One week / one topic: The road less travelled

What happened?

The year is halfway through, and what have we learned?

While bonds have in aggregate posted respectable performance year to date, equities have as usual displayed much higher dispersion of returns and so perhaps they offer more clues as to what’s been going on.

Had you gone off to a desert island at the beginning of the year and came back just now (lucky you), based on equities’ performance you would conclude that everything is fine and dandy – especially in Europe.

The lived experience of 2025 so far has of course felt very different, and we can’t escape having our current perception heavily shaped by what happened since the April lows, when Trump unexpectedly announced a 90-day pause on his own tariffs.

Seen through that lens – and focusing on common currency returns, therefore including a ~6% drop in the Dollar since April 7th – US Tech also came back strongly aided by strong Q1 results and another torrid run from Nvidia.

At the same time, various emerging market equity indices – despite widespread fears about the impact of trade tariffs, which in turn betrayed little understanding of how different countries included in this bucket are from each other – continued to display fairly uncorrelated behaviour.

Investors have therefore been conditioned to remain laser-focused on the latest presidential utterance, leading to a self-fulfilling Pavlovian mindset which largely ignores anything else.

If that is indeed the case, perhaps we should go on an ‘EM investing safari’ and look for uncorrelated investment opportunities?

Our observations

• Fundamentals: Brazilian real yields are sky-high, Turkish and Indonesian equities are very cheap, China might continue to benefit from ever-higher ‘policy put’ strikes… Are these enough to compensate investors for idiosyncratic risk? Homework time!

• Price action: Just taking Turkey as an example, investors seem to care much more about local developments than ‘global equities beta’…

• Investor beliefs: Trump 2.0 poses a culture shock for many non-US investors. Will their continued disaffection for the Dollar turn into further, sustained inflows into EM assets?

So what?

Perhaps even more so than usual, we need to be discerning when evaluating investment opportunities in the emerging markets equities space.

Cheap valuations might look like good place to start when looking for an insurance policy of sorts, but – as we know – they tend to acquire more and more meaning as you approach either extreme of the distribution.

Put differently, things can remain expensive (or cheap!) for years at a time. It is only when you approach the extremes that you can realistically hope for valuations to meaningfully affect your odds.

Additionally, we can observe that historically certain EM equity markets have staged multiyear rallies – which what can indeed make all the difference if you manage to catch them.

Putting it all together, can we identify the next candidate markets to stage a similar rally to what Turkish equities managed in 2022? (in a year when global developed market equities finished down 20%, too!)

As we already have positions in Brazilian and Chinese equities, other candidates that stand out for further analysis are Mexico, Indonesia and Turkey.

Mood music: Fleetwood Mac – Go Your Own Way