Emerging Markets Archives - CC&L Financial Group Ltd.

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

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

Note: MSCI weighted. Source: Jeffries, FactSet

Our kind of businesses remain cheap

Note: MSCI weighted. Source: Jeffries, FactSet

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

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

China quality now ahead year to date following years of underperformance

Source: NS Partners and LSEG

Improving returns are fuelling the rally

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

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

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

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

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

Source: Berstein and government data (2025)

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

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

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

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

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

Cash generation

Source: NS Partners and Bloomberg

Working capital

Source: NS Partners and Bloomberg

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

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

Source: Financial Times April 2025

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

Source: Contemporary Amperex Technology Presentation May 2025.

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

Source: NS Partners and Bloomberg

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

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

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

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

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

Active equity fund redemptions decelerate

Source: Itau BBA (August 2025)

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

Brazilian water utility SABESP returns improving

Source: SABESP Q2 2025 investor presentation

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

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

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

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

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

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

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

Valuations in Brazil remain attractive

Source: Itau BBA (August 2025)

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

Outlook: Calibrating bets as odds shift

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

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

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

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

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

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

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

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

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

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

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

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

Internet and technology portfolio

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

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

Industrials portfolio

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

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

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

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

Healthcare and education portfolio

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

Outlook

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

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

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

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

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

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:

mandates that directors balance corporate and shareholder interests;
requires electronic shareholder meetings for large listed companies (market cap over 2 trillion won, ~$1.5 billion); and
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.

South Korean holdings outperformed a surging market as Democratic Party leader Lee Jae-Myung won the snap presidential election to replace impeached former president Yoon. An underweight to Taiwan was a detractor as renewed investor enthusiasm boosted the market’s tech stocks. The falling US dollar supported liquidity sensitive Hong Kong names, while shares in mainland China detracted. Stock picking in India was positive led by defence company Bharat Electronics and Max Healthcare. Negative tariff headlines hit Southeast Asia, with stocks and overweight positioning in Indonesia, the Philippines, Malaysia, and stocks in Thailand all detractors. Stock picking in Brazil, Mexico and Peru outperformed strong markets. Stocks in Greece and Poland underperformed, partially offset by overweight positioning as these markets rallied. An underweight to Saudi Arabia was positive, with the market weaker as conflict between Israel and Iran intensified. During the quarter we added to Argentina, Hong Kong, India and Malaysia, and reduced Mexico, Greece, and China.

South Korean financials and technology positions outperformed, rallying on hopes for president Lee Jae-Myung’s election platform of corporate governance reforms. Lee’s Democratic Party are also supporters of the Value-up Program introduced under president Yoon. Market authorities aim to use the initiative to pressure companies into improving governance, returns, and drive higher valuations. Our position in Samsung Life rose 67.7% on expectations reforms will force disposal of company holdings in affiliated companies. Samsung Life selling its position in Samsung Electronics would trigger a huge one-off gain freeing up cash to be re-deployed productively. 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 contributor, reporting robust profit growth with a surprise share buyback and cancellation as well as a higher dividend. KB also looks set to benefit from planned fiscal loosening by the Lee government and falling central bank rates boosting loan growth.

Underweight positioning in Taiwan was a detractor as the market rose 26.3% on a revival in sentiment for companies in the AI supply chain. Wireless communications chip designer Mediatek (2.2%) underperformed, partly on the lack of a clear AI catalyst. While it is successfully challenging Qualcomm for market share in high end smartphones, we expect demand for its chips in China to soften in the second half as the sugar hit from consumer electronics subsidies fades. We decided to exit Mediatek to recycle the capital into higher conviction ideas. Aspeed (82.4%) and Accton Technology (44.1%) fared much better. Aspeed is a producer of server management chips and reported rapid sales growth underpinned by AI server demand. Accton specialises in the design and manufacture of high performance data centre switches. We expect demand for AI infrastructure to remain robust as AI applications evolve from reactive, limited chat functions requiring clear inputs and producing limited outputs, to autonomous assistants able to complete tasks. Despite the bright story we are not throwing caution to the wind. DeepSeek’s R1 AI model raises questions over whether software innovation will dent infrastructure demand, while a falling USD will pressure exporters. Our approach is to focus exposure on companies dominating leading edge hardware while avoiding commoditised segments lacking moats and pricing power to mitigate against currency volatility.

