Emerging Markets: investor letter Q1 2025

Your capital is at risk. 

“Who wants yesterday’s papers?            
Nobody in the World”
                                                    The Rolling Stones

I am writing this quarters’ commentary in the shadow of “Liberation Day’ on the 2nd of April when President Trump will announce his programme of reciprocal tariffs. That means that much of what I may write could prove completely obsolete by the time this reaches your attention. As a historian, I find it a little ironic that ‘D-Day’, perhaps the high-water mark for America and her allies, should be associated with ‘Liberation Day’ that has the potential to be the reverse. Given this enormous uncertainty, I thought it best to start with something with a longer shelf-life.

Our Labrador, Elsa (‘Born Free’ NOT ‘Frozen’!) is, like many of her kind, very, very greedy. When food is around, she has the singular focus you only really see in top class athletes at critical moments. Recently, my father-in-law briefly opened the fridge to top up his white wine glass and in the blink of an eye Elsa had made off with an entire salmon. At family mealtimes she usually lurks next to me; I am easily the messiest eater in our family and therefore the most likely source of scraps. Try enjoying your meal with a Labrador focussed with laser like intensity on every forkful as it makes its way from my plate to my mouth.

So, Elsa is greedy, but how greedy? The other day we found out. We keep her food, ‘Chappie’ (other dog foods are available) on a shelf in the utility room, guarded by a phalanx of large fabric conditioner bottles. That day, I went into the utility room and there on the floor were the remnants of what had been a new 2kg bag of ‘Chappie’. It was clear what had happened, so out of interest, I weighed the remaining contents of the bag - 1.2 kgs. So, we now know that an uninterrupted Labrador has the capacity to eat 0.8kgs of food before she is full to bursting (“FTB” in our family)1.

While Elsa clearly doesn’t have a problem with consumption, this has not been the case in China. In Beijing, the Year of the Snake began with a resolve to rekindle growth. At the March National People’s Congress, China’s government reaffirmed a ~5% GDP growth target for 2025 and unveiled its most expansionary fiscal plans in decades. The official budget deficit was raised to around 4% of GDP – the highest in over 30 years – as authorities prepared to spend big on shoring up demand. Industrial output surprised to the upside, rising 5.9% YoY and beating expectations. Notably, high-tech manufacturing led the charge – production of industrial robots jumped 27%, and service robots 35%, underscoring China’s drive to lead in AI and automation. 

While the Tech heavy MSCI China Index rose throughout the quarter, including the likes of Tencent and Meituan in the portfolio, the A share markets had a roller-coaster quarter as domestic hopes ran up against geopolitical anxieties. Investors drew parallels to 2017 – the first year of Trump’s earlier term – when, after initial dips, China’s market went on to soar 56% for the year. Whether 2025 will echo that historical rhyme remains to be seen, but bargain valuations (Chinese stocks entered the year at multi-year low P/E multiples) and policy backstops limited the downside. On fundamentals alone, a larger overweight in the portfolio is warranted, but the geopolitical risk of sanctions (rather than tariffs) makes a small overweight position appropriate.

India entered 2025 determined to shake off a late-2024 slump. The fiscal year concluding in March 2025 is on track to grow about 6.4%, a four-year low by government estimates, as high inflation and external headwinds tempered the post-pandemic boom. In February, the Reserve Bank of India delivered its first interest rate cut in nearly five years, trimming the repo rate by 25 bps to 6.25%. The Union Budget unveiled in early February leaned moderately expansionary with a mix of populism and pragmatism. Notably, the government cut personal income taxes for lower-income brackets putting a bit more disposable income in the hands of consumers. At the same time, the budget sustained India’s infrastructure drive, allocating funding to railways, roads, and energy projects in a bid to crowd in investment and generate jobs. 

In the opening weeks of 2025, the market mood was guarded – even gloomy. The benchmark Nifty 50 index had fallen 14% from its peak by February, after logging five consecutive months of losses (the longest losing streak since 1996). A wave of foreign investor selling – over $25 billion in outflows since October 2024 – and a weakening rupee (hitting record lows repeatedly) had compounded the downturn, turning India from Asia’s top performing market to one of its weakest in a span of months. Rich valuations were a culprit; mid cap stocks in particular remain expensive, despite the correction. Accordingly, holdings such as Reliance Industries and Jio Financial Services were weaker over the quarter, while the Indian bank stocks in the portfolio performed better in anticipation of interest rate cuts. While India remains one of the best long-term stories in Emerging Markets, we await more reasonable valuations before closing the underweight position in the portfolio.

