Emerging Markets – CC&L Financial Group Ltd.

MENA equity markets ended the first quarter of 2025 with returns of 2.7% (for the S&P Pan Arab Index Net Total Return) broadly in line with the MSCI Emerging Markets Index which was up 2.9% in the same period.

While index-level returns were healthy in the first quarter, they were flattered by rather aggressive buying in large cap Saudi stocks (the largest member country in the index) in the four days leading up to the Eid holidays (close of March 27). In fact, 1.9% of the 2.7% gains for S&P Pan Arab Index in the quarter occurred in those four days of trading. Underlying trends in the Saudi market were far less encouraging, with 169 of 246 stocks in the Tadawul All Share Index posting a negative quarterly return amidst significant underperformance from midcap stocks (MSCI Saudi Midcap Index -4.0% in the quarter).

Uncharacteristically, it was the smaller Kuwait market that stood out in the quarter, with the MSCI Kuwait Index up 11.4%. After nearly a year’s wait, the country’s reform program is beginning to take shape, with the cabinet approving the long-awaited debt law that is counted on to unlock a significant proportion of the financing required for a much-needed infrastructure spending program. The approval of the debt law also paves the way for the new mortgage law, which is expected imminently. The mortgage law creates a new market estimated at $65 billion (source: Bloomberg) which allows banks – for the first time – to offer mortgages. Kuwaiti banks are obvious beneficiaries as they are sitting on significant excess capital which can be deployed in attractive risk-adjusted assets in corporate lending (infrastructure spending), government bonds (via the debt law) and mortgages.

Another (even smaller) market that performed positively in the quarter is Morocco. The MASI Free Float Index was up a remarkable 25.6% in the quarter, although its impact on the regional index is limited due to its small size. The market was supported by a one-off 5% tax amnesty that brought almost $10 billion worth of assets and cash (from Morocco’s large grey economy) into the banking system and the equity market. Interestingly, this also resulted in a doubling of retail investor participation from the historical average of 12-15% to over 30% year-to-date ending March. The market was further bolstered by a policy rate cut of 25 bps which catalysed further flows into equities. Moroccan institutions have limited options to deploy capital outside of their local capital markets and as a result exhibit high-interest rate sensitivity that manifests itself in visible and sometimes aggressive shifts between equities and bonds.

Looking forward, the investment outlook has been muddied by the ongoing escalation and volatility in US trade policy. While the direct impact of tariffs on the region is limited, the indirect impact is significant and captured primarily by the weak oil price. Cracks in the OPEC+ alliance are also beginning to appear, which, together with slower global trade, cast a long shadow on the oil price outlook. While there are varying degrees of sensitivity to the oil price in the region, a sustained low oil price (in the low $60s on Brent) is invariably negative. Fortunately, the region’s countercyclical buffers are plentiful and can absorb the fiscal and current account pressures of a lower-for-longer oil price environment.

The region’s geopolitical position also appears robust and highly relevant, which puts it in a good position (relative to other regions) to weather the fallout from the rising tensions in Sino-American relations. The end of the multi-year USD bull run is another factor to consider; increasing openness to foreign portfolio investors and the USD peg increased the share of the region’s ex-US capital inflows in the last decade or so. Insofar as USD bearishness is coupled with a weaker oil price (as is the case now), the region’s share of global inflows is likely to decline in % terms. This, of course, would be the opposite for the smaller oil-importing markets in MENA like Egypt and Morocco, where a weak USD and a lower oil price sets up an accommodative environment for fiscal and monetary conditions, and ultimately asset prices.

While we have a view on macroeconomics, that is certainly not our investment edge and therefore not a tool we count on for making major investment decisions. As we’ve articulated in previous letters, our edge comes from having a deep understanding of the companies we invest in. This understanding is critical in our ability to determine the impact that macroeconomic changes have on the earning power of our companies.

Crucially, this knowledge is leveraged in our valuation framework and gives us a good (and historically reliable) barometer of when our companies are under or over-valued by the market. As stated in previous letters, valuations are the ultimate determinant of our capital allocation reflexivity and is a key tool we rely on in making investment decisions. This has served us well year to date as it reduced the portfolio’s exposure to areas where the market was not prepared for any bad news, and subsequently increased exposure to areas where good news was not needed for outperformance.