Strong performance from Hong Kong financials offset drag from stock picking in mainland China. Chifeng Gold Mining led domestic holdings, along with contributions from China Merchants Bank and ICBC. Alibaba stumbled on regulators delaying deployment of BABA AI services on iPhones in China. We reduced mainland exposure in favour of Hong Kong. While modest fiscal stimulus on the mainland fades, liquidity surged in Hong Kong as its Monetary Authority intervened against a falling USD to maintain the HKD-USD peg, causing rates to plunge. The monetary boost supported a rally in Hong Kong Exchanges and Clearing (HKEX), AIA Group and Prudential. The current environment looks encouraging for HKEX, which reported that a record 208 companies applied for a listing in the year to end-June. A-to-H share listings have been a demand driver, and our investment in Chifeng is an example. Earlier this year we were fortunate to have met their entrepreneurial and ambitious management team before being invited to participate in the Chifeng H-share IPO at a discount, with proceeds to be used as funding for deals outside China. We ultimately made a large trim to the position as it doubled within a few months of purchase.

Greek and Polish equities surged over 50% through the year on the back of rising sentiment for European equities driven by fiscal expansion in Germany. While overweight positioning was a positive as both markets rallied during the quarter, this was offset by underperformance in Polish consumer names and not owning the Greek banks. Polish fashion retailer LPP was the main laggard with margins under pressure from an aggressive store rollout plan, as operating expenditures climb on hiring costs. However, in our talks with LPP, management confirmed that they will scale back the rollout, especially among smaller stores, which will benefit margins. LPP should benefit from healthy consumer demand supported by the Polish government’s loose fiscal footing. The strong economy and relatively high rates are also a boost for holding Bank Pekao’s profitability, trading on 1.25x book with a 23% ROE.

Contributions from stock picking across rallying markets in Latin America were strong. In Brazil, high end jewellery chain Vivara, water utility SABESP and property developer Cyrela outperformed. Agribusiness lender Banco do Brasil was the largest detractor, reporting poor results including rising loan delinquencies. We exited the stock on a view that weak agricultural prices have taken a bigger toll on the sector than first thought. Strength in Brazilian equities belies a volatile macro backdrop souring on president Lula’s fiscal profligacy. Our contrarian take is that Brazil’s economic malaise presents an opportunity in that it makes Lula’s re-election unlikely. A conservative victory in the 2026 federal elections could usher in an era of fiscal responsibility which would be a huge upside catalyst for stocks trading at cheap valuations. In Mexico we moved to zero weight by exiting high ROE bank Banorte. While the bank’s performance has been robust, we expect slowing loan growth moving forward. However, what is more concerning is Mexico’s deteriorating institutional quality following president Sheinbaum’s pursuit of judicial reform culminating in popular election of judges across the country in June. The regressive vote strengthens the ruling Morena party’s grip over what was a relatively independent judiciary.

President Trump’s desire to reduce the US trade deficit has important implications for financial markets. If the US trade deficit shrinks then the need for foreign capital to finance imports falls. Less foreign demand for USD assets should boost weak EM currencies and under-owned equities which have faced the headwind of a strong dollar. Things start to break when the dollar reaches such extremes, and whether it be through the market mechanism or politics, reversion eventually occurs. President Nixon ended dollar-gold convertibility in 1971, and slapped tariffs on the rest of the world in response to rising balance of payments pressures. The Plaza Accord under President Reagan in the 1980s was an attempt to rebalance trade through currency intervention. The dollar fell hard in both cases. There are echoes of these interventions in today’s “Trump shock”, and if this includes a shift to a weak dollar regime we could see a cycle of EM reflation. An EM currency tailwind will bring about easing credit conditions feeding into economic and corporate earnings growth, attracting capital flows. If this virtuous circle takes shape, we believe that understanding the reflexive linkages that currencies, money and credit have with company fundamentals will be crucial in navigating a new market regime.

