit, making this a fundamentally benign development, except for those caught long dollars.

“The overhang of liquid dollar holdings is just too large if the dollar weakens, the Fed cuts interest rates, and China stages a cyclical rebound. In other words, both the push and pull factors that kept the export earnings in dollars outside the home countries in the past years will potentially flip signs in the coming quarters. At the same time, many of those holding long-dollar exposures know very well that the dollar is over-valued.”

Emerging markets love a falling dollar, which is an environment we’ve not seen in over 13 years.

Source: LSEG Datastream

Historically, this has seen EM outperform DM, while the winners and losers within the asset class also rotate. For instance, while the strong dollar environment typically favoured EM exporters, a weak dollar would be a shot in the arm for domestic consumers.

Other markets which could surge are those which the United States permits to manage their currencies against a falling dollar by easing monetary policy. There are a number of other smaller EM economies with managed exchange rates which could enjoy surging liquidity that feeds bull markets in financial assets.

The cleanest example of this currency-liquidity transmission is the Hong Kong dollar peg. When the USD falls, the Hong Kong Monetary Authority intervenes to maintain the HKD peg by buying USD and selling HKD, increasing HKD supply. This surge in liquidity lowers interest rates, stimulates economic activity and can lead to higher asset prices (and inflationary pressures).

Our liquidity analysis should be a powerful tool for identifying the risks of both booms and busts if this trend continues.

It’s all about pricing power for the export winners

While exporter stock prices may pop in the coming months on better tariff news, currency dynamics could be important drivers of future outperformance. Let’s use Taiwan Semiconductor Manufacturing Company (TSMC) as an example at the stock level. The company has previously given clear guidance that every 1% of appreciation in the TWD against the USD is a 0.4 ppt hit to OPM. We roughly model this impact out below to illustrate the currency risk to earnings:

EPS	Q1 25a	Q2 25e	Q3 25e	Q4 25e	2025	Implied PE	Implied share price with 17x	Fr current share px
Consensus	13.9	14.8	15.7	15.5	60.0	15.4	1019	11%
FX Impact (10%+)	13.9	13.7	12.7	12.1	52.4	17.5	891	-3%
FX Impact (15%+)	13.9	13.1	12.1	11.5	50.6	18.2	861	-6%
FX Impact (20%+)	13.9	12.5	11.5	10.9	48.8	18.8	830	-10%

If we assumed a further appreciation of TWD/USD to 25 – a 20% appreciation from where TSMC recently guided (when TWD/USD was 33) – the hit to TSMC’s EPS is around 23%.

If we apply a mid-cycle PE (17x) to the company and factor in the earnings hit from the currency shift, that would take us to a stock price of TWD830 from the TWD950 at the start of May.

Adding to the risk is the unpredictability of tariffs negotiations between the United States and Taiwan. Tariffs above 20% on Taiwan semiconductor exports could be a meaningful hit to earnings. Perhaps authorities in Taiwan are allowing the TWD to appreciate as part of a pitch to avoid tariffs.

Mitigating the risks is TSMC’s immense pricing power. We believe robust demand will persist for the leading-edge chips enabling AI where it has a monopoly status. This positions TSMC to pass through a significant portion of price increases to its customers.

However, players in the more commoditised segments of the semiconductor industry which lack the moats and pricing power will be more vulnerable to hits from tariffs and currencies.

The end of “US exceptionalism” as an investment narrative, the value on offer in EM, and the potential for these maligned markets to enter a virtuous circle of performance are themes that we have been banging on about for months now.

While the unwinding of the “Trump trade” was in keeping with our outlook published to investors in past months, we clearly did not anticipate how the chaotic imposition of tariffs on “Liberation Day” would serve as such a potent accelerant.

This was a radical outcome

Markets expected a gradual and predictable rollout of tariff measures, but what we got was random and unpredictable. The economic fallout, should the 90-day tariff reprieve fail to yield de-escalation, will hit the United States harder than most other countries as the affected share of GDP is much higher. US goods imports alone are equivalent to c.11.5% of US GDP versus total bilateral trade (exports plus imports) with the US of 3.5–5.5% of respective GDPs in Japan, Europe and China.