As a result, we find ourselves in a strong position where the portfolio generates a dividend yield that is nearly the same level as the index (~4%) and trades at comparable multiples on a P/CF basis (~7x), but with vastly superior fundamentals (captured in an ROE of 18%, which is 500 bps over the index average). The portfolio is sitting on a healthy level of cash which puts us in a good position to make surgical and incremental bets when we deem that the market has overreacted (negatively) on stocks where earning power remains relatively intact. The environment remains fluid and volatile, but our barometer is beginning to signal pockets of under-valuation that we aim to take advantage of in the coming period.

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

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 first quarter of 2025 and share observations on the portfolio and the markets.

Internet and technology portfolio

The portfolio’s investments in the internet and technology sector led returns in the first quarter of the year. This was driven by Fawry for Banking Technology & Payments S.A.E. (FWRY EG), the Egyptian payments company. Fawry’s strong execution over the past few years culminated in a record 2024, with revenue and operating profit growing 68% and 160% y-o-y respectively. The value of the payments ecosystem that Fawry’s management team developed over the last few years is now being validated by strong financial results, to which the market is reacting positively. While Fawry’s multi-faceted suite of products, services and business verticals is admittedly complicated to grasp for investors, we believe it is also a source of competitive advantage. Fawry is scaled across several use cases and has a large balance sheet that gives it an advantage in a market with high interest rates and tight liquidity. The company’s ability to leverage technology and deep local expertise to provide their customers (merchants and consumers) with several financial products and services in a seamless online/offline environment is still understated by the market, in our opinion.

The portfolio experienced positive returns from our investment in Allegro.eu S.A. (ALE PW), the leading Polish e-commerce company. Allegro posted a strong fourth quarter results report which included a confident medium-term guide, and a capital allocation policy that was both thoughtful and ahead of the market’s expectations. Allegro also announced a new CEO who, unlike his predecessors, is a native of Poland and comes with 25 years of relevant experience in that market – our preference is always for local talent to lead a company we own if that talent is available. Allegro is the most polarising stock in our portfolio with enough fodder for the bulls and the bears to make a credible case. The recent positive developments contribute to a partial de-risking of the investment thesis and with it, the dial moves closer to the bull camp in which we are situated.

The portfolio’s largest drag in the quarter came from our long-held investment in FPT Corporation (FPT HM), the Vietnamese IT services company. Entering 2025, FPT was the portfolio’s third largest holding (~6% of AUM). We recognised early on in the year that we had too much exposure to a company we liked but with a stock that was becoming increasingly difficult to justify owning as much of, having run up ~150% in USD terms since January 2023. We also began to notice some cracks in the AI universe with Nvidia’s shares beginning to roll over in mid-January and we were well aware that a big part of the multiple expansion in FPT’s shares last year is explained by the company’s proximity to the AI theme.

Putting all that together, we began selling the stock in the first week of February and did another round of selling in mid-March. The selling, while preventing a larger negative impact on the portfolio, was not sufficient to protect the portfolio from a reasonable bps drawdown from the balance of the shares we decided to hold onto in the quarter. While Vietnam has been in the news for the all wrong (tariff) reasons as of late, we have determined that FPT’s service-based business and diversified geographical exposure (including a strong presence in Japan, where the company is long an appreciating JPY) will mean that its earning power remains relatively intact, and that the valuation on the shares we decided to hold onto are now reasonable.

A major highlight from the quarter in the internet and technology portfolio was our decision to finally exit from Kaspi.Kz (KSPI.KZ US), Kazakhstan’s super-app and a truly incredible business. We’ve owned Kaspi since its early days as a London-listed company and continued to own it (in different percentages) through the turbulence in the country in January 2022, to its listing on the Nasdaq in January 2024, and until our eventual full exit early this year.

We were the first foreign investors to visit Almaty and meet with Kaspi in its HQ (according to the company) after the unrest that toppled the regime of Nursultan Nazarbayev in 2022 and have spent considerable time and resources to understand the ins and outs of the business. At this point, we believe that Kaspi will experience slower growth in its home market as it exhausts its ability to monetise its well-penetrated userbase, while digesting an increase in the cost of capital that is essential for the profitability of its lending business. Kaspi’s decision to enter the Turkish market, by way of acquiring Hepsiburada.com, is strategically sound and we will certainly not bet against Kaspi’s management to turn this into a successful venture. However, a slowing home market in Kazakhstan and a competitive and new market in Turkey might prove to be (at least in the short term) too much for even Kaspi to manage. As a result, we chose to watch from the sidelines, hoping to get a chance to re-enter the stock (which is reasonably lower than our exit price now), but pleased with the results of our investment since we acquired our first shares.

