In July the fund gained 6.3% as markets continued to rally from their April lows. Performance has been broad-based but led by Taiwan, which was driven by the ever-increasing capex for AI, combined with easing tariff concerns.
Another factor clearly helping prices has been the growing momentum in rate cut expectations. Money markets are now forecasting around 60bp of Fed cuts over the remainder of this year, which has been reflected in our rate-sensitive positions such as real estate and financials. Our Hong Kong landlords have performed particularly well as short term rates have now fallen to a level where there’s a positive rental yield, having been at elevated levels for the past 3 years.
Financials have also been our best performing sector so far this year, with around half of the return coming from European banks where the sector index has risen by c60% year-to-date (compared with a 15% gain in the broader Euro Stoxx), continuing the repair from the self-destructive policy of negative rates. Probably more noteworthy is that this has helped Greece to become our best country allocation, despite being a mid-ranked weighting of 8%.
Although Greek (and Cypriot) banks have rallied in-line with the broader European banks, their fundamental case is probably stronger. Amongst other factors, loan growth is running at 11% YoY as of June which contrasts with France and Germany at only 2.7% and 2.0% YoY respectively. However, all our Greek positions have performed well this year reflecting the broader economic recovery which can be evidenced by employment expectations which are now 15.5% above the long-term average.
Whilst Greece is insulated from US tariffs, concerns for those that are impacted has begun to abate as recently individual country deals have been announced with more palatable rates than first assumed. Nevertheless, it’s still unclear who will be absorbing the surging US tariff revenues, currently running at US$27.7bn in July or an annualised US$332bn. Our discussions with company management suggest a mix of ‘transition’ arrangements but most are orientated to smoothing the impact no further than the end of this year.
Our reduced Taiwanese exposure reflects the decision to focus only on companies with higher margins and/or those experiencing a demand squeeze in AI related hardware or chipset testing, which is not impacted by tariffs. This has worked well, but valuations and yields in these areas are now stretched so it is another area we’re looking to recycle.
Given the Trump administration’s focus on the perceived over-valuation of the US$ as a symptom of being the world’s reserve currency, mercantilist countries such as Taiwan will still be under pressure to revalue their currency over time. As a result our preference is increasingly towards domestically exposed companies and stock-specific opportunities in other parts of Asia and China where valuations are attractive.
We are also entering back into the season when Chinese policy makers might announce additional stimulative policy adjustments and given the further US tariff deadlines delay to November, there are specific bottom up opportunities that have good yields and are attractively valued.
More broadly despite the recent strength EM is still attractively valued on a relative basis, with S&P500 price to sales ratio pushing record highs of over 3.3x and the Emerging world at less than half that level. The growing possibility of a more sustained easing cycle gives further support for higher yielding equities.