Exports plus imports of goods as % of GDP
US – total, others – bilateral with US

Source: NS Partners and LSEG Datastream.

Unless there is a dramatic reversal, a return to protectionism threatens a supply shock in the United States, which will drive the price of many things higher and create shortages for many basic goods. This will be destructive for demand and ultimately deflationary unless the Fed accommodates the shock by increasing the money supply.

What is the tariff endgame?

Is President Trump willing to risk a financial crisis in the pursuit of reindustrialising America? Or is this all in the “Art of the Deal,” a negotiating tactic designed to secure better trade terms? Or is it about completely decoupling from and isolating China?

Uncertainty over the outcome sought, the potential fallout from American businesses pausing investment and consumers reining in spending are undermining sentiment for all US assets.

The soft economic underbelly of the United States is being exposed. Liberation Day saw the dollar falling along with bond and equity markets. This is how emerging markets are meant to behave on political risks spiking, and not the global market safe haven.

If Trump truly seeks a dramatic reduction in the US trade deficit, this will be accompanied by a reduction in the capital account surplus, meaning that foreign investors do not need to buy the same quantum of US assets as before.

The trouble is that a falling capital account surplus as foreigners repatriate funds (or simply invest less in US assets) puts upward pressure on government bond yields. It was persistent demand for US Treasuries irrespective of the fiscal profligacy of the government that allowed it to build up a debt pile of $36 trillion, with $9 trillion of that due to be refinanced this year.

So President Trump wants a weaker dollar to boost domestic manufacturers, but what to do about yields? The most simple solution will be financial repression, by forcing domestic financial institutions to increase their holdings of US Treasuries. Where do the funds come from for these purchases – from selling US equities perhaps?

The damage is done

Course corrections were inevitable. As former President Clinton’s political advisor James Carville famously said:

“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”

President Trump backed down in the face of spiking bond yields with his 90-day tariff pause to everyone but China, but it is likely that damage has been done here that cannot be undone.

We may be in the early innings of a broader secular shift in markets. Our economist Simon Ward has asked whether this will be similar in magnitude to the dollar bear market sparked by President Nixon’s suspension of gold convertibility and imposition of tariffs in 1971.

While this could signal a rocky period ahead for US equities, a falling dollar flushes emerging markets with managed currency regimes with liquidity and allows central banks to cut rates.

Historically, this has been a good signal and driver of EM outperformance.

EM relative performance and USD

Source: NS Partners and LSEG Datastream.

Expect some unsettling trade headlines in the months ahead, but things could start to get very interesting for emerging markets fuelled by a falling dollar.

Portfolio strategy notes

High level

Tariffs will be deflationary if central banks do not accommodate them – see Smoot-Hawley tariffs in the 1930s which were massively deflationary. Compare and contrast the inflationary oil price shock in 1973 where the central bank accommodated, and the second oil price shock in 1979 which was not inflationary as the Fed under Volcker kept monetary policy tight. We do not expect Powell to accommodate.

It is likely that this will be a very deflationary event for the rest of the world as supply is diverted from the United States elsewhere resulting in downward pressure on rates.

We were already relatively defensively positioned as money trends were suggesting a Q2/Q3 economic slowdown before trade war shock – this will be negative for US growth. Our expectation is for a short, sharp economic shock, but not a crisis (based on our cycles analysis).

Strategy

• Inflation boost from tariffs expected to be small/temporary – monetary backdrop still disinflationary
• Relative money trends positive for China/EM
• Excess money backdrop neutral/negative
• Favour more defensive exposure – underweight oil and commodities
• Favour interest rate sensitive countries and companies
• Falling dollar beneficiaries
• Highly cyclical markets downgraded – especially consumer cyclical exposure
• Avoid exporters with high exposure to the United States
• China consumer – stimulus to step up as tariff response

Last July we wrote to clients about the vicious and virtuous circles which define EM investment cycles and argued there are signs of potential shift from the former to the latter: Are emerging markets on the cusp of a “virtuous circle”?

