MACRO AND MARKET REVIEW
Emerging market equities saw a mild pullback in June, with MSCI EM declining 1.4% in USD terms. Taiwan and India stood out with positive performance during the month, while China saw a sharp correction. Performance was weak across ASEAN ex Singapore, with MSCI Indonesia declining sharply by 9%. Although the technology-heavy markets of Taiwan and Korea were relatively resilient, it was far from calm as volatility went up a notch, with frequent large swings across AI technology hardware names. Non-Asia EM markets were also weak, with MSCI Brazil and MSCI Mexico declining 3%, while MSCI South Africa dropped 5.7%.
The Korean government announced the "Mega Project Plans", reaffirming the structural growth pillars of the economy, namely semiconductors, AI robotics, physical AI, and AI data centres. Memory semiconductor capacity is expected to double over the next five years, with roughly USD 600 billion to be spent on fab buildouts and R&D investments, in line with the spending plans of major technology companies over the next three to five years. Wealth creation has also become an investment theme of its own, with financials and consumer discretionary companies seen as key beneficiaries of a stock market boom. SK Hynix's ADR listing will take place in July, and the impact it may have on the valuations of SK Hynix and Samsung Electronics will be closely monitored. Micron's results and guidance, as well as the signing of long-term agreements (LTAs), provided some comfort for the sector amid volatility and concerns over whether the market has run up too far and too fast. In Taiwan, the positive business outlook for the technology hardware sector remains intact, with differences in the near-term outlook largely driven by new product transitions heading into the second half of the year. Market expectations of TSMC raising capex in the second half of the year appear realistic, as planned Chip-on-Wafer-on-Substrate (CoWoS) capacity is likely to remain insufficient to meet demand.
the Indian market turned a corner during the month, delivering positive performance in both absolute and relative terms, as it is increasingly viewed as a defensive market, benefitting from its "anti-AI" characteristics and serving as a hedge against volatility in technology hardware. Nonetheless, following the US-Iran ceasefire, which we hope will be sustained, the Indian market should begin to recover from its recent underperformance as energy prices moderate. Higher-beta plays in India, such as airlines, wealth managers, and brokers, performed relatively better during the month. After a slow first half, an estimated USD 50 billion of IPOs is expected to launch this year, with Jio Platforms and the National Stock Exchange (NSE) being among the most high-profile offerings.
Confidence in Indonesia remains low as foreign outflows intensified in June relative to May, bringing total market outflows to approximately USD 4 billion YTD. Headlines continued to be dominated by concerns over government policy, the risk of intervention in private businesses, and the overhang created by MSCI delaying its Indonesia status review to the end of November from its earlier target of the end of May. Some discipline is being restored to fiscal spending as the government scales back its free meal programme, which has been plagued by corruption and wastage. Following the selloff in Indonesian assets, long-term opportunities have emerged in selective sectors such as large-cap financials, which are trading at trough valuations with sustainably high dividend yields.
In non-Asia EM, weakness remained broad-based, with macroeconomic concerns dominating headlines. In Brazil, concerns over the impact of El Niño and food inflation during a period of elevated inflation expectations have continued to weigh on the equity market. Likewise, in South Africa, mining companies have been impacted by weaker metal prices.
PORTFOLIO ACTIVITY
The Fund added selectively to positions in India and China while maintaining its high-conviction exposure to technology hardware.
PERFORMANCE
The Fund underperformed the benchmark slightly in June. However, several high-conviction positions in Korea and A-share-listed AI technology hardware, China healthcare, and India airlines were among the top contributors and helped cushion weakness in Taiwan technology hardware and China.
OUTLOOK
We flagged the possibility of a pullback in the technology sector in June and expect volatility to persist in July. While it is fair for the market to question the sustainability of AI capex spending beyond 2027, we continue to view technology hardware as the key driver of earnings growth in the region, and any pullback should represent a healthy reset in expectations and valuations.
The sharp selloff in the China market has created attractive opportunities to add selectively to high-quality large-cap companies. We see re-rating potential in select names within the China internet sector, which are also AI beneficiaries, albeit with a slower pace of earnings inflection due to heavy AI capex spending.
Long-term structural growth drivers in MSCI Asia ex Japan remain intact, and we believe China and India are well positioned to participate more meaningfully in the next phase of the Asia equity upcycle, which has thus far been led by Korea and Taiwan.
We appreciate your support and please do not hesitate to contact us with any questions.
WEE JIA LOW
On behalf of the LOIM Asia & Emerging Markets Equities Team
condividi.