Market background
2025 has been a mixed year for the Strategy. On one hand, we believe our bullish and constructive top-down call on the asset class is accurate in terms of a number of the key fundamentals and that has translated into good absolute returns. However, we have not been able to capture the full upside. Historically, this strategy has had very good upside capture but this year we have missed out on a few key stocks when China rallied strongly in the early part of the year.
At the same time, a few names underperformed significantly in February and March, resulting in a weak start to the year. As ever, many topics and events that impacted emerging markets in Q2, as in Q1, had global touch points. The tension in the Middle East caused a spike in risk aversion, though the takeaway for us is how calm the Middle East’s equity markets were during this period. There were some share price movements, but in the greater scheme of things, these were relatively small swings, which tells us that there is a strong consensus in the region that Israel is the dominant military power (backed by the US, which helps). There is also an implicit understanding that Iran should not have nuclear arms capabilities, at any cost.
From our investment perspective, the UAE is the Switzerland of the Middle East and even events like this strengthen this dynamic and its status. Oil prices stabilised quickly, and we believe the risk of any oil price shock or negative supply-side effect to emerging markets from higher oil prices from here is limited – though this conflict is likely to return at some stage.
Another key – and positive – event at the end of the reporting period was the US and China agreeing on a tariff framework. As we understand it, there is still no signed agreement and given how Trump’s tariff and trade deals have evolved since Liberation Day, there is still an element of risk. However, what makes us optimistic and why we still believe in our base case for tariffs is that it increasingly looks like the US has realised putting tariffs on every country thinking it will generate a revenue stream with no trade-offs or supply-side risk does not work – China’s total control of rare earths being very much a case in point.
This was a really poor quarter for the US dollar and we have seen emerging market currencies appreciate, the strongest being those with a trading surplus
In addition, and just into July, we have had an announcement of the trade deal between the US and Vietnam. We are still missing the details, but it looks like it will be a 20% tariff on Vietnamese exports to the US and 40% on Chinese goods repackaged in Vietnam before hitting US shores. If these numbers hold, we see them as a positive. Remember, our base case has been for a 10-15% tariff on all countries, with China at 30-40% and a few other countries, including Vietnam – that has a huge trading surplus with the US – above this level. The 20-40% range here matches our scenario.
It is worth highlighting that this was a really poor quarter for the US dollar and we have seen emerging market currencies appreciate, the strongest being those with a trading surplus. That has created market noise of a so-called ‘Mar-a-Lago Accord’ being worked on, and Stephen Miran’s A User’s Guide to Restructuring the Global Trading System from last year has seen renewed interest. We do not believe this is the case and, on simple fundamentals, we see a case for a weaker dollar and stronger emerging market currencies. This is a risk to some Taiwanese and South Korean tech and industrial companies, hence our very selective approach in these markets.
The US 10-year Treasury yield remained stable and we see it likely that the dollar weakness for the Treasury market was offset by weaker US macro data points and a renewed market belief in Fed cuts into H2. We share this view and still believe that such an outcome is not fully priced into emerging market assets as the Fed rate-cutting story has been turned into one of “I’ll believe it when I see it” – emerging market investors have been disappointed too many times on US inflation over the past three years or so.
US tech and AI saw a rebound at the end of Q2 with encouraging AI data points, including commitments to capex, over the month. This also helped some of the Asian tech companies to perform well and, from our portfolio perspective, we had positive performance contribution from a good number of our tech names. We were particularly encouraged that some of the laggards we owned from the early part of the year rebounded nicely.
Regional highlights
China
The key event here was, as mentioned above, the trade talks with the US and US/China relations have subsequently taken a more constructive turn. Following diplomatic progress at meetings in Geneva (May) and London (June), trade tensions have begun to de-escalate. Recent developments include measured easing of US technology export restrictions and a modest normalisation of China’s rare earth exports to the US. While strategic competition remains, these gestures have been interpreted by markets as signs of pragmatic engagement returning to the bilateral relationship.
The first half of the year has marked a turning point in investor sentiment and policy direction for China
On the domestic side, the key spillover to the equity market was the increased competition between some of the internet companies. On one hand, the DeepSeek moment gave the sector a boost in what is a more favourable economic backdrop in China; on the other hand, we have seen increased competition which has invited short-term profit-taking. We feel this was initiated by JD.com as it has come under a great deal of pressure structurally and one of the stimulus programs gave it a small windfall which the company seemed to want to spend on being aggressive in different business areas. The company is burning through cash, these programs are running out and it has had very little operational impact so we forecast that JD.com will give up on these non-core activities and things will normalise. This should also lead to a rebound in the likes of Trip.com Group, Alibaba Group Holding and Meituan Dianping.