In the piece we cautioned that fixation on dominant investment narratives can lead to investors missing opportunities in neglected asset classes:

The disparity between the US and EM over the past decade tempts investors into the behavioural trap of building conviction for future returns based on what has performed well in the recent past. It is easy to forget that the annualised returns from 2000 to end-2023 for EM were 7.6% versus 7.8% for the US, both outpacing 6.2% for MSCI World. The risk here is that a pro-cyclical mindset can lead to perverse thinking where conviction strengthens for a popular asset class as the likelihood of a good result decreases, and vice versa.

Along the same lines, we argued in December that investors needed to be mindful of success bias in US equities:

Making money as an investor is all about the delta between reality and expectations. Investors myopically fixated on market narratives about US exceptionalism as justification for extreme outperformance versus the rest of the world risk overstaying their welcome, along with missing opportunities in unloved markets.

Investors adding to US exposure at the expense of the rest are making a bet that such scorching outperformance can continue.

This was against a backdrop of a raging “Trump trade,” as investors bet on a hot US economy, tariffs feeding inflation, rising yields and dollar, and US stocks outperforming the rest.

These trades are now in retreat on fears of tariff blowback on the US economy, while stocks in China rip higher and the dollar plunges.

Vicious and virtuous circles

Is this the turning point we have been calling for? Let’s re-examine the vicious and virtuous circles for EM equities. The performance of US companies, especially its tech giants has indeed been exceptional, while weak fundamentals in EM have fed a self-reinforcing feedback loop which has been a major headwind for the asst class, illustrated below.

Source: NS Partners

Is China leading a shift?

Recent dollar weakness as well as a boost to the monetary backdrop in China provides further support to the view that a shift to the virtuous circle may be approaching.

Source: NS Partners

Chinese equities have run hard over a short stretch and may well be due a pullback. However, valuations remain attractive with the market ticking up from 10x CAPE to just over 11x. The rally so far has centred on tech giants Tencent and Alibaba as investors wake up to China’s capacity to innovate in AI and compete with the United States.

There is potential for this outperformance to broaden as the economy stabilises, corporate earnings bottom out, and with the potential for more stimulus from Beijing to come in response to President Trump’s trade sorties.

From famine to feast in Southeast Asia

It’s not just China that would enjoy a stalling dollar. There are a number of liquidity-sensitive markets likely to switch from famine to feast, where capital inflows are sterilised by central banks through money creation on commercial bank balance sheets.

The small, open trading economies of ASEAN in particular would be beneficiaries. The liquidity boost from a falling dollar would be a shot in the arm for a region already benefitting from strong foreign direct investment (FDI) flows, relatively stable politics, economic and governance reform initiatives, along with efforts to foster stronger regional economic ties. Investor positioning in the region is light as illustrated below.

 ASEAN investor positioning – active investors are only overweight in Indonesia

Source: EPFR as of 31 January 2025

Malaysia in particular has been unloved by EM investors, a heavy underweight with its stock market being hit by over five consecutive years of outflows. This belies what we think is an opportunity for the country to capitalise on the combination of its position at the intersection of Chinese and US FDI flows, a positive domestic economic reform story, and huge potential of greater economic links with neighbouring Singapore through the Johor-Singapore Special Economic Zone (JSSEZ) which was announced in 2024.

Malaysia’s golden opportunity

We have written previously about how a decade of reform under Modi in India has fuelled a positive development cycle acting as a driver for sustainable economic growth. Malaysia’s reform story is on a much smaller scale given a population of 35 million against India’s 1.4 billion, but it is meaningful and emblematic of wider regional reform efforts. It is also more incremental as Prime Minister Anwar manages a relatively fragile coalition government, in contrast to Modi’s commanding hold over Indian politics.

Like India’s Aadhaar program, Malaysia has introduced biometric identification in MyDigital ID. The system streamlines access to government services such as welfare payments, and reduces fraud. Anwar has also successfully axed costly diesel subsidies, which will save around RM4 billion annually, reduce smuggling, and free up cash to be redirected to healthcare, education, and infrastructure. A far more economically impactful (but equally contentious) reform of wider fuel subsidies is also on the agenda.

We think the most exciting development is the government’s ambition to form closer economic ties to Singapore through the JSSEZ. Our Co-CIO Ian Beattie met with both Prime Minister Anwar and Finance Minister II Amir Hamzah over the past few months in London to hear about opportunities for foreign investors.