Brazil’s economy in Q1 2025 was a study in contrasts. President Luiz Inácio Lula da Silva, grappling with low approval ratings, had ramped up social spending and tax breaks to spur consumption. This pro-growth fiscal push put the central bank in a bind, effectively pitting Lula’s expansionary fiscal policy against BCB’s tight monetary policy. In mid-March, the BCB under its new governor Gabriel Galípolo hiked the benchmark Selic rate by 100 basis points to 14.25%, a level not seen since 2016. This move was part of a tightening cycle totalling 200 bps in Q1. Amid these crosscurrents, Brazil’s currency had an eventful quarter. Initially, the Real strengthened on the back of rising rate differentials – by early March it had gained roughly 9% against the dollar year-to-date. However, subsequent global risk-off moves saw the Real give up gains; by mid-March it wobbled, especially as U.S. recession fears caused a commodity pullback. The growth picture in Brazil was mixed: Q4 2024 activity had weakened more than expected, but early 2025 data showed areas of resilience. Unemployment hovered near multi-year lows around 8%, and a record soy harvest plus solid services activity hinted that Brazil might skirt a recession.
 
The Bovespa index extended the rally that began in late 2024, climbing nearly 10% in the first two months of 2025 before encountering turbulence in March. As a reminder, much of the Brazilian overweight position in the portfolio is made up of Petrobras, whose share price is largely oil price dependent, and Mercado Libre, the pan Latin American platform business which is a structural rather than cyclical growth story. Nonetheless, valuations in domestic Brazilian companies are so beaten up, our inclination is to add here.

In Mexico, the first quarter brought a blend of continuity and change, with the economic compass pointing towards steady, if unspectacular, growth – until the tariff dispute with the US reared its head. The economy had been decelerating gently: after a 3.2% expansion in 2023, Mexico’s growth cooled to about 1.5% in 2024 as the post-COVID rebound faded. To start 2025, however, there were glimmers of resilience – GDP grew 1.8% year-on-year in January according to INEGI’s preliminary data, suggesting the slowdown was levelling out. The labour market remained robust, with unemployment at a low 2.7%. Importantly, inflation had finally come under control. Headline CPI hit a four-year low in early 2025, dipping to around 4% – the middle of Banco de México’s target range – before a mild uptick in February to 4.1%. This progress on inflation allowed Banxico to decisively shift gears: on February 6, the central bank cut its policy rate by 50 bps to 9.50%, its second consecutive cut in the current easing cycle. Banxico signalled it could cut by another 50 bps in the next meeting.

In the first week of March, the new U.S. administration unexpectedly imposed a 25% tariff on all Mexican imports covered under USMCA. President Sheinbaum engaged in urgent diplomacy and within days U.S. President Trump suspended the tariffs after what he described as an “excellent and respectful” phone call with Sheinbaum. The tariff suspension was set to last until at least early April pending further negotiations. This skirmish had immediate impacts: the Mexican peso whipsawed violently and the stock market fell sharply on the initial news but subsequently recovered. Mexican bank stocks rose as investors anticipated that easing monetary policy would stimulate credit growth and consumer spending. Grupo Banorte saw double-digit percentage stock gains, reflecting optimism that lower rates and robust loan demand (especially mortgages and auto loans) would boost profitability. While we continue to appreciate the domestic opportunities in Mexico where consumers are underbanked and underserved (hence the portfolio’s holdings in the likes of Banorte and convenience store operator FEMSA), it is likely that in the short-term share prices will be driven by events north of the border.

Performance

During the quarter the MSCI Emerging Market index rose and the portfolio outperformed. Mercado Libre has again yo-yoed, moving from the top detractor last quarter to a top contributor this quarter. The company is Latin America’s largest online e-commerce and payments ecosystem and having held it for over 15 years, these short-term fluctuations are not something we pay close attention to. The company reached its 25-year anniversary in 2024 and reported one of the best years in its history, with strong top line growth in core markets, Brazil and Mexico, achieving revenues of $21bn and free cash flow of $1.3bn for the year, while investing over $900m in capital expenditure. Its FinTech platform achieved a milestone of 60 million monthly active users, demonstrating the growing adoption of its financial services. Gross Merchandise Volume (GMV) surpassed $50 billion for the first time in 2024, marking a significant milestone for its e-commerce business. E-commerce penetration remains low across LatAm, at about 13% of retail sales. Comparing this to other global markets like the US (25%) and China (40%), there remains a very strong runway for growth, and we remain excited about what this company can deliver for clients.