Financials portfolio

The financials portfolio was the second largest contributor to returns in the quarter. Our investment in Boursa Kuwait Securities Co. (BOURSA KW), the owner and operator of the Kuwait Stock Exchange and the Kuwait Clearing Company, delivered solid returns. Boursa’s natural monopoly position and its embedded operating leverage to the country’s banking sector market capitalisation and average daily traded value makes it a very good proxy for Kuwait’s reform story. After nearly a year’s wait, the country’s reform program is beginning to take shape with the cabinet approving the long-awaited debt law that is counted on to unlock a significant proportion of the financing required for a much-needed infrastructure spending program. The approval of the debt law also paves the way for the new mortgage law, which is expected imminently. These are very positive developments for Boursa via the prospect of new products being introduced in the market (e.g., fixed income trading and margin lending) and is supportive for valuations and trading activity in the stock exchange (YTD value traded ending March is up over 30%).

On the other hand, the portfolio experienced a drag from our investment in Indonesia’s Bank Syariah Indonesia Tbk Pt (BRIS ID). BRIS is a state-owned entity that has been forged through the merger of Indonesia’s three largest Islamic banks in the country back in 2021. The bank is the largest player in the Islamic financing market with over 40% market share. Indonesia is home to the largest Muslim population in the world (along with Pakistan) and so BRIS has a natural right-to-win in that market. Of course, much rests on management’s ability to execute on its strategy of building a market-leading banking proposition so that they can gain share from the dominant conventional banks in the country (BRIS’ share of the total system assets is only ~6%). We bought BRIS shares last year as we became familiar with their strategy and appreciated the clarity with which they articulated it. We also noticed that there was a visible increase in profitability with return on equity increasing by nearly 400 bps between 2021 and 2024 (to 16.4%) and concluded that there is still another 400 bps of improvement in the next three years that management can deliver that the market did not fully appreciate.

Unfortunately, the Indonesian market had a difficult quarter with the Jakarta Composite Index down 10.3% in USD. Concerns about the country’s political and economic direction weighed on the market and on sentiment. These concerns are valid; the new administration embarked on a series of big projects, including the implementation of a new sovereign wealth fund (Danantara), changes to the 2004 military law (allowing military officers to serve on boards of state-owned companies), and the rollout of the President’s flagship ambitious and fiscally burdensome free school meal program.

Fortunately, the final shape of these initiatives seems to be much better than the market feared. For example, concerns on who would run the new sovereign wealth fund were dispelled quickly when a credible team composed of technocrats and business-friendly professionals was announced. There was also some relief from the details of the appointment of an advisory board that includes the 6^th and 7^th presidents of Indonesia (especially the popular Jokowi), and an advisory council that includes the likes of Ray Dalio and Jeffery Sachs. We see a lot of value in Indonesia at the moment and are sticking with our investments in that market with a potential to increase our investment as the dust settles, including in BRIS.

Healthcare and education portfolio

The weakness in the ASEAN markets in the first quarter was particularly visible in the negative price action experienced in our healthcare and education portfolio. In Thailand, the portfolio experienced a large drawdown in the shares of Singapore International School Bangkok PCL (SISB BK), the operator of K-12 schools that teaches the Singaporean curriculum to over 4,500 students in six locations in and around Bangkok. SISB is a founder-led business that has built a small (in public listed company terms; the company made $25 million net income in the last 12 months) but successful business. It has operating and free cash flow margins in excess of 30% and a healthy return on invested capital of 23%. SISB is a small-/mid-cap Thai stock and so was implicated in the weak sentiment around the market (FTSE Small Cap Thailand is down 30% from September 30, 2024 to March 31, 2025).

SISB built a strong international student base (~30% international) and since Covid-19 received a large influx of students from China. This proved to be a double-edged sword in 2025 as news of the abduction of a Chinese actor in Thailand spread like wildfire on social media, culminating in a sharp decline in tourism from China and raising safety concerns among Chinese nationals living in the country. While SISB’s business is intrinsically defensive, the link to China via its student body (which we gather is about 20%) meant the stock was caught up in the fallout of the news. SISB did see some Chinese students leave, but we believe the market had overly punished the stock for its exposure to that market. We have been in communication with SISB’s CEO and met him in Bangkok in February. Our conclusion is that some of the pressure they are seeing (on the business and the shares) will be temporary as they digest the impact of the China exposure.

