In May the fund rallied by 6.8% in GBP terms, with most of the gains coming from South Korea and Taiwan. Technology was the leading sector followed by Industrials, some of which have significant technology exposure.
One of the more underappreciated developments this year has been the dramatic reshaping of global equity market rankings. By sitting at the epicentre of the semiconductor supply chain, Taiwan and South Korea have rapidly climbed the global league table and have now overtaken both Canada and the UK in market capitalisation. Samsung Electronics has become the second Asian company (after TSMC) to cross the $1 trillion threshold and is now larger than the entire technology sector of the Eurostoxx. More broadly, out of the largest dozen companies globally, a quarter now come from the Emerging world with SK Hynix not far off joining the party.
Inevitably such moves have led to talk of ‘bubbles’, but unlike in previous examples this transition has been corroborated, and even led by earnings. Even more notable is that both suppliers and buyers are enjoying very high profit margins with Nvidia, TSMC, Samsung and Sk Hynix all reporting Q1 gross profit margins of between 60-80%, indicating strong pricing power across the upper end of the supply chain. The shift from training to inference, which now accounts for most of total AI compute demand, is a rising tide that is floating a broadening fleet of boats. Whilst there’s certainly areas with very frothy valuations, the irony is that it isn’t in the heavyweights.
The crucial issue is how long this can last. The concern at the beginning of the year was that it was a lot of capex and no profits, but Anthropic’s annualised run-rate continues to grow exponentially (est now $45 billion) and is on track for its first profitable quarter. Whilst Samsung’s memory chief recently warned that demand fulfilment is at record lows, with customers pulling forward orders into 2027, so this bottleneck can continue for some time (it only started last September). What is also unusual, and is relevant to a value-driven income strategy, is that they are attractively valued with strong balance sheets and will be returning cash to shareholders. Given their dividend policies of returning 50% of free cash, at current prices they could be in the high single digits and with the Samsung preference share discount could even break into double digits.
All of this enthusiasm is however masking the broader reality that government bond rates in G7 continue to move higher. Asia isn’t helping by exporting inflation on top of the elevated oil prices (Korean semi export prices +148% yoy) and it’s now showing in the numbers with April US PPI increasing by 6% YoY (est 4.8%) and 1.4% MoM, which annualised is 17.8%. This is relevant given that in a highly leveraged system, government bonds are the key source of collateral and whilst the fear in bonds is nowhere near as strong as the greed in equities, it can change quite quickly.
We are balancing this strong bottom-up opportunity for capital appreciation and yield, with our diversified approach to risk in what has become a highly concentrated and volatile market. We are holding to our self-imposed concentration limitations in position size whilst making intelligent allocations to lower volatility equivalents, such as highly discounted holding companies (eg SK Holding vs SK Hynix) and preference shares that boost the dividend yield. We are also recycling positions with significant gains and frothy valuations. The squeeze-in to technology has created a broadening array of opportunities in non-tech sectors and countries where valuations are at cycle lows and will inevitably come back into focus when the allure of AI begins to fade.
