Global Equity Spotlight Episode 15

Hello everyone and welcome back to Global Equity Spotlight, a series where we delve into interesting topics affecting equity markets. Today, I have Jacques and Cornelius joining me. Thank you for being here today. So let’s kick off. We’ve continued to see really strong emerging market performance coming through, but the underlying country performance seems to diverge a lot. Could we perhaps unpack that?

Yes, it’s not abnormal for countries to diverge a lot with their performance in emerging markets. Every year, there is a large dispersion which creates a very fertile environment for active managers, and this year is no different. The quantum is just off the charts at the moment. So, we’ve seen South Korea up more than 250% over the last 12 months, and Taiwan has also posted very strong gains. These two countries are big beneficiaries of the AI buildout with their memory companies and the chip manufacturing coming from TSMC. On the flip side, India and China have lagged. India is one of the more exposed countries when it comes to oil imports, and China continues to struggle with their property market, which is still in decline. The main e-commerce companies there, like Alibaba, Meituan, and JD.com, have also struggled. But the performance in Korea and Taiwan has mainly been driven by three companies. SK Hynix is up more than 850% over the last 12 months, and Samsung has also posted massive gains. But the remarkable thing is that their earnings growth has actually outpaced the share price action, so they’ve actually derated when it comes to a forward price-earnings ratio. Because when you look at the memory prices of DRAM and NAND, the prices have skyrocketed because there’s a shortage. This AI buildout and the use of agents is very memory-intensive, and the supply cannot respond quickly enough to service the demand. So, these companies are seeing record margins on their NAND and DRAM, and that is coming through in earnings growth.

Brilliant. Thank you. And Jacques, maybe you can unpack how these big moves have impacted the benchmark composition?

Sure. So, we’ve seen South Korea go from 12% to 19% in the emerging market index, while Taiwan has gone from 16% to 25% of the emerging market index. To put that into context, Taiwan is now a similar size to China in the emerging market index, despite China’s economy being 20 times larger than that of Taiwan. Looking at the individual MSCI indices, within the Taiwan index, TSMC is now 56% of that benchmark, while in the South Korean index, Samsung is now 38% of that benchmark, while SK Hynix is 26%. So those two companies are 64% of that benchmark, driven by the strong memory cycle that we’re seeing. Looking at TSMC specifically, we think it’s one of the best businesses in the world, and it’s one of the biggest overweights in our global equity fund. But the reality is within the emerging market fund, we are limited to a 10% maximum holding according to the regulatory rules, while TSMC is more than 14% of the emerging market index.

Brilliant. Thank you so much, guys. To the audience, thank you so much for tuning in, and we look forward to seeing you next time.