During a turbulent April, the Strategy underperformed the MSCI Emerging Markets index by 2.4%.
As tends to be the case with dislocated markets, during the
volatility our stock selection proved a drag across markets ranging from China
and Taiwan to Latin America. The recovery in the still expensive Indian market,
which is looking like a relative tariff safe haven, also detracted from
relative performance. The outperformance in our more “defensive”
markets like the UAE or Poland and Greece was not sufficient to offset this.
Our approach during times of volatility is to avoid radical
changes but take advantage at the margins. Where stocks may have moved in
excess of changes in fundamentals, we look to buy more. As such we were able to
add to some second line positions in Taiwan, which were particularly hard hit
by Liberation Day, as well as in Latin American markets that may end up as
beneficiaries of lower inflationary pressures outside the US. This was funded
by taking profits in some financial stocks in the Middle East and elsewhere.
As we write these words, markets have just been taken by surprise
by a China-US “deal” to temporarily bring down extreme tariffs. It appears that
off-the-cuff policies can also be reversed equally quickly.
We have written previously that severely damaging levels of
tariffs were not credible in the long-term. Their instigators would either
scale them back or be voted out of office. The latest twist shows a very
limited tolerance for pain with reversals happening a lot sooner than expected.
Much like the latest India-Pakistan conflict, both sides are happy to claim
victory and step back from the brink. Of course, in both situations the core
issues have not been resolved, just parked to one side. Actual progress as a
result of the hostilities has not yet materialised.
It strikes us that the most lasting effect of the current
gyrations is likely to be a gradual decline in the US dollar. As any foreigner
who has recently travelled in the US can attest, the currency is almost
certainly overvalued. This has been sustainable as a result of US
exceptionalism and an insatiable appetite for US assets. If the rest of the
world starts questioning their safe haven status, this will reduce dollar
purchases at the margin. It may also suit the US administration. A weaker
dollar could remove a long-standing headwind to returns on Emerging Market
investments, where currency depreciation has been offsetting domestic growth.
We continue not to take any outcomes for granted and fully expect
that real “trade deals” will be difficult to achieve even as markets have
rapidly priced in benign outcomes. This is likely to become clear over the
coming months even if all parties are keen to de-escalate. The focus remains on
keeping our portfolio diversified in a way that doesn’t attempt to predict the
pathway to normalisation but allows us to calmly follow developments.
