During November the fund underperformed the MSCI Emerging Markets index by 0.6%.
In what was generally a strong month for equities, our larger allocations to Korea, Taiwan, Brazil and Mexico contributed to relative performance but were more than offset by stock selection as value factors lagged the broader market.
During November we rebuilt a small exposure to Argentinian oil following the election of Javier Milei. Additionally we have added a copper mining stock to the portfolio again as we expect supply to tighten over the coming years which should support pricing and offset macro headwinds.
We remain positive on Taiwanese stocks, with the market remaining one of our largest country exposures. At the same time we are watching political developments with interest, given the upcoming presidential election on January 13th of next year. Taiwan continues to maintain a delicate fiction of being the same country as the Peoples Republic of China while administering itself independently. This formula has allowed both sides to save face over the past few decades and maintained an uneasy peace.
Taiwan operates a first-past-the-post presidential system, meaning there is only one round and the winning candidate does not require a majority vote. The pro-independence DPP party of incumbent President Ing Tsai Wen has put forward her outgoing Vice President as a continuity candidate and he is the front-runner. Relations with China have worsened significantly since the DPP’s victory in 2016 but she has steered clear of crossing Beijing’s “red lines” such as a unilateral declaration of independence. It appears this would remain the policy going forward with no improvement in relations with the mainland.
Both opposition parties, the KMT and TPP take a softer stance on China although none support actual unification. In November they attempted to agree on a joint candidate but this degenerated into very public squabbling. Had they succeeded, they would have most likely defeated the DPP which currently only has 35-40% support. In recent weeks, the KMT which had traditionally ruled Taiwan seems to have picked up support from their rivals, the TPP. If this momentum continues and TPP supporters vote tactically, it is not impossible that the KMT could still win. This would almost certainly lead to an improvement of relations with China with potentially positive economic impacts and some reduction in perceived risk.
Regardless of the outcome, we note that Taiwanese companies maintain extensive business links with China and the countries remain highly interlinked. Although it seems implausible in the near term, we accept that over the coming decade there is a non-negligeable risk of military conflict over Taiwan. Without having insight into President Xi’s mind, we can only guess at how high that risk is. This may explain why Taiwanese stocks tend to be undervalued relative to their quality and growth prospects. MSCI Taiwan offers a 7% earnings yield with 20%+ growth expected next year. Simultaneously, Taiwanese bond markets imply no such risk at all given ten year yields remain locked around 1%. The two are clearly inconsistent and invite arbitrage. Recently this has resulted in explosive growth of domestic ETFs with retail investors likely attracted by the high dividend yields available compared to fixed income savings.