11 February 2025
One of the phrases that has always wound me up as an investor is when market participants argue that the outlook is “uncertain.” Markets are always uncertain because human beings cannot see the future. To be fair, we would concede that there is greater complexity in current market conditions that will likely require second and third level thinking. We would encourage investors to re-read the “Art of the Deal” – for the most part, the US Administration is implementing the Trump policy agenda as telegraphed.
The good news is that this has created “emotional” sources or volatility that we have been able to exploit. For example, the tariffs announced last week on Canada and Mexico were not intended to raise revenue but designed for national security reasons. We exploited the emotional overreaction last Monday by scaling up our exposure to Asia & China technology stocks that opened down 4.5%. Of course, there is also attractive asymmetry in that sector. Our Asia Tech sub-portfolio trades on 11 times earnings, net cash on balance sheet and FY+1 EPS of +25%.
Moreover, our sense is that the prevailing bias is too pessimistic on growth-inflation impact of the US Administration’s policy agenda. The consensus belief is that tariffs will lower GDP and raise inflation risk. Concurrently, the capacity of the Fed to respond to falling growth expectations in a timely manner further increases downside risks to growth – making equity prices more vulnerable to weakness – tightening financial conditions, which might eventually require even more easing from the Fed. Our quarrel with the consensus is that this observation might overstate the market unfriendly aspects of the policy agenda and understate the benefit of de-regulation, tax cuts, energy policy and fiscal consolidation. US manufacturing new orders – a reliable leading indicator of Asia trade and earnings revisions – rebound sharply in January (chart 1).
Chart 1
On the negative side for US equities, elevated valuation and limited risk compensation is a challenge if AI does not deliver returns to meet investor expectations. As we noted last week, Our conclusions post Deep Seek are 1) AI gets cheaper, 2) AI requires less power than previously thought, 3) AI proliferates faster, 4) AI winners aren’t who we thought and 5) existing capital spending outlays might be very wrong. Of course, for now, the US mega-cap tech companies have largely reconfirmed capital spending guidance post results.
The complexity for markets more broadly is that the consensus belief in American exceptionalism and the mega-cap technology sector has become extremely crowded. That is evident in performance, positioning, and valuation. Our sense is that there is also a strong recency bias. Market participants are not evaluating the economic cycle and regime shift particularly well as most historical models and analysis tend to be cyclical or mean-reverting in nature.
What we do know is that US equities, especially mega-cap technology, has very heroic growth and profit margin assumptions that are vulnerable to disappointment relative to beliefs. In contrast, valuations, positioning, expectations, and beliefs are the opposite for Chinese technology. We don’t know if the Alibaba AI model is superior, or if they can monetise the platform, but the stock trades on 10 times earnings, net cash on balance sheet and is buying back shares. It has rallied handsomely so far year to date. Moreover, our sub-portfolio of Asia tech trades at 11 times earnings, net cash on balance sheet and FY+1 EPS of +25%. Following a long bear market since February 2021, perceptions have started to shift on the sector. Our sub portfolio of Asia Tech is +37.2% over the past year and +23% ahead of MSCI Asia Pacific.
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