Outlook

Looking forward, the investment outlook has been muddied by the ongoing escalation and volatility in US trade policy. From a portfolio standpoint, our direct exposure to tariffs is limited. We estimate that 85% of the portfolio is invested in service-based industries, 9% in product-based, and the rest in cash. Across the portfolio, 87% is invested in companies that make no money outside of their core region. At a country level, nearly half the fund is in countries that were not named in the first tariff announcement. Of course, we are well aware of second-round effects on our companies’ fundamentals from slowing global trade which can come in the form of lower disposable incomes, lower oil prices (on our Middle East portfolio specifically) and a lower wealth effect across the board. We also know (from experience) that markets dislocate and that prices can deviate significantly from intrinsic values. This is especially true now as long-held assumptions about world-order and the established American role in it are being questioned.

On the other hand, as with any crisis, there will be opportunities. We cannot help but feel bullish about the implication of a weak US dollar and the prospect of an end to US exceptionalism. We see a lot of value in our markets today and believe there is a scenario where the current dynamics can favour certain countries and companies that we believe the strategy is over-indexed to.

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

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

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

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

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

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

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

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

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

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

Global money growth has picked up since late 2024 but remains subdued, while the stock of money is no longer in excess relative to nominal economic activity and asset prices. The monetary backdrop, therefore, appears insufficiently supportive to offset economic / market damage from US-led tariff hikes.

Prospective tariff effects, meanwhile, require a revision to the previous forecast here of a downside global inflation surprise in 2025 related to extreme monetary weakness in 2023. A price level boost this year is unlikely to yield second-round effects given disinflationary monetary conditions, so a near-term lift to annual inflation should reverse in 2026. The effect may be to extend the lag between the money growth low of 2023 and the associated inflation low from two to three years.

The elimination of a surplus stock of money has been mirrored by erosion of excess labour demand, with job openings / vacancy rates mostly now around or below pre-pandemic levels. Economic weakness, therefore, may be reflected in a rise in unemployment that eventually dominates central bank concerns about inflationary tariff effects, suggesting that current policy caution will give way to renewed easing later in 2025.

Global six-month real narrow money momentum – the key monetary leading indicator followed here – fell between June and October 2024 but has since rebounded, reaching a post-pandemic high in February. (The timing of the mid-2024 dip has changed slightly from previous posts, mainly reflecting annual revisions to seasonal adjustment factors for US monetary data.) Real money momentum, however, remains below its long-run average – see chart 1.

Chart 1

The lead time between real money momentum and manufacturing PMI new orders has averaged 10 months at the four most recent turning points. Based on this average, the 2024 real money slowdown and subsequent reacceleration suggest a PMI relapse in Q2 / Q3 followed by renewed strength in late 2025 – chart 2.

Chart 2

Tariff effects – including payback for a front-loading of trade flows – are likely to magnify mid-year economic weakness and could push out or even abort a subsequent recovery: delayed central bank easing, a confidence hit to business / consumer credit demand and a near-term inflation lift could reverse the recent pick-up in real money momentum.

Previous posts, meanwhile, argued that stocks of (broad) money in the US, Japan and Eurozone are no longer higher than warranted by prevailing levels of nominal economic activity and asset prices, implying an absence of a monetary “cushion” against negative shocks. Excess money appears to be substantial in China but could remain frozen as US trade aggression and domestic policy caution sustain weak business / consumer confidence.

Chart 3 shows six-month real narrow money momentum in major economies. Chinese strength is a stand-out but may partly reflect payback for earlier weakness – momentum needs to remain solid to warrant continued (relative) optimism. A Eurozone recovery still leaves momentum lagging the US (where revised numbers show less of a recent slowdown), with the UK further behind. Japanese weakness is alarming, suggesting significant downside economic / inflation risk and consistent with recent lacklustre equity market performance.

Chart 3

European economic optimism has been boosted by a relaxation of German fiscal rules and a wider drive to increase defence spending. This is significant for medium-term prospects but has limited relevance for the near-term economic outlook, which hinges on whether an uplift from monetary easing will prove sufficient to offset trade war damage.

The two flow indicators of global “excess” money followed here are giving a mixed message: six-month growth of real narrow money has crossed above that of industrial output (positive) but 12-month growth remains below a long-term moving average (negative). This combination was associated with global equities slightly underperforming US dollar cash on average historically.

