Over the month the fund returned -11.9% reflecting the conflict in the Middle East and the closure of the Straits of Hormuz. Given the significant gain year to date, South Korea was the largest detractor followed by South Africa. Positive contributions came from energy companies in Austria and Latin America, together with positions that have strong idiosyncratic themes such as Kaspi, JD.com and Yutong Bus.
The current investment climate is dominated by the bifurcated forces of an energy supply crisis juxtaposed by an AI technology super-cycle, which continues to gain momentum despite being three years old. As with ‘Schrodinger’s Cat’ we have two contradictory states that can exist at the same time, until the ‘reality’ becomes known.
Whilst the ‘hot’ conflict appears to have abated the true impact of the supply crunch is still yet to be seen given the delayed effect of ‘floating barrels’ and SPR reserve releases. Most at risk is Asia, although the Chinese strategic reserve of 1.4 billion barrels (approximately 3x the US strategic reserve) has provided a meaningful buffer to the region. Even if a resolution is found immanently, the time to market, impairment of shuttered wells and damaged infrastructure all indicate higher oil prices for longer.
Whilst this is positive for oil producers short term it has also furthered calls in many countries, especially in Asia, to reduce dependency on ‘petro-states’ in favour of alternatives, both new and old. In China it will likely delay the move away from coal and encourage nuclear, whilst elsewhere it will catalyse the move to other renewables, increasingly now known as ‘Electrotech’. This is another industry that both South Korea and China have leading companies that feature in the portfolio and have performed well this year. We see this as a multi-year capital allocation theme across generation, distribution, renewables and energy storage.
Energy security has additional urgency for AI providers given the $640bil committed by US hyperscalers for compute and data centers. GE Vernova (market leader in gas turbines) reported that 1Q26 sales to data centre operators had already exceeded the whole of FY25. The natural direction for this capex continues to move higher as the use case for AI gains momentum and reflected in the strength in annual revenue run-rates for AI labs such as Open AI and Anthropic which hit $30bil in April, up from just $1bil at the beginning of last year. The demand for compute is going parabolic which shifts the cycle towards inferencing and broadens the beneficiary base considerably.
All of this has furthered the EM earnings renaissance given the dominance of Korea and Taiwan in tech manufacturing. Consensus projections for 2026 now signal the largest EM vs DM EPS growth differential in at least two decades (46% versus 18% for DM). This is most apparent in memory where Samsung and SK Hynix have reported Q1 yoy earnings growth of 415% and 500% respectively, which will lead to very healthy dividends.
Within the portfolio we are trying to balance this extraordinary juxtaposition of risks and rewards. Within technology we are focused on areas where we have confidence in both the growth in earnings and that they will translate to free cash and dividends, whilst moderating volatility in what is a high beta sector. This can be achieved by exposure to preference shares or relevant holding companies that have significant discounts to NAV. This also means some technology will be obscured by being classified as ‘Industrials’. We have lowered our exposure to the Middle East and countries with vulnerability to higher oil prices such as South Africa in favour of countries and companies with resilient idiosyncratic factors, whilst keeping good geographic diversification. We have also focused on re-enforcing the yield buffer in the portfolio to account for the expected increase in inflation. At the time of writing the estimated gross forward yield is over 6%.
