Review and Outlook

as of 03/31/24

Illustrating the inherent reflexivity of liquidity and credit and economic expectations, early 2024 witnessed a notable uptick in growth and inflation expectations by investors as well as the pushing out of anticipated Federal Reserve easing. While global equities extended the bull run that started in early November, strength was concentrated in the U.S., Japan, mega-caps, and semiconductor and other AI proxies, while developing Asia and small-cap equities lagged as global central bank easing expectations moderated and the U.S. dollar firmed.

The shifting conditions we are witnessing present an interesting setup for non-U.S. equities. We have consistently remarked that the global response to COVID was disproportionate, with U.S. fiscal expansion and monetary support orders of magnitude larger than that of most non-U.S. jurisdictions. This, in turn, led to a stronger recovery and greater inflation pressure in the U.S., which largely remains today. In contrast, we believe conditions in most non-U.S. jurisdictions warrant substantially more easing than the U.S. While the Fed is poised to remain “higher for a bit longer,” many non-U.S. central banks already appear too tight today. An easing cycle would likely trigger a more urgent re-evaluation of improving non-U.S. earnings prospects by global investors and allocators. We believe our portfolio remains well positioned, particularly given our large overweight position in India, as its growth, productivity gains and geopolitical advantage are structural and largely insulated from macro conditions, but it would also be a key beneficiary of lower interest rates.

We are encouraged that several of our holdings, most notably Taiwan Semiconductor Manufacturing Company Limited, Tokyo Electron Limited, Samsung Electronics Co., Ltd, SK hynix Inc. and Baidu Inc., are increasingly recognized as key beneficiaries of the AI phenomenon. We are researching additional non-U.S. candidates, particularly as we believe investor focus is poised to shift from AI training to the broader and myriad beneficiaries of the implementation of AI inferencing. India, by far our largest country exposure and overweight position, continues to deliver world-leading economic and earnings growth while offering a longer-term geopolitical dividend, and presents a multitude of exciting investment opportunities. Korea has embarked on an early-stage and shareholder-focused initiative resembling the highly successful campaign in Japan, and we believe this could offer new investment candidates in this statistically cheap jurisdiction. Finally, after a weak start to the year given ongoing questions regarding growth momentum, China’s economy and equity markets are exhibiting signs of stabilization and improvement, largely in response to policymakers’ stepped-up efforts to restore consumer, business, and investor confidence. We maintain cautious optimism, noting that any signs of improving growth should trigger significant equity appreciation given widespread skepticism and depressed valuations in China.

Top Contributors/Detractors to Performance

as of 03/31/24

Contributors

  • Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited contributed in the first quarter due to investor expectations for a continued strong cyclical recovery in semiconductors and significant incremental demand for artificial intelligence chips. We retain conviction that Taiwan Semiconductor’s technological leadership, pricing power, and exposure to secular growth markets, including high-performance computing, automotive, 5G, and IoT, will allow the company to sustain strong double-digit earnings growth over the next several years.
  • Shares of Jio Financial Services Limited contributed to performance during the quarter. Jio Financial Services is fast emerging as a leading digital-first non-banking financial company. It offers various financial products and services including loans, insurance, and payment solutions to individuals and small businesses. Shares were up this quarter as the market started to price in the company’s aggressive growth plans. Jio Financial Services also owns about 6% of outstanding shares of Reliance Industries and benefited from the appreciation of Reliance shares. The company’s key competitive advantage is its parentage under Reliance Industries, which has the largest retail footprint in India. We view Jio Financial Services as a formidable market player in the non-banking financial companies industry, and we think it should be able to drive share gain over the next three to five years by leveraging Reliance's broad customer network.
  • Zomato Limited is India's leading food delivery platform, with roughly 55% market share. Shares of Zomato were up this quarter on improved profitability. We believe the company will continue to benefit from structural growth in online food delivery in India and potentially double its revenue in the next three to five years. We also retain conviction that Zomato can continue to increase profit margins and grow earnings over the next several years.

Detractors

  • Zai Lab Limited is a Chinese biotechnology company dedicated to bringing Western medicines to greater China and to transitioning to a fully integrated company with internal drug development capabilities. While performance as a business has been excellent, shares fell on issues related to investing in China, most recently highlighted by a bill pending in Congress that would prohibit federal agencies from contracting with China's BGI Group, MGI, Complete Genomics, WuXi AppTec, their subsidiaries, and other biotechnology companies of concern. From a valuation standpoint, we think the shares are cheap, but it is unclear if anyone will reward this class of investment, given the U.S. government's efforts to curb profitability. Zai Lab is under review in the context of the portfolio's exposure to China as an investable market.
  • HDFC Bank Limited is India’s largest and most prominent private-sector bank. Shares declined after the company reported results that showed slowing deposit growth due to competition and overall tight liquidity conditions. The company will likely have to curtail the pace of asset growth or increase funding costs to attract more deposits in the near term as a result. We think this headwind is temporary. We believe the size and scope of HDFC Bank’s distribution network is a competitive advantage that will allow it to grow its funding base at a faster pace than the industry over the long term. We retain conviction in HDFC Bank as one of the best ways to invest in the underpenetrated market for retail lending in India.
  • Shares of PDD Holdings Inc., a leading Chinese e-commerce platform, were down during the quarter despite strong earnings results. Geopolitical concerns have weighed on the stock, especially regarding its platform Temu following the potential U.S. ban on TikTok. We remain shareholders. Strong performance and positive feedback from merchants suggest that PDD will gain market share with strong pricing power. In addition, the company’s grocery segment should turn profitable this year due to Meituan's exit from the market. Finally, we think the risk surrounding Temu's U.S. operations is exaggerated. Even assuming Temu remains valued at zero, a path to 12 to 15 times 2025 domestic profits against a robust 26% 2023 to 2026 CAGR would imply solid returns going forward. We believe PDD's solid execution will ultimately reward patient investors who prioritize fundamentals, despite potential headline-driven trading dynamics during the U.S. election cycle.