From a cyclical perspective, a key issue is whether the US tariff war shock brings forward peaks and downswings in the stockbuilding and business investment cycles, which are scheduled to reach lows in 2026-27 and 2027 or later respectively. The previous baseline here was that upswings in the two cycles would extend into 2026, a scenario supported by the current monetary signal of a rebound in economic momentum in late 2025.

The next downswings in the two cycles are likely to coincide with a move of the 18-year housing cycle into another low. Triple downswings are usually associated with severe recessions and financial crises. Such a prospect is probably still two years or more away but the US policy shock may have closed off the possibility of a final boom leg to current upswings before a subsequent crash.

Table 1 updates a comparison of movements in various financial assets so far in the current stockbuilding upswing (which started in Q1 2023) with averages at the same stage of the previous eight cycles, along with changes over the remainder of those cycles. Three months ago, US equities, cyclical sectors, the US dollar and precious metals were performing much more strongly than average, suggesting downside risk. By contrast, EAFE / EM equities, small caps and industrial commodities appeared to have catch-up potential.

Table 1

Q1 moves corrected some of these anomalies, with the US market falling back, Chinese / European equities performing strongly, US cyclical sectors lagging, the dollar falling and industrial commodity prices recovering. Precious metals, however, became even more extended relative to history, while small cap performance has yet to pick up.

The updated table suggests potential for further strength in EM and to a lesser extent EAFE equities, along with industrial commodities. Cyclical sector underperformance and dollar weakness could extend, while gold / silver appear at high risk of a correction. The larger message, however, is that, even assuming a delayed peak, the stockbuilding cycle has entered the mid to late stage that has been unfavourable for risk assets historically.

The suggestion of EM outperformance is supported by monetary considerations. Six-month real money momentum is stronger in the E7 large emerging economies than in the G7, while – as noted earlier – global real money is outpacing industrial output. EM equities beat DM on average historically when these two conditions were met, underperforming in other regimes – chart 4.

Chart 4

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:

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.
DeepSeek has managed to compress memory usage, circumventing the need for loads of expensive GPUs.
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:

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.
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.
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.

MENA equity markets finished the fourth quarter with returns of 0.7% (S&P Pan Arabian Index Total Return), significantly outperforming the MSCI Emerging Markets Index, which was down 8.0% in the same period. For the full year of 2024, MENA equity markets ended up 6.3%, a slight underperformance relative to the MSCI EM Index which was up 7.5%. Through to the end of 2024, MENA markets outperformed the MSCI EM Index by 43.4% and 17.3% over the last five and three years respectively.

Annual return dispersion among the major MENA markets (at the index level) continued to be high this year. The performance differential between the best (Dubai) and the worst (Qatar) market was 29% in 2024. Interestingly, this has also been the quantum range of returns between best and worst in 2023 and 2022. This high level of dispersion is a particularly desirable feature of investing in the region and one we believe is likely to remain given the composition of listed securities in each market (providing different earnings-factor sensitivities), the presence of domestic capital pools dedicated to each market and, more generally, the relatively low levels of foreign ownership in the region.

MENA equities were put to the test this year as they grappled with an escalation in political risk, lower oil price, high interest rates and incremental supply of shares from initial public and secondary offerings. Our view on this was articulated in our fourth quarter letter of 2023 wherein we described our approach to the Saudi market in particular:

“Since the end of the first quarter of 2023, we have become more vocal about our concern on valuation levels in Saudi. During this period, we’ve seen an increase in geopolitical risk, persistently high interest rates, and lower oil prices. None of those factors seem (for the time being) to temper local and regional investor enthusiasm for Saudi stocks, particularly mid-caps and IPOs. We believe it is prudent to avoid being overly exposed to situations where, by our estimates, investor positioning and expectations are excessively high. While we remain constructive on the quality of the Saudi-based businesses we own and the country’s structural growth story…we enter 2024 with lower exposure to these stocks. The Saudi market is highly dynamic, and we expect there will be opportunities to rebuild our exposure to those stocks throughout year.”

In the same letter, we cited a preference for owning the UAE:

“We are relatively more bullish on the UAE, focusing primarily on banks and quasi-monopoly businesses like utilities and infrastructure. Benign liquidity conditions and strong economic growth favour UAE banks with a solid deposit franchise and strong lending opportunities in 2024.”

Fortunately, that view has largely played out in 2024 (with some exceptions of course), and we now find ourselves in a situation where our relative preference has reversed in favour of Saudi as valuations appear more reasonable. We spoke about this more constructive stance on Saudi in our third quarter letter last year following our trip there in October 2024:

“There are three factors working for the strategy at the moment. Firstly, there are growing profit pools resulting from reforms and demographics which is critical to our investing style – growth. Secondly, in the last two months, the market has begun the long-awaited process of recalibrating its expectations of earnings to levels that we deem realistic and interesting – reasonable valuations. Lastly, the strategy has already begun shifting the portfolio to areas where there is a healthy combination of growth, risk-reward and low investor positioning.”

In other markets, we continue to favour Morocco in the portfolio as it represents one of the best structural economic development and equity stories in emerging markets and certainly the region. While the portfolio in Morocco has experienced some turnover in 2024 (primarily due to an exit of a long-held position in the retail sector), we remain committed to our long-term holding in technology and have expanded the portfolio to include companies in healthcare and financial services.

In Qatar and Kuwait, our statement from last year’s letter remains largely relevant today:

“We remain selective, with growth remaining constrained, though we see potential in Qatar’s liquified natural gas value chain and are more optimistic about Kuwait following the appointment of a reformist royal as the new Emir in late 2023.”

While our optimism on Kuwait may have proven pre-mature, we believe the direction of travel is positive and have continued to build selective exposure over the year, primarily in banks and financial services.

As for Egypt, we expressed an openness to increasing our small ownership last year, subject to the devaluation of currency and a correction of the imbalances in the country’s trade and capital positions.

“Egypt remains a wildcard, with an imminent devaluation likely to be the first step in a long journey towards rebuilding policy credibility with investors. That said, we remain open to increasing our ownership in our preferred Egyptian healthcare and technology businesses if opportunities arise later this year.”

The Central Bank and the government of Egypt did eventually capitulate and devalued the currency from just above 30/USD to 50/USD. The devaluation came two weeks after the government sealed a mega property deal with one of Abu Dhabi’s sovereign wealth funds. As a result, we felt more comfortable with the medium-term outlook for US dollar returns on Egyptian assets and stepped up our exposure to our technology company by way of a discounted block transaction in June last year that so far has proven rewarding for the portfolio.

In conclusion, the region passed a particularly testing year in 2024. The structural story for the region remains sound and we are confident it will underpin a powerful combination of a multi-year growth in earnings and a low equity risk premium relative to emerging markets. While it is too early to determine what happens in 2025, a strong US dollar, stable oil price and a Trump presidency all bode well for MENA equities.

We wish you a prosperous 2025 and look forward to sharing updates on our strategy with you.

Below, we explore several key factors that influenced returns in 2024 and share observations on the portfolio and the markets.

Internet and technology portfolio

The portfolio’s investments in the internet and technology sector propelled returns in 2024. This was driven by FPT Corporation (FPT), the Vietnamese IT services company, which established a relatively early mover advantage in the AI consultancy space. This placed the company firmly in the AI winner camp in 2024 and led to a re-rating of its shares. FPT also benefited from continued IT capex recovery from its traditional markets in the APAC region as well as strong execution in the US and Europe, which drove a ~30% growth in the company’s global IT services revenue in the nine-month period ending September.

The sector also saw strong contribution from Kenya due to improvement in the macroeconomic environment there. This was reflected in a strong appreciation of the Kenyan Shilling and a lower cost of equity that transmitted favourably into the valuation of Safaricom PLC (SCOM) (which we own primarily for its fintech asset, M-Pesa). We took advantage of the macro-induced rally and reduced our exposure to Safaricom in the first half of 2024.

We were also fortunate to have the opportunity to participate in discounted share sales by the private equity owners of Baltic Classifieds Group PLC (BCG), the leading online classifieds group in the Baltics. This helped the strategy increase its investment in the company at attractive prices. BCG continued to flex its market leadership in auto and real estate classifieds through calculated price increases and the introduction of value-added services which translated to an 18% growth in operating profits in the six-month period ending October.

We experienced a drag in returns from our investment in Allegro.eu S.A. (ALE), the leading Polish online marketplace. Allegro’s management provided relatively downbeat commentary in their guidance with their nine-month report which it attributed primarily to competition from Chinese players (mainly Temu). The stock had already come under pressure from the unexpected resignation of Roy Perticucci from his CEO role, and so the incremental negative news on competition put extra pressure on the stock. Fortunately, we decided to reduce exposure to Allegro following the news of the departure of the CEO but the strategy still experienced a drawdown from the stock’s reaction post the nine-month results. We still have a small position in Allegro as we believe it will weather the current competitive pressures given its dominant position in the Polish online marketplace.

While we made changes to our internet and technology portfolio during the year to reflect relative valuation preferences and make room for new ideas, the sector remains the largest bet in the portfolio entering 2025 (the end-of-year exposure to the sector is equal to the average exposure in the year). The combination of improving macro, evolving consumer habits, benign regulatory environment and strong management execution is likely to drive another year of strong earnings growth in 2025.

Retail portfolio

Retail was the second major contributor to returns in 2024, but contribution was top heavy, with the shares of Philippine Seven Corp (SEVN) and Mr D.I.Y. Group (M) Berhad (MRDIY) in Malaysia generating nearly all the returns. With Seven, the resumption of dividend payments (via a special dividend) after a three-year hiatus proved to be a powerful catalyst that woke the market up to the company’s strong fundamentals and growth prospects (14% growth in EPS in the nine-month period ending September 2024 and one of the fastest growing 7-11 convenience store networks in the region).

Mr D.I.Y. Group’s shares benefited from the anticipation of a recovery in demand from the B40 group of Malaysian households (B40 refers to the bottom 40% income group) and the entry of the company in a 49% joint venture with Chinese retailer KKV, as well as a supportive equity market environment in Malaysia last year.

We took decisive action to reduce exposure to this sector in the second half of last year, emboldened by what we deemed to be full valuations following the rally in our core holdings above, and better opportunities emerging inside and outside the sector.

We also saw some pressure on consumer wallets and increased competitive intensity in some areas of the retail portfolio including in the home improvement and grocery categories which we deemed to be persistent and as such triggered selling of underperformers in the portfolio. One such example is Wilcon Depot Inc. (WLCON), the Philippine’s largest home improvement retailer, which is experiencing significant pressure on sales densities as demand for home renovations appear to have stalled after the post-Covid demand pull.

We also exited our long-held investment in Moroccan grocery retailer Label Vie S.A. (LBV) on a combination of slowing growth and concerns on capital allocation decisions that we deemed would be dilutive to minority shareholders.

While we end the year with exposure that is well below the average exposure in the year for the sector, we are bullish on some of the additions we made to the portfolio in the year in UAE grocery retailing and Indonesian variety retail which we hope we can share more information on in 2025.

Fast moving consumer goods portfolio

Consumer goods were the third largest contributor to returns this year, driven by long-term holdings Philippines’ Century Pacific Food Inc. (CNPF) and Indonesia’s Industri Jamu dan Farmasi Sido Muncul Tbk PT (SIDO), or Sido Muncul. Century Pacific’s consistency in delivering on their guidance of low- to mid-teens yearly growth proved to be extremely valuable this year as most other Philippine consumer companies experienced significant headwinds from lower disposable incomes and commodity price pressures. The consistency in delivering is the result of a diversified portfolio of consumer products (mainly canned seafood and meat, and dairy), an exposure to institutional demand from developed markets (mainly canned marine and coconut water) and the large consumer market in the Philippines. This creates natural hedges in the company’s cost structure and foreign currency exposure.

Sido, the herbal medicine company that we have discussed extensively in the past, emerged from a difficult 2023 with operating income growth of ~29% in the nine months ending September. Sentiment on the shares also benefited from a transaction in which the controlling shareholder Irwan family bought out the full 17% stake of Affinity Equity Partners, a private equity investor that had come to the end of its investment cycle in the company. The transaction was done at a 30% premium to the three-month average price, signalling confidence from the family in the prospects of the business, and removing the overhang on the shares that typically arises with late-stage private equity ownership of public companies in our markets.

We remain highly selective in this sector and continue to see pressure on profit pools due to increasing competitive pressures, changing consumer behaviour, and the rise of new distribution channels that are disrupting the competitive advantage that many leading companies have historically enjoyed.

Healthcare portfolio

Healthcare was the fourth largest contributor to returns in the year driven mainly by Morocco’s Aktidal S.A. (AKT) and Turkey’s Medical Parks – MLP Care (MPARK).

Aktidal listed its shares on the Casablanca stock exchange at the end of 2022 and came back to the market for a follow-on offering (USD100 million) last year as growth exceeded the company’s initial expectations. Management at Aktidal expects its bed capacity to increase 2.5x between 2023 and 2026 as it capitalises on the structural undercapacity in the market and a supportive regulatory environment for private healthcare investments that is leading to quick utilisation ramp-ups and strong unit economics.

We invested in MLP early in 2024 as we started seeing encouraging signals from the Turkish government on its intent to reverse course and pursue market-friendly economic policies. MLP benefited from improving sentiment toward Turkish assets as the country received its first credit rating upgrade in over a decade from Moody’s in July. Fundamentally, MLP has established itself as the market leader with a 40% share in the lucrative top-up insurance segment which is the fastest growing payor group in the Turkish healthcare market. MLP has also been making sensible single-site acquisitions which it is successfully integrating into the network.

We experienced some drag in returns from the sector from investments in Indonesia and Thailand where weak equity market sentiment and pressure on payors (insurers and medical tourists in the case of Thailand) led to a de-rating of our stocks at the end of the year. That being said, our position size in that region is relatively small and we are oriented to be buyers of this weakness as growth drivers around demographics and regulations remain intact.

Outlook

We are constructive on the strategy’s positioning in 2025. While the global market environment is uncertain, we believe earnings visibility from our portfolio companies is relatively high in the next two years. As in every year, we reduced valuation risk when appropriate (reducing exposure to areas where share prices ran ahead of fundamentals), and exited underperforming positions where fundamentals are likely to worsen. Positively, we found many areas to invest in and, as a result, find ourselves with low levels of cash relative to the history of the strategy.

We look forward to updating you on the strategy over the rest of the year.

This month, NS Partners fund manager Luis Alves de Lima writes on navigating a volatile backdrop in Brazilian equities, and the huge potential this market offers if political risks ease.

Imagine a game of blackjack. Not your typical duel in the bowels of a dark casino, but a game of chance steeped in the vibrant hues of Brazil’s economic landscape. This is a game where the potential rewards are tantalizingly high, but the risks, like the Amazon rainforest, are dense and unpredictable. Like a card counter, we watch carefully as each card is dealt – investigating companies and assessing the macro backdrop – to formulate a running count of the deck and calculate our odds of hitting 21.

The ace in this deck represents the transformative power of political change. A conservative victory in the 2026 federal elections could usher in an era of fiscal responsibility, market-friendly policies and renewed investor confidence. Drawing this ace could yield a multi-bagger return as Brazil sheds its “risk premium” and the investment narrative flips from basket case to market darling. That doesn’t mean you won’t be wiped out before the ace arrives.

As we count, the deck is stacked with low number cards (2-6) – embodiments of lurking macro uncertainties – with the ability to wipe out your hand. Brazil’s fiscal deficit, stubbornly high cost of capital and the ever-present spectre of political volatility loom large. Playing aggressively to a deck loaded with low number cards favours the dealer’s odds, much like the potential downside risks that could erode investment value when macro is deteriorating, but valuations are yet to catch down.

The high cards (10, Jack, Queen and King), represent the underlying strengths of the Brazilian economy (all high cards are worth 10 points, with the ace either 11 or 1 depending on what’s best for the player’s hand). These cards increase your chances of winning if low number cards are dealt out of the deck and the proportion of high cards increases. The low cards in Brazil are coming out as the clock ticks on socialist president Lula’s term, with elections in 2026. While an increasing proportion of high cards does not offer an immediate payout in our game, it does suggest an investment environment where the player/investor can soon lift their bets in line with improved conditions and chances of upside surprise increasing.

Investing in Brazil today is a calculated gamble with ever-shifting odds. While the macro and political backdrop seems daunting, low cards are exiting the deck as pessimism runs to an extreme and fails to reflect the true potential of the market. While future outcomes remain uncertain, we see a disconnect between strong company fundamentals and depressed valuations. The “true count,” the extent to which a deck favours the dealer or player (investor), will swing in the latter’s favour as political risks ease. The probability of making it to that elusive ace rises.

My recent virtual roadshow with 20 Brazilian companies painted a picture of resilience and growth. Companies like Grupo GPS, Rede D’Or and Lojas Quero-Quero are demonstrating robust financials, exceeding growth expectations and trading at inexplicably low valuations. I have also planned a trip to Brazil next month to continue the mission of finding when the ace might appear in this high-stakes game. It’s an opportunity to delve deeper into the dynamics of the Brazilian market, gather firsthand information and assess the true probabilities beyond the abstract numbers.

Investing in Brazil today requires a contrarian mindset; an ability to understand the macro risks and direction of travel and weigh this against what we are seeing on the ground as we engage with companies. It’s a game for those who understand risk and can calibrate their bets as the odds shift for or against them. As any seasoned player knows, ignoring the headlines and acting with conviction when the true count tilts in your favour is when the most lucrative bets can be made.