Emerging market equities have made a positive start to 2025, climbing 3.9% in EUR terms. Encouragingly, they have also kept pace with developed markets (+4.0%), shrugging off concerns over the impact of tariffs and potential trade wars under the new US president (more on this later).
2025 has been eventful for emerging markets in other ways. Chinese AI start-up DeepSeek announced in January that it had developed an open-source large language model using a fraction of the time and cost of developed market tech companies, briefly wiping many billions of dollars from their market values. Several of last year’s trends have also reversed, notably Latin American equities recovering while Asia has lagged.
SKAGEN Kon-Tiki has had an even stronger start to the new year, outperforming the EM index by 2.1% net of fees¹. The fund had a challenging 2024 relatively speaking, largely driven by its overweight positioning in Brazil and Korea, two of last year’s worst performing emerging markets with EUR losses of 25% and 18%, respectively.
“China was our most successful exposure last year, both in terms of the strong market return but also our Chinese stock selection continuing to add significant value,” Lead Portfolio Manager Fredrik Bjelland explains. “Our stock picking in Korea also served us well, thanks mainly to its Value Up programme, where momentum was particularly strong in the banking sector. In Brazil, selection unfortunately didn’t go our way, especially for the holdings with higher leverage that were hurt by rising financing costs.”
There have been some portfolio changes this year with the fund trimming its Chinese exposure by reducing positions in Ping An, Prosus and Naspers on the back of strong share price performance. This money has been put to work through new investments in Petrobras, the Brazilian state-owned oil and gas company, Axis Bank, India’s third largest private sector bank, and Walmex, the Mexican-listed subsidiary of Walmart (see box below).
Quality portfolio at an attractive valuation
Headline EM valuations are currently 13.6x forward earnings, slightly below the historic average (14.0x). Yet relative to developed markets, multiples are close to their widest discount in 20 years – trading around 40% cheaper and almost the half price of US equities[1].
Valued at 7.8x earnings, Kon-Tiki’s portfolio is over 40% cheaper than the EM index with estimated upside of 42% over the next two years based on current price targets[2]. This comes without sacrificing quality – Morningstar analysis ranks the fund only slightly below the Global Emerging Markets Equity category average and at the top of Kon-Tiki’s own five-year historical range[3].
The fund’s small and mid-cap tilt is one factor driving the valuation discount, as Bjelland explains: “Exposure to giant cap names is below the benchmark but also much lower than the average fund in our category. We find that the payback on our research efforts and ability to find interesting investments is greater at the lower end of the market cap spectrum and the team continues to find good ideas there.” This portfolio positioning also helps drive the fund’s high active share – the extent to which the portfolio differs from the benchmark – which is an important determinant for achieving superior relative returns.
Positive outlook
Despite emerging markets’ strong start to the year, investors remain cautious on the outlook, particularly as the US ratchets up trade tensions. Trump introduced steep tariffs on China during his first term in office that were then continued under the Biden administration, yet the country’s trade surplus doubled over that eight-year period with exports to both the US and other countries increasing. China is now the main trading partner for most countries around the world, illustrating that economies and companies can flourish amid the political noise.
“Even if countries become embroiled in a trade war with the US, they have a couple of options,” Bjelland explains. “One is to focus on their home market – between 2020 and 2024 Chinese companies grew their share of the domestic car market by 37% at the expense of manufacturers from Japan, Europe, the US and Korea. They can also still win abroad – China has become the world’s biggest car exporter by conquering countries outside of the US, notably in emerging markets where legacy manufacturers have been replaced.”
SKAGEN Kon-Tiki looks well-placed to navigate this ever-changing market back-drop with a portfolio of hand-picked undervalued companies diversified across regions and sectors. Bjelland concludes: “We believe that our holdings offer a very attractive trade-off between quality and the price we paid for them. This could become even more important if tariff-driven volatility persists to help avoid the losers from any trade wars but also to find the winners.”
You can watch a recording of the recent SKAGEN Kon-Tiki webinar with Fredrik Bjelland here.
Walmex: A standout opportunity in Mexico
SKAGEN Kon-Tiki recently invested in Mexican retailer Walmex which has historically commanded a premium valuation to parent company Walmart, thanks to its impressive track-record of value creation. This has been eroded over the last 18 months, partly due to the weak Mexican stock market, making the risk-adjusted reward increasingly attractive, as Bjelland explains: “Unlike locally-listed subsidiaries which trade at average premiums of 25% to the parent companies, rising to 250% in India, Walmex is valued at less than half the earnings multiple of Walmart, despite growing faster and being more profitable.”
Against a challenging Mexican macro backdrop, the team believes that Walmex has a very robust operating model, which has allowed it to consistently take market share and deliver attractive financial returns. “The company is following the successful online strategy of Walmart in the US that saw the parent company positively re-rate. When we visited Mexico in January it became apparent that Walmex is also creating valuable eco-systems around their stores with digital payment solutions, telecom services and customer loyalty programmes”, concludes Bjelland.
All info as at 31/01/2025 unless stated.
[1] Sources: JP Morgan and LSEG Datastream as at 31/01/2025.
[2] Top 35 holdings (90% of portfolio AUM).
[3] Source: Morningstar as at 31/12/2024.