The first half of the year has marked a turning point in investor sentiment and policy direction for China. The DeepSeek moment triggered a re-evaluation of Chinese innovation and technology assets. The emergence of a credible Chinese large-language model sparked a sense of possibility, not only among investors but also among entrepreneurs. This rekindling of animal spirits comes at a time when the policy environment has made a clear and decisive pro-business pivot.
Beyond AI, Chinese innovation is resurging across multiple sectors. In biotech, nearly one third of global licensing deals now originate from China. In humanoid robotics, China is at the forefront, leveraging the synergy between AI and its deep manufacturing base. In autonomous driving, China leads the way in its deployment and is beginning to export solutions to other emerging markets.
We have significantly increased our exposure to China over the past six months.
South Korea and Taiwan
June’s South Korean election outcome was, as expected, a large victory for the Democratic party candidate and, as one of the party’s key focus points was narrowing the South Korean discount, the market rallied in anticipation of policy reform announcements. However, we are surprised by the market reaction given this was well within expectations. There have been positive announcements around the Value-up Program and we have even seen the new leftwing president set an index target for the market. However, as we have said before, we want to see progress from Value-up Program reforms and for this to play out it needs to go deeper on tax reforms, especially inheritance tax, and here we sense the agenda is still lacking.
In South Korea there was a huge market rally on the back of multiple expansions… but we are more sceptical and believe some companies look overly hyped
There was a huge market rally on the back of multiple expansions, so there are signals of a strong uptick in earnings, but we are more sceptical and believe some companies look overly hyped.
Besides the banks and the holding companies trading higher on the Value-up Program theme, defence and shipbuilding also rallied on geopolitics and a surge in defence spending globally.
In technology, SK Hynix had a strong end to the quarter thanks to improving sentiment on legacy DRAM (dynamic random-access memory) coupled with several positive AI data points on data centre capex and AI ASIC (application-specific integrated circuit) demand.
Overall, we think there is potential in the Value-up Program but we believe that expectations from it are too high.
Taiwan had a strong end to the quarter, with the Index up 10% driven by positive sentiment returning to the AI theme and good sales numbers from most companies, particularly during May, with data centre component companies notably strong, as were AI ASIC companies on robust demand. We have generally been right on our more bullish and structural demand stories for AI and have stuck to our fundamental views. Furthermore, on the back of DeepSeek and Liberation Day, Taiwan took a big hit and was a drag on the Strategy’s performance. We are pleased to see Taiwan making a good – and fundamentally backed – comeback and remain positive on operational fundamentals for H2 and into 2026, but the move up in the Taiwan dollar has made us cautious in the short term.
ASEAN
The region was weak relative to the rest of the emerging markets, with the Thai market a clear underperformer. The border dispute between Thailand and Cambodia is decades old, however tensions have been rising again following the killing of a Cambodian soldier in May. What followed was the withdrawal of Thailand’s second largest party in the coalition, the Bhumjaithai Party, and a petition calling for the Prime Minister’s suspension over a leaked audio clip leaving the embattled premier holding onto an increasingly fragile government. Prime Minister Paetongtarn Shinawatra, daughter of the controversial Thaksin Shinawatra, assumed office less than a year ago after the disqualification of her predecessor, Srettha Thavisin – the fourth Thai Prime Minister to be dismissed by the courts in the past 16 years. The ongoing political turmoil is unlikely to support the already fragile economy, which continues to struggle under the weight of weak consumption, subdued investment and limited government stimulus.
We have a zero weight in Thailand and have had for many years.
Elsewhere, the positive news is around Vietnam and its trade deal with the US. We are still short on details, but it does look like this will be something Vietnam can deal with and more importantly give clarity on, as we see further de-escalation with the US in the region.
We meet many companies each quarter and would like to highlight a recent meeting with Grab Holdings (Grab) as this is a relatively new holding and operates across the ASEAN region. We met with the CFO of Grab, the ride-hailing, delivery and FinTech ‘super app’, who expressed strong optimism about the company’s future prospects. Supported by a recently upgraded trading outlook, the company is seeing growth acceleration across its businesses with consolidation globally in ride-hailing and food delivery. It has introduced an affordable and premium offering in delivery leading to an acceleration in growth and a widening of its addressable market. In addition, its FinTech division has recently started to see growth accelerate as the company gains more comfort in its internal credit-scoring metrics. The division also has significant potential to scale its loan book as a substantial portion of the population in the south-east remains unbanked and financial literacy is low. Many micro, small and medium-sized businesses face challenges assessing credit due to limited credit data and digital financial services like Grab’s are bridging this gap.
