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Three things we are thinking about today

  1. Trade. The United States accounts for 13% of global imports, down from 20% two decades ago. The European Union (EU) and China account for 20%.1 While “Liberation Day” had a dramatic impact on equity markets globally, we believe the optimal response for the largest trading nations is to increase trade with each other as opposed to picking a fight with the United States, which is pursuing unorthodox economic policies.
  2. Trump Tariffs. The across-the-board 10% tariff on US imports, with higher rates for China (54%), Vietnam (46%) and Taiwan (32%), does not tell the full story. There are exemptions for high-value imports, including pharmaceuticals and semiconductors from Taiwan, which sold US$44 billion worth of chips to the United States last year.2 While auto imports from all countries will face tariffs of 25%, all eyes are on negotiations with Mexico, the largest source of US automobile and automobile parts imports, where auto tariffs are paused until May. We expect markets to remain volatile until signs of a negotiated settlement emerge.
  3. Chinese banks raising capital. Four of China’s biggest banks raised RMB 520 billion in fresh capital from the Ministry of Finance to boost common equity tier 1 ratios, which will rise an average of one percentage point. The goal is to boost capital buffers to enable loan growth to continue for “focus” areas including technology, green energy, inclusive lending, retirement and digital. There will be low double-digit earnings dilution, but we expect dividends to remain secure.

Outlook

One of our equity portfolio managers in Asia visited South Korea, one of the key countries for our portfolios. One key takeaway—which was contrary to our expectations—was that, among investors, there was little angst over tariffs. This could be the beauty of employing a longer-term, bottom-up approach.

Automobiles

In our view, there is no clear outlook on South Korean automobile exports. The weaker macro backdrop has led to some caution on a weaker model cycle. Despite this, the automobile makers that our portfolio manager met were very confident about maintaining their profit margins. These were in the high single-digit to low teens percentages. This is considerably higher than OEMs (original equipment manufacturers) in the West.

Looking beyond 2025, companies we visited continue to have a very strong powertrain, or assembly of vehicle components, and can toggle among their internal combustion engine, hybrid and electric vehicles. This enables them to adjust to changes in the operating environment and helps to grow average selling prices, allowing room for earnings growth.

Memory

Our portfolio manager also met prominent memory chip makers during the trip. The competition between the two larger companies in high bandwidth memory (HBM) segment continues. One company is lagging the other, with their fifth-generation HBM chips yet to be qualified by a key customer.

Valuations on the laggard are compelling. This also means that the risk-reward ratio from any positive developments will be attractive. The company has just pledged to shift its portfolio to increase sales of HBM. While our portfolio manager feels that more clarity on its HBM progress may come in the second half of the year, she feels comfortable with holding this name in the portfolio.

Hence, in her view, while there are some near-term headwinds for South Korea, the long-term outlook for the auto and semiconductor industries remains promising. While we definitely welcome any signs of stability, we believe our approach keeps us grounded and allows us to remain calm in the face of uncertainties.

Market review: First quarter 2025

EM equities rose over the first quarter of 2025. Investor sentiment see-sawed as fears of broad US tariffs gave way to relief and optimism on delays and the possibility of a more targeted approach. Still, there was a hint of wariness over the impact to global economic growth emanating from a trade war. For the quarter, the MSCI EM Index returned 3.01% while the MSCI World Index declined by 1.69%.

The emerging Asia region rose. Chinese equities advanced on the back of continued stimulus measures from regulatory authorities. The China government work report’s focus on technology was viewed as a sign of support for the sector. This sent technology stocks higher. Plans to boost consumption across a multitude of sectors were also revealed. Despite these plans lacking any quantitative information, our China equity portfolio manager believes that this shows the government is focused on longer-term consumption from the youth to the elderly.

Indian equities recovered in March, but declines in the first two months of the year led to an overall fall for the first quarter. Corporate earnings in India and sluggish consumption had disappointed investors initially, but better-than-expected macroeconomic data, including gross domestic product and inflation, improved sentiment. Valuations also looked more attractive. This has expanded the considerable investment universe for our portfolio managers. In the words of our smaller companies portfolio manager, he is able to now evaluate names that would not have made it to his portfolios a year ago due to valuations hovering above his comfort level.

South Korean equities got a leg up from its most valuable company. The memory semiconductor manufacturer affirmed to improve shareholder value this year. While the “Value-Up” program continues in South Korea, we do not anticipate any quick progress in terms of exports, tariffs and geopolitics. Taiwanese equities fell as the country’s—and the world’s—largest contract chipmaker announced its plan to invest US$100 billion in the United States. This investment gave rise to investor concerns of higher costs for the company.

The emerging Europe, Middle East and Africa region closed higher. The quarter kicked off with hopes of abating geopolitical tensions. An initial ceasefire deal between Israel and the Hamas militant group went into effect, and peace negotiations between Russia and Ukraine took place. These were subsequently violated.

Equities in the emerging Latin America (LatAm) region advanced. Delayed imposition of US tariffs on Mexico’s exports led to gains regionally. There was also optimism over the possibility of the United States considering some exemptions. Mexico’s economy minister expects to increase the number of compliant companies exporting to the United States. This could help to temper any aggressive deterioration in the trade environment between Mexico and the United States. In our LatAm equity portfolio manager’s view, Mexico will work hard to prevent jeopardizing its trade relationship with the United States.

Endnotes:

  1. Source: IMF World Economic Outlook. October 2024.
  2. Source: Congressional Research Service. August 2024.

 

Index Definitions

  1. The MSCI Emerging Markets Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
  2. The MSCI All Country World Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global developed and emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
  3. The MSCI EM Latin America Index captures large- and mid-cap representation across five emerging markets (EM) countries in Latin America. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
  4. The MSCI Emerging Markets EMEA Index captures large- and mid-cap representation across 11 emerging markets (EM) countries in Europe, the Middle East and Africa (EMEA). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
  5. The MSCI EM Asia ex Japan Index captures large- and mid-cap representation across two of three developed markets (DM) countries (excluding Japan) and eight emerging markets (EM) countries. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
  6. The MSCI China Index captures large- and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
  7. The MSCI Emerging Markets ex-China Index captures large- and mid-cap representation across 23 of the 24 Emerging Markets (EM) countries* excluding China. With 672 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
  8. The MSCI Mexico Index is designed to measure the performance of the large and mid cap segments of the Mexican market.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.

There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.

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