In August the fund gained 3.3% as markets continued to rally from their April lows. Performance has been broad-based but led by Taiwan, China and Brazil, with the consumer discretionary and information technology sectors contributing most at the sector level.
Despite prevalent concerns that tariffs would derail global growth, markets have continued to rally. So far this year the benchmark EM index is up 10% (in GBP) and has outperformed the S&P by 7.7%, showing that the global rebalancing away from the US is in full swing.
While valuations across the board have increased, the index P/E remains quite close to the 10 year average having started off inexpensive. There are now positions in the portfolio that have rebounded dramatically from the April lows and have yields or valuations below required thresholds, so we continue to recycle from regions such as Central Europe and some of the smaller positions in UAE.
There are currently three main areas of interest. The most obvious is that the Fed cutting rates will catalyse other EM central banks to do the same. We see potential for the most significant cuts coming from Brazil, Mexico and South Africa, with further benefits coming from a weaker dollar. At the sector level we want to add to interest rate sensitive areas such as quality real estate, which is another key beneficiary.
In the Asian markets we’ve been light in Taiwan so far this year given the trade tensions, preferring to gain exposure to very specific areas such as high-end testing and substrate, but the AI capex cycle appears to have no bounds, and demand is now broadening out into associated areas such as specialist memory and PCB. This is apparent in both Taiwanese and South Korean holdings, which are also benefitting from the ‘Value-Up’ agenda.
After a legislative pause over the summer, President Lee reaffirmed his commitment to the agenda by overruling some policymakers looking to scale back on the proposed tax cuts to dividends. Lee believes Korean savings are too focused on real estate with 64% of household assets in property, compared with only 7% in equities and funds. Lee wants to see this rebalanced in favour of financial investments and is why he championed the Kospi 5,000 target.
It’s been estimated that a 10% reduction in property investment would lead to US$2tn of flows into financial markets. Meanwhile efforts to increase shareholder returns appear to have gained traction, with Treasury share cancellations rising from W4.5tn in 2023 to W17.6tn in the first seven months of 2025. Similarly, dividends have risen from W33tn in 2020 to W50.5tn in 2024.
China is also interesting as there’s been a steady rally in the markets, underpinned by declining rates and ‘home team’ buying. Given the limited stimulatory effect of lower rates, a strong stock market is an effective way to boost consumer sentiment. In addition efforts to improve anti-involution are improving corporate profitability by quelling price wars caused by overcapacity, low profits, and inefficiency. This is particularly relevant in sectors like electric vehicles or solar panels where margins have been eroded without sustainable growth.
More broadly despite the recent strength, EM is still attractively valued on a relative basis. The growing possibility of a more sustained easing cycle gives further support for higher yielding equities.