SEA Ltd saw its share price rise on the back of exceptional financial results and strong execution across its core business segments. The company reported a 37% year-over-year increase in Q4 2024 revenue, driven by robust growth in e-commerce, digital financial services, and digital entertainment. Shopee, its e-commerce platform, achieved a milestone by surpassing $100 billion in GMV for 2024, with a 28% year-over-year GMV increase and continued profitability in key markets like Asia and Brazil. Meanwhile, SeaMoney, the digital financial services arm, saw its loan book grow by over 60% year-over-year to $5.1 billion, alongside a 55% rise in revenue, solidifying its position as a leading consumer lending platform in Southeast Asia. Garena, the gaming division, also contributed with a 19% increase in bookings. These achievements reflect Sea's ability to balance growth with improving profitability, as evidenced by its second consecutive year of positive adjusted EBITDA across all segments. The company’s strategic focus on monetisation, operational efficiency, and market leadership has positioned it as a key player in Southeast Asia's digital economy, driving strong investor confidence and share price appreciation during the quarter.

During 2024, AI was a big driver of stock returns, no more so than TSMC which hit all-time highs. It reported very strong results in 4Q24 with notably strong margins. Moving into 2025, the Chinese startup DeepSeek sparked a wave of discussions with its open-source, cost-effective AI models. This caused challenges for the global semi-conductor industry, primarily around whether the handful of leading ‘hyperscalers’ with vast capex and computational advantage can keep their moats in the AI race. However, we've seen in technological revolutions in the past that increased capabilities and decreased pricing often increase demand rather than curtail it. This is termed the ‘Jevons Paradox’ and has the opposite implication than the drop in valuations would suggest. Hardware manufacturing moats take considerable time to establish, and we are confident in TSMC’s ability to navigate this short-term cyclicality. Alongside this, there are ongoing concerns around US trade tensions and geopolitical risk. TSMC has recently expanded into the U.S, as well as new foundries in Japan and Germany, in an attempt to mitigate this risk and diversify its revenue. Indeed, during the quarter, the chipmaker announced that it would be spending an additional US$ 100 bn for new plants in the US on top of their US$ 65 bn expenditure.

Not owning Chinese consumer and electronics and EV maker Xiaomi detracted from relative performance during the quarter, as the company’s share price surged on the back of strong financial results with total revenue up 35% and adjusted net profit up 41%. The launch of new products, including the Xiaomi 15 Ultra smartphone and the highly anticipated Xiaomi SU7 Ultra electric vehicle, garnered significant market attention. The SU7 Ultra, in particular, demonstrated impressive market traction, securing 10,000 locked-in orders within just three days of its release. In addition, Xiaomi's diversified ecosystem showed robust growth across multiple segments. The IoT and consumer products business saw revenue exceed RMB100 billion for the first time, with tablet shipments increasing by over 70% and major home appliances growing by more than 55% year-on-year. The company's entry into the electric vehicle market with the SU7 has opened up a new growth trajectory, complementing its already strong position in smartphones and smart devices. While we have closely followed Xiaomi's developments and despite strong share price performance, we decided against owning the stock due to valuation concerns.

Regardless of where you are, these are obviously uncertain times and it looks like the benefits of diversification could never be greater and the heterogenous Emerging Markets universe can provide this. We continue to be happy with both the positioning and composition of our Emerging Markets portfolio. We are finding a plethora of exciting opportunities and there remains strong competition for capital within the portfolio. The portfolio encompasses a wide array of countries, sectors and structural growth themes that should do well in the years ahead regardless of the short-term news flow. One of the qualities we look for when evaluating a company is its adaptability and its resilience. Whatever comes to pass on ‘Liberation Day’ and beyond, the stocks in the portfolio will not become yesterday’s papers.

1Elsa weighs 25kgs, which means she can eat 3.2% of her body weight in one sitting. Applying this to the average man and woman in the UK would be a 2.7kg meal for him and a 2.3kg meal for her.

This is an Emerging Markets commentary based on Emerging Markets All Cap and Emerging Markets Leading Companies. Not all stocks may be held, but themes of this commentary are representative of these investment strategies.

Source: Revolution, MSCI. US dollar. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.

Past performance is not a guide to future returns.

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