The JSSEZ aims to capitalize on the geographical proximity and complementary strengths of Johor and Singapore. Singapore is bursting at the seams with people and flush with capital, pushing property prices and rents sky high. These issues are putting constraints on businesses in the bustling Asian financial hub that are looking to expand. Johor’s key advantage is in its geographical proximity to Singapore along with providing access to much more competitively priced land, water and energy, globally connected ports, as well as educated workers able to speak Malay, English and Chinese.

Meeting the Malaysian government

NS Partners Co-CIO Ian Beattie standing in the second row just to the right of Malaysian Prime Minister Anwar Ibrahim, who visited London in February to promote Malaysia’s promise as an investment destination. Source: Invest Malaysia 2025.

“It’s a no-brainer” – Johor-Singapore Special Economic Zone

While the meetings in London were exciting, nothing beats seeing it first-hand. Ian and I travelled to Singapore and Malaysia in late February, kicking the trip off at one of the busiest land borders in the world (10,000 people crossing per hour and rising), between Singapore and the Malaysian city Johor Bahru, the heart of the JSSEZ.

After missing our early morning train (turns out you need to be at the customs counter more than 30 minutes before departing) we were relieved to find that we could swiftly pass through a massive, automated customs facility at the entry to the bus terminal, with departures heading over the border every few minutes. We then spent the day touring the city and surrounding areas which would make up the JSSEZ, which span several areas illustrated in the map below.

Source: PWC 2025

Each of these areas, known as flagship areas, will focus on different vital sectors such as manufacturing, business services, digital economy, education, health, tourism, energy, logistics and financial services.

Johor is already a global hub for data centres, attracting investments from US and Chinese tech giants like Nvidia, Microsoft and ByteDance. However, the combined support of the Malaysian and Singaporean governments pushing for more seamless movement of goods and people through the region through developing better transport links and cutting red tape between the economies, is seen as a game changer that will supercharge development.

It really is different this time

The JSSEZ is the latest iteration of previous (and disappointing) attempts to promote investment and development in Johor. However, as explained by the team at the Invest Malaysia Facilitation Centre (IMFC – which had been established only a week or so before we visited), this is the first coordinated push by Malaysia and Singapore, with the IMFC tasked with shepherding capital around the country.

Meeting the head of IMFC Adny Jaffedon bin Ahmad and Iskandar Regional Development Authority VP Rozy Abd Rashid.

Booming Johor

While the task of getting all of the various agencies and governmental authorities to work together will be a monumental task, our discussions with companies in the region paint a bright picture. In property, we met with the team at Knight Frank Johor who said that the region had been booming even before the announcement of the JSSEZ. Residential real estate prices have risen around 50% in five years as Singapore’s growth spills over the border, with workers buying property in Johor and commuting into the city-state each day. This looks set to continue with the completion of the Singapore–Johor Rapid Transit System set for completion in 2027 which will directly connect Johor with Changi airport.

We met with property developer EcoWorld which owns a large land bank of residential, commercial and industrial sites close to the border. The company is focused on the development of large townships connected to commercial spaces set to soak up demand from Singaporean businesses looking to expand in a cost-effective way, e.g. HQ based in Singapore, but with an expanding operations team in Johor.

EcoWorld taking us through the plan for developing their Botanic township.

Trying out EcoWorld’s virtual sales technology.

Development in residential and commercial property is unfolding at a rapid pace. However, almost all of the companies we met with were wary about whether the local infrastructure could scale up to accommodate the influx of people and activity.

At the centre of the China-US AI investment race

Malaysia is positioning itself as a key Asian hub for where the physical manifestation of the digital world is built out. Huge investment in AI and cloud infrastructure is transforming the region through the construction of data centres, power stations, transmission cables, power plants, water reservoirs and more. Tech giants looking to invest in Malaysia rely heavily on local players across real estate, construction and banking for their knowledge of the market and ability to navigate the regulatory environment to successfully execute on projects.

Everyone we spoke with in Johor was excited about the surge in interest for industrial land to develop data centres, for both cloud and AI. We toured sites where just a few years ago there was dense jungle. Thousands of acres have given way to massive concrete and steel structures built for the some of the largest tech companies in the world.