We believe Grab is highly likely to become a ‘Star’ company over the coming three years or so as it starts to monetise its strong market position and technology leadership.
India
The MSCI India Index rose 9.4% over the quarter, in US dollar terms, supported by a favourable global macro backdrop and resilient domestic flows. However, it underperformed the broader MSCI Emerging Markets Index. The market reacted positively to the Reserve Bank of India (RBI)’s surprise 50bps repo rate cut and 100bps reduction in CRR (Capital Requirements Regulation) announced in early June. The move marked one of the most aggressive easing actions in recent years and signalled a clear shift towards reviving domestic consumption and stimulating credit demand. This was backed by sharply moderating inflation late in the quarter, with headline CPI for May coming in at 2.8%, well below the central bank’s 4% target. Services PMI jumped to 60.4 in June, its highest reading in 10 months. However, a sudden spike in Brent crude oil prices to $78–79/barrel during the month caused some nervousness, given India’s high dependence on oil imports. While crude oil prices moderated towards the end of Q2, the volatility highlighted India’s external vulnerability on the energy front. Despite high valuations, the combination of monetary easing, strong domestic macros and improving rural sentiment underpins a constructive medium-term outlook.
We travelled extensively in India in June, the takeaway is key names that have been weak so far this year still have a very strong long-term outlook
We travelled extensively in India in June and the takeaway here is key names that have been weak so far this year, such as Phoenix Mills and 360 ONE (IIFL Wealth Management), still have a very strong long-term outlook and we remain happy shareholders on behalf of our investors. In addition, we also looked for new ideas and have an interesting pipeline of new companies we are working on.
CE-MENA
In the Middle East, there was a significant escalation in geopolitical tensions after Israel and the US conducted missile strikes on Iran’s nuclear facilities. The Iranians subsequently struck the US army base in Doha, Qatar, although the missile launch was reportedly preannounced to allow for a quick interception. Although a Trump-brokered ceasefire is currently in place between Israel and Iran, violations by both sides have been reported – even only a few hours after Trump’s ceasefire announcement – keeping the situation volatile.
This escalating conflict caused a temporary surge in oil prices, with Brent crude rising over $80/barrel. Oil prices have since stabilised around $65-70. Despite the current calm, the potential for future disruption remains, particularly given the strategic importance of the Strait of Hormuz which Iran controls and through which roughly one-third of all seaborne traded oil supply transits. We continue to be very selective in our Middle East exposure, with our single holding in Aldar Properties still performing well despite the rise in geopolitical tensions. Indeed, the property market in Dubai and Abu Dhabi is increasingly being seen as the bright spot in an otherwise cloudy region.
Latin America (LatAm)
Following its June Market Classification Review, MSCI maintained Argentina’s status as a “Standalone Market”. This was perceived negatively by the market as there had been some expectation that an upgrade would happen. MSCI said the decision reflected its “ongoing concerns about market accessibility, including capital controls and liquidity issues”, which in their view “hinder foreign investor participation” in the Argentinian stock market. We continue to have zero direct exposure to the market, given our preference to play President Javier Milei’s structural reform story via more pan-Latam digital players (MercadoLibre; VTEX), though we are keeping an eye on potential opportunities in what looks to be a relatively significant selloff in the local market, including in the ADRs (American Depositary Receipts).
In Brazil, President Luiz Inácio Lula da Silva (Lula)’s approval ratings continued to decline, with a recent poll showing his approval dropped to an all-time low of 28% (for context, in his previous presidential terms, his approval rating never dipped below 60%). In terms of potential challengers for the presidency in the election next year, we are yet to see if former president Jair Bolsonaro will decide to run or if he will endorse another centre-right candidate.
At its most recent meeting, the Central Bank of Brazil (BCB) raised its benchmark Selic interest rate by 25 basis points to 15%, marking the seventh consecutive increase since September 2024 (this brings the total tightening during this cycle to 450 basis points, elevating the Selic to its highest level since 2006). In its forward-looking statements, the committee indicated that this hike would likely be the final one in the current cycle. This makes Brazil a real outlier as we have started to see a number of key emerging market countries not willing to wait for Fed rate cuts and have gone ahead, India being the latest example.
Brazil’s two key macro catalysts are the potential for a rate-cutting cycle sooner rather than later and a potential political regime change in 2026
In our view, Brazil’s two key macro catalysts are the potential for a rate-cutting cycle sooner rather than later and a potential political regime change in 2026 and a shift towards the right. As a result, we are cautiously positioned in Brazil, with much more evidence needed that Lula will indeed be beaten at the ballot box (it would help to have a formal announcement from Bolsonaro as to whether or not he will run) before we can become more bullish on Brazil’s macro trajectory over the medium to long term.
