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.