Touring an enormous data centre park.

There is so much demand that development is running into resource bottlenecks, and the government is wary that mushrooming data centres could deplete local resources at the expense of the local population. While power supply is cheap in Malaysia, the intensity of power consumption requires huge investment in renewable energy and transmission capabilities. The biggest constraint is water supply for cooling. Local authorities are furiously working to build new reservoirs to support the infrastructure. Some data centre players are looking to move so fast, they are building their own desalination plants, made possible by the close proximity of some sites to the sea.

Leading the region

We made the three-hour drive from Johor up to Kuala Lumpur to meet with a host of companies behind the development story not just in Johor, but also across Malaysia and Southeast Asia. To single out just one business, construction company Gamuda spoke with us about how their technical expertise and strong balance sheet allows them to tender for highly complex and long-term projects that deter competitors while driving double-digit margins. This includes AI and cloud projects for tech giants like Google and Microsoft, as well as for the Malaysian government in its push to improve the country’s infrastructure.

Gamuda has expanded regionally, with operations outside of Malaysia now accounting for over 85% of its business. It boasts stronger margins than peers in the major markets of Australia and Taiwan, with a tightly run project management team based in Malaysia helping to drive costs down. This, along with an innovative engineering culture, allows Gamuda to make competitive bids for highly complex projects that local peers struggle to match. In Australia, this has seen them win bids for multi-year, multi-billion-dollar mega projects in renewables and infrastructure like Sydney’s metro rail network.

Leading the construction of nine kilometres of metro rail tunnels in Sydney

Source: Gamuda 2025

In Taiwan, Gamuda has been building underground railway lines, transmission lines, sea walls and bridges. Taiwan’s monopoly position in leading-edge semiconductors has left the country flush with capital to fuel an infrastructure upcycle. Gamuda’s order book is growing as it often finds itself the only bidder to some attractive tenders. This is down to both the complexity of projects, but also the lack of competition. Everything is tendered in Mandarin, but Chinese construction businesses are “not welcome” in the market. Local players generally do not have the strength of balance sheet or experience that Gamuda boasts, allowing the company to set very attractive prices in contracts that our contact described as “obscenely fair.”

Ambition and (cautious) optimism

Aside from company research, we also spent a lot of time admiring Kuala Lumpur’s skyline, particularly Merdeka 118 (pictured below) which stands at 679 metres tall (its spire alone being 158 metres tall). It is the second tallest building in the world, surpassed only by the Burj Khalifa, and was officially opened in early 2024. The name « Merdeka » means « independence » in Malay, reflecting its proximity to the historic Stadium Merdeka, where Malaysia’s independence was declared. Not only does it stand as a symbol of the country’s progress, we think it also signals its ambition, potential and the opportunity on offer for many of the excellent businesses that we met.

Merdeka 118

Source: NS Partners 2025

This month we dig into the frenzy over China’s DeepSeek and ask whether this has punctured the narrative of US tech supremacy.

Has DeepSeek just punctured the market narrative of American tech supremacy? We think that is a stretch, but the revelation of DeepSeek’s ability to innovate in AI with shocking efficiency is a reminder that there are only two contenders in this battle to build artificial general intelligence – China and the United States.

DeepSeek has unveiled two new models – DeepSeek-V3 and DeepSeek-R1, as well as instructions called R1 Zero – that deliver performance on offerings from OpenAI and Anthropic. These models have set off a media and market frenzy, both because they appear to match or exceed the capabilities of more famous systems, and because DeepSeek is offering API access at a fraction of the cost.

Highlights:

1. DeepSeek uses a method called reinforcement learning. Essentially, the models are allowed to solve the problems themselves with few guidelines and limited example solutions. Remarkably, this was accomplished using only 8,000 math problems, whereas other research groups often need millions.
2. DeepSeek has managed to compress memory usage, circumventing the need for loads of expensive GPUs.
3. DeepSeek has shown that AI models can work remotely and on edge computing very effectively without needing the power of data centres.

Overall, DeepSeek demonstrated that you don’t have to invest massive amounts (exactly how much is debatable) of money, hardware or human oversight to build an AI that excels at difficult tasks. The arguments about how much money they spent to get here are irrelevant: by relying on focused reinforcement learning and efficiency-boosting techniques, DeepSeek proved that powerful models can be created with fewer resources.

