Liontrust Emerging Markets Fund

• Markets struggled to keep up with the ongoing barrage of tariff announcements and retaliatory threats. However, the resulting weakness in the dollar and Treasuries was a tailwind for markets outside the US.
  
  
• Emerging markets outperformed developed markets, with China particularly strong. The Fund saw good stock selection in China – where holdings are focussed on the recovering domestic consumer market.
  
  
• Offsetting this was a significant negative contribution from the Fund's Indian holdings, with mid-caps in particular experiencing profit taking after their good performance in 2024.

The Liontrust Emerging Markets Fund returned -2.3% over the quarter, compared with the -0.1% return from the MSCI Emerging Markets Index comparator benchmark and the -1.5% average return from the IA Global Emerging Markets sector, also a comparator benchmark*.

The first quarter of 2025 was marked by notable volatility – both in terms of equity market gyrations but also seeing significant shifts in long-term structural themes. The inauguration of Donald Trump for his second term as US President at the turn of the year has led to considerable policy uncertainty – his first day in office saw the announcement of multiple trade reviews, due to report at the beginning of the second quarter. In the meantime, Canada, Mexico and China were hit with initial tariffs on 1 February, with additional tariffs added for China mere days later, whilst Canada and Mexico were given almost immediate 30-day reprieves, as well as exemptions for USMCA-compliant imports. Ultimately, markets struggled to keep up with the ongoing barrage of announcements and retaliatory threats, with the potential impact and uncertain outcome of the forthcoming trade reviews weighing on sentiment. Doubts over supposed US exceptionalism were heightened due to softening economic data out of the US and rapidly falling consumer confidence as price expectations rose, leading to stagflationary concerns. Outside of the US markets, the main impacts of these developments were the significant depreciation of the US dollar – very unusual given that every correction in US markets has seen the dollar rise (or at a minimum hold its value) – and volatility in the US Treasury market, where yields fell alongside weakening growth expectations. The combination of lower global cost of capital and US dollar weakness was a helpful tailwind for ex-US markets.

Global PMIs (purchasing managers index) picked up during the quarter, though this may prove to be a temporary front-running of upcoming tariffs in the current quarter. Sentiment in Europe was buoyant thanks to fiscal loosening, with the European Commission relaxing fiscal rules to exempt defence spending of up to 1.5% of GDP. With the Russia-Ukraine war frequently in the headlines thanks to Donald Trump's calls for rapid ceasefire, markets started to price in what a cessation of hostilities and potential post-conflict reconstruction might look like, with Eastern European markets a key beneficiary. China also delivered a more proactive fiscal policy, with the National People's Congress in March announcing a growth target of "around 5%", anchoring expectations and reiterating a resolve to bolster domestic demand by targeting increased consumption, advanced innovation and an awakening private sector. Moreover, the announcement of the DeepSeek-R1 model on 20 January marked a critical moment in China's tech evolution – achieving performance comparable to OpenAI’s GPT-4 model but at a fraction of the cost and developed with a relatively small team. Having previously trailed behind US foundational model development, DeepSeek showed that Chinese labs could replicate frontier-level large-language models with relatively lean teams, that talent and compute access are no longer limiting factors at this scale, as well as marking China’s shift from application-layer innovation (e.g. TikTok) to core tech development.

Over the quarter, the MSCI Emerging Markets Index returned -0.1% in sterling terms, comfortably beating MSCI Developed Markets in general (-4.7%) and the S&P 500 specifically (-7.2%). Within emerging markets, the best markets were China (+11.6%), Latin America (+9.4%) and Eastern Europe, where Poland (+27.4%) was a star performer. On the flipside, the tech-heavy Taiwanese market suffered significant underperformance (-15.2%) and South East Asian markets also suffered on the back of concerns over lower global trade.

The Fund’s key positive drivers of performance were good stock selection in China – where holdings are focussed on the recovering domestic consumer market – and also through relatively light exposure to Taiwan, where losses were significant. Elsewhere, individual holdings performed well, from DigiPlus in the Philippines, a digital entertainment platform benefitting from the launch last year of Perya Game, a suite of mobile-first games inspired by traditional Filipino carnival classics, to Polish banks such as PKO, where improved sentiment concerning Ukraine drove a significant re-rating.

Offsetting this was a significant negative impact of the Fund's holdings in India, where the market saw a heavy sell-off, especially in January. Having performed extremely strongly in recent years, the Indian market suffered a correction immediately after the New Year thanks to relatively extended valuations, a short-term slow-down in economic growth due to one-off factors last year including the general election and extreme weather events. The underperformance was particularly felt