Mexico is all about getting a form of official deal with Trump regarding trade and it is not helpful that Trump keeps picking fights with Canada as this adds risk to the US-Mexico-Canada Agreement.
Strategy performance
The Strategy is up by 8.1% year-to-date compared to a 15.3% return for its benchmark, the MSCI Emerging Markets Net Total Return Index, and 11.6% (12%) over the past three months (all figures in dollar terms).
Ivanhoe Mines continues to have a hard time finding support in the market. We had a very firm and constructive face-to-face meeting with the CEO in London. The seismic activity that unexpectedly hit part of the mine had an operational impact. Ivanhoe Mines’ key asset is the Kamoa-Kakula copper mines in the Democratic Republic of the Congo (DRC; a key part of the African copper belt with high grade copper). Kamoa was unaffected by the seismic activity and is back on full production. However, the Eastern part of Kakula was affected as part of the pumping infrastructure was hit; the Western part has resumed operations as there was no impact there.
It will take six months to dry the Eastern part of Kakula, and production is expected to resume around December. Therefore, what was the anticipated 2025 revenue and profit number will now be the 2026E number. The net present value here is limited, but instead the market pressure has been on the share price. Having the CEO, Martie Cloete, on the road explaining the situation is very helpful. She is a very impressive CEO and is also the person who hosted us when we visited the mine in the DRC.
It is frustrating when political noise, rain and now seismic activity have hit the company, when it has otherwise been ramping up production well. However, we are convinced that we will make up our lost performance. We believe that in around six months, the mine will be back on its original production schedule and in addition we see a high likelihood of a strong resource upgrade and expanded mine life. We also see further upside to copper pricing. Ivanhoe Mines’ operations were supposed to be more straightforward than most copper miners so it being hit shows how difficult it will be in the years to come to bring new capacity online. In the meantime, the grade and volume stay under pressure in old mines – costs are moving up.
H1 2025
It has been a very frustrating period, as we mentioned earlier. China explains a large part of the Strategy’s underperformance. As our investors will likely remember, we turned more positive on China in September last year but retained our view that there are still significant structural issues in the Chinese economy that were spilling over into a large part of the equity market. However, the quick, concentrated series of events around geopolitics, DeepSeek, and Xi meeting with the tech companies led to a rally, the magnitude of which surprised us. The events are positive but we also believe that in a number of cases the market has moved ahead of fundamentals as even these have improved.
We have been running this strategy for close to 15 years and China has been a key provider of alpha for us. In the past three years, we have been struggling to find alpha in China as the market has been driven more by politics and economic profit, and the lack of any alpha explains much of the soft Strategy performance lately, relative to the benchmark. However, we do see these changing fundamentals resulting in a more ‘normal’ China where real company fundamentals will start to play a more important role and we are confident that China’s alpha will come back. We are particularly excited with some of the more recent Chinese portfolio holdings.
The other main drags in H1 were Ivanhoe Mines (see above) and Globant.
Outlook
We have not changed our overall longer-term outlook for emerging markets or our Strategy. If anything, we believe we have seen more TACO (‘Trump Always Chickens Out’), with the US seemingly willing to engage with China on a deal as Trump has realised they need rare earths, among plenty of other materials.
We believe that increasingly the US will be forced to cut deals on less extreme terms... In our view, this is hugely positive for emerging markets
We still see a strong likelihood of de-escalation around the tariff structures. This does not mean we will never see a negative headline from Trump again, but we believe that increasingly the US will be forced to cut deals on less extreme terms than those announced on Liberation Day. In our view, this is hugely positive for emerging markets and could lead us to the sweet spot of the US buying emerging market goods with a weaker dollar. This will also allow for the monetary easing cycle to play out in key emerging market countries.
Furthermore, it is clear that nobody can push China around and its position as the world’s preferred trading partner is very strong.
In addition to the improved export story and spill-over to domestic economies, we specifically see tech companies benefiting from improved demand from both the US and elsewhere.
Given where emerging market companies are currently trading, and given a large number of quality growth names are becoming increasingly ‘local’, as per our New Multipolar World scenario, this could land well for our portfolio once the dust settles.
We still believe the resilience and underlying growth in emerging markets is hugely underappreciated and there is a good set of ‘star’ companies out there we are convinced will be compounding significant EVA in the years to come.
From a top-down perspective, in times like these, we feel it is best to stay with secular growth companies and future leaders in local business. For us, this is the recipe for good returns in emerging markets and it is how we are positioned.
11 July 2025