All training steps and code have been shared so others can also try it and change things, making concerns over “censorship” entirely moot. The result was a model that can rival Anthropic and OpenAI, even when turned into a much smaller version that can be run locally on a pair of Mac Minis! (Which use ARM architecture: the M4 Pro uses TSMC 3nm, and runs at 80W.)

The team behind DeepSeek is open about its own limitations. First, the model is akin to a brilliant scientist but would struggle to write a poem as it lacks “creativity.” Second, it doesn’t deal with languages beyond English and Chinese very well. And third, it lacks the experience in building large-scale software projects.

Implications

Anyone who has followed this story is probably now aware of Jevons Paradox. Originating from the work of economist William Stanley Jevons in 1865, the observation suggests that as technological advancements make a resource more efficient to use, the overall consumption of that resource may increase rather than decrease. This paradox occurs because increased efficiency often lowers the cost of using the resource, leading to greater demand and, ultimately, higher total consumption.

Applying Jevons Paradox to AI tools, as these technologies become more efficient and cheaper, their usage is likely to grow significantly. Just as more-efficient cars led to wider adoption over horses, more-efficient and cost-effective AI models like DeepSeek’s will encourage broader usage across various industries. This greater adoption can drive further innovation, but it also means that the demand for AI resources, such as data and computing power, will continue to rise.

As a result, businesses and developers will need to consider the implications of widespread AI deployment, including potential increases in energy consumption and the need for sustainable practices in AI development and usage.

To summarise:

1. Large language models (LLM) have become commoditized. For instance, Meta’s Llama (an LLM) is open-source and therefore free. The key takeaway here is that the cost and compute requirements to run these models could potentially be reduced significantly.
2. The implication is that demand for AI infrastructure including computer chips, the semiconductor supply chain and power requirements (particularly for AI training) may be lower than first thought.
3. However, as highlighted by Jevons Paradox, history shows that for most technological advancements, reduced costs are almost always offset by increased demand.

What does this mean for the stocks of different global tech leaders?

It’s still early days, but how could the broad adoption of DeepSeek models impact global tech leaders’ stock prices?

Type of tech company	Stock impact
AI infrastructure and some semiconductor companies Jevon’s paradox will likely spur more AI applications, with the end result potentially being greater demand for compute down the line. However, the market is questioning the margins of semiconductor players and infrastructure solution providers (i.e. cooling tech). We need to see the mix of LLMs vs. “distilled models” and, more importantly, inferencing vs. training. Training requires much less compute power than inferencing.	Unclear
Hyperscalers On one hand, processing AI could become significantly cheaper which will reduce their cost/capex. On the other, their moat could be lowered if AI workloads can be run on less powerful data centres. Microsoft has already stated that it is prioritizing enterprise inference workload over AI training for its Azure business. That is why OpenAI went to Oracle/Softbank/Project Stargate for compute because Microsoft won’t sell them all the compute OpenAI demanded.	Neutral/unclear
Application-specific integrated circuit (ASIC) companies Possibly beneficial for custom ASICs as chip architecture diversifies/specialises.	Neutral/unclear
Applications, such as software, with access to proprietary data This is where I believe the most significant AI equity value will be created over time. Lowering AI costs is unlikely to negatively impact these companies. In fact, it could even be a positive development. The moat is in the access to data. Compute is a cost item.	Positive/unclear
Specialised edge computer chip companies	Positive/unclear

In emerging markets, we believe major positions like Taiwan Semiconductor Manufacturing Company (TSMC), Mediatek and select niche names (in custom chip design and energy efficiency) remain well positioned for growth in overall demand for AI. We doubt that DeepSeek will change the demand for the highest performance chips running at the lowest possible power. In that regard, TSMC’s dominance in leading-edge production processes and advanced packaging solutions remain an intact competitive moat. We expect that their customer mix may change, but the demand for their capabilities will be resilient.

We are more cautious on data centre assemblers and memory, and see potential for an improving sentiment in software, with several high-quality names in the portfolio and on our watchlist in China, ASEAN and Latin America.