MACRO AND MARKET REVIEW
Emerging Market equities rallied 9.7% in USD terms, building on April’s strong performance. South Korea and Taiwan took the spotlight again with the massive rally in technology hardware which helped deliver a 35% gain in Korea and a 16% gain in Taiwan. MSCI China continued to lag, with large cap internet companies like Tencent and Alibaba being cast aside in favour of semiconductor names in China. Indonesia had a weak performance in April with the index declining 12%. Brazil was also weak with MSCI Brazil declining 9.1% in the month.
Positive headlines around the emergence of Agentic AI driving CPU demand upgrades added fuel to the rally in technology hardware. Memory semiconductor names are seeing further upside to near-term price forecasts as strength in high-bandwidth memory (HBM) demand continues to crowd out conventional memory semiconductor supply thereby tightening supply further across the board. Bullish guidance from AMD, Intel and Nvidia also helped reaffirm the strong growth outlook for the technology hardware sector. Physical AI also returned as a topic of interest, leading to a sharp rally in robotics-related companies in Korea.
In China, semiconductor related companies also posted strong performance consistent with recent trends in Korea and Taiwan. This global liquidity shift to technology hardware also came at the expense of dismal performance in Chinese large-cap companies like Tencent and Alibaba which continue to be used as funding sources for reallocations. While Alibaba reported weaker than expected earnings due to heavy AI investments and muted E-commerce business, the market became more optimistic about its AI monetisation with rapidly rising annual recurring revenue (ARR) and accelerating cloud services growth and improving margins. Likewise, Tencent reported a strong set of results that indicated a resilient core business in advertising, gaming and accelerating growth in cloud services with AI capex expected to step up in the second half of the year.
In ASEAN, Indonesia was exceptionally weak as policies on commodity exports were introduced amid a lack of clarity on implementation, which further raises concerns about greater state intervention in the private sector. As a result, currency and equities were sold off.
India had a muted month. Concerns about a macro slowdown due to high oil prices linger, and the lack of AI or technology hardware exposure in the equity market continues to be a key concern and a pain point for the equity market. Foreign capital outflows added to concerns about rupee weakness which has seen Reserve Bank of India (RBI) intervening more actively in the currency market.
The Brazilian equity market was weak in May as energy related sectors saw a correction alongside the banking sector. Large cap growth companies like Mercado Libre and Nu Holdings also saw a significant pullback following results as investments and rapid onboarding of new fintech customers and services resulted in near-term profit pressure.
PORTFOLIO ACTIVITY
During the month, the Fund did not make any material changes to the portfolio.
PERFORMANCE
The Fund outperformed its benchmark in May. Key contributions came from Korea, Taiwan and China with strong performance in our technology hardware and automotive/robotics exposure.
OUTLOOK
We had expected to see some profit-taking in Emerging Markets equities and consolidation in the technology hardware sector, but May turned out to be another strong month, which will likely increase the risk of a sharper correction in June. Nonetheless, we remained convinced that the long-term structural growth drivers in MSCI Emerging Markets remain intact with further upside to Asia equities. South Korea has been a stellar performer which will naturally give rise to the question of when the rally may end. We see the strong performance supported by earnings upgrades and continue to see re-rating potential for the Korea semiconductor companies where the massive cash flow generation potential remains underappreciated even if the cycle were to normalise after 2028. We are witnessing a shift in the mix of global IT spending from IT services and software, which have been the key growth drivers of IT spending pre-AI and this will likely support a sustained elevated AI capex spending on hardware. Chinese large-cap commerce and internet names also seem mispriced as the likes of Tencent and Alibaba will also likely become AI beneficiaries with their strong ecosystem. Markets like India and South Africa, which are highly sensitive to higher energy prices should also see a recovery once we have a resolution to the US-Iran war.
Thank you for your continued support.
LOIM Asia and Emerging Market Equities team
condividi.