Emerging Markets Overview

Trump's threats against Mexico, China and Colombia dominated the news. The tariff threat was then immediately postponed for a month after it was announced - both Canada and Mexico agreed to take measures to stop migration and the fentanyl trade. However, Chinese goods were "only" subject to a 10% tariff, and China's countermeasure on US goods was not long in coming. In line with the reciprocity of his tariff policy, Trump immediately announced an increase to 25% on Chinese goods.

Meanwhile, the Mexican economy is already showing the first signs of weakness. The vacancy rate for commercial property in the north has risen from a very low 1% to around 5%, the highest level for around six years. Prices are still holding up, but employment growth in the north has already declined. The Mexican central bank lowered key interest rates from 10% to 9.5%. It justified this with more stable inflation but an uncertain economic situation due to a possible trade war.

In China, the New Year had a slightly better impact on the economy than expected, with consumer prices rising, especially in the service sector. Casino visits in Macau fell slightly and it is reported that many consumers are still renting cameras and even handbags instead of buying them. When it comes to electric cars, Chinese own brands are favoured and sales figures for Honda and Tesla have fallen. It is also rumoured that an increasing number of Chinese companies are asking their local suppliers to set up production capacities in Vietnam.

The situation in Brazil has calmed down somewhat since the last newsletter, after President Lula revised the spending proposals that were considered excessive and once again emphasised the importance of a stable budget. 

Overview of EM Companies

January brought several tenders of short-dated bonds (Buenaventura, Arcos Dorados, Usiminas to name a few) as well as bonds with longer maturities, in some cases to finance the tenders. In terms of quarterly figures, there were hardly any surprises in January. Our overweight in the fund, Latam Airlines, reported strong figures despite the weakness of the real and gave a confident outlook for the booking situation.

Note: The companies listed here have been selected as examples and do not constitute an investment recommendation.

Companies such as CEMEX from Mexico have indicated that they want to export less from Mexico to the USA and would prefer to increase capacity in the USA instead. The spreads in the affected countries also showed so far little effect from the threatened tariffs.

In January, I took part in several meetings with CEE banks as part of the annual CEE conference in Vienna. The meeting with OTP Bank from Hungary, for example, was exciting as they reported on the excellent business development of the newly acquired Uzbek subsidiary IPOTEKA Bank. According to the management, the purchase price will be fully amortised in just 3-4 years. We are for a while already heavily overweighted in subordinated bonds and in the short (11/2025) IPOTEKA-Bank bond issued by OTP. 

How do we align the fund with current developments?

As far as Mexico is concerned, we are around 0.5% short in the peso against the dollar and have reduced the overweighting of our Mexican bond holdings. The peso had already fallen in the run-up to the now postponed tariffs, but a further devaluation must be expected if the tariffs actually materialise as planned.

In general, it can be said that individual emerging markets have hardly reacted to Trump's tariff policy so far. For example, neither Chinese corporate bonds nor government bonds from South Africa have shown any noticeable reaction. China owes this resilience to strong local bond purchases, as the banks in mainland China and Hong Kong are literally swimming in money (there is hardly any lending) and are investing the funds in USD bonds. This is also being driven by private investors who want to protect themselves from the currency weakness of the renminbi. This also partly explains the current market environment, where the market is barely reacting to news. Many market participants have not been rewarded for prudent and defensive management and this awareness has become ingrained in many people's minds.

We are diversifying our bond holdings away from China and other countries where risk premiums are low and US tariffs are becoming a reality. To be fair, however, it must also be said that Trump is currently waging a superficially rhetorical tariff war with almost all countries in order to be able to announce a "successful" deal for the US. As a result, many market participants are simply waiting to see what real economic impact the tariffs will have. It is also clear that a real trade war would also represent a lose-lose situation for the US, which would create logistical problems, unemployment, higher inflation in the short term and therefore a recession-like or stagflationary environment. 

Outlook & Performance

The situation on the bond market resembles the well-known English fairy tale of the three little pigs, where people are warned of danger (the wolf) until they are not sufficiently prepared when it materializes. Due to the historically high absolute yields following the period of zero interest rate policy and a broader investor base focusing more on "buy-and-hold" or an absolute return, the risk indicator function of the market, yield = price/reward for the risk taken, has changed. Potential risks are hardly or not at all priced in beforehand.

Risk premiums remain at historic lows despite a coming reorganisation of the global economy/global politics with latent inflationary tendencies and escalating government debt (e.g. in the USA). And so, our more defensive stance in January was not rewarded either, but we also know that "there is no glory in precaution"