The Composite rose 11.84% (11.61% Net) versus an 11.99% rise for the benchmark.

The latest signal from monetary data is that global economic momentum will inflect weaker from around late 2025. Cyclical considerations suggest that this will mark the beginning of a sustained downswing into 2027.

Lagged money trends argue that underlying inflation will fall further and remain low through 2026. Nevertheless, central banks may be slow to offset economic weakness with additional policy stimulus because of concerns about tariff effects and fiscal indiscipline, as well as scarring from the 2021-22 inflation surge.

The suggestion is that equity markets face rising headwinds, with another sustained bull phase unlikely before 2027, when key cycles are scheduled to bottom. An appropriate strategy may be to underweight markets where monetary trends are relatively weak – Japan and the UK currently – while overweighting sectors with lower earnings sensitivity to expected cyclical weakness.

Elaborating on the above, global six-month real narrow money momentum – a key leading indicator in the approach followed here – reached a local high in March, falling sharply in April / May – see chart 1.

Chart 1

The rise from October 2024 into March suggested that the global economy would regain some momentum from around mid-2025, based on the recent average lag. A June rise in manufacturing PMI new orders could mark the start of such a shift, although results from national (as opposed to S&P Global) surveys were mixed. Still, April / May monetary weakness argues that any near-term recovery will be short-lived, with economic indicators likely to deteriorate again from around late 2025 – chart 2.

Chart 2

The latest fall in real money growth has been broadly based across countries, reinforcing the negative signal. Momentum is notably weak in Japan and the UK, arguing for economic underperformance. Eurozone growth has held up but hasn’t yet crossed above the US, cautioning against “europhoria” – chart 3.

Chart 3

From a cyclical perspective, the stockbuilding cycle is in the window for a peak in terms of both time since the last low (Q1 2023) and the contribution of inventory accumulation to annual G7 GDP growth – chart 4. The latter has been boosted by front-loading to avoid tariffs, which appears to have continued in Q2.

Chart 4

The cycle should turn down by early 2026 at the latest and the baseline assumption here remains for a low in H1 2027, implying that the current cycle will be slightly longer than the 3.5 year historical average, balancing a shorter-than-average prior cycle. Stockbuilding cycle downswings are usually associated with significant slowdowns (or worse) in global economic growth and underperformance of risk assets.

A key question is whether the coming downswing will be accompanied by weakness in the housing and / or business investment cycles, in which case a 2026-27 recession becomes the baseline. A housing downturn is more likely, given the maturity of the current cycle (16 years versus an 18-year average) and downward pressure from elevated longer-term interest rates. The business investment cycle is less advanced (year five versus a nine-year average), with corporate financial balances still healthy and AI deployment providing a tailwind.

Close attention, therefore, should be paid to housing indicators. The six-month rate of change of G7 housing permits / starts recently turned negative, suggesting a darkening outlook – chart 5.

Chart 5

Inflation follows money growth with a roughly two-year lag, according to the simplistic monetary rule, which outperformed every other forecasting approach in 2021-22. Annual broad money growth bottomed in mid-2023 in the G7 and a year later globally, with limited subsequent recoveries. The suggestion is that underlying inflation will fall further and remain low through 2026.

On the analysis here, therefore, central banks could limit economic weakness by delivering timely additional policy stimulus while still meeting, or even undershooting, their inflation objectives. The US Fed, however, may continue to drag its feet amid uncertainty about near-term tariff effects and counterproductive political pressure, with a knock-on effect on the pace of easing elsewhere.

Both global “excess” money flow indicators used here to assess equity market prospects are currently negative, having been mixed three months ago. Specifically, global six-month real narrow money momentum has crossed back below industrial output momentum, while 12-month real money momentum remains beneath its long-run average – chart 6.

Chart 6

The indicators were misleadingly negative in 2023-24 because of a stock overhang resulting from the 2020-21 money growth surge. The assessment here is that there is no longer any excess relative to current levels of nominal GDP and asset prices.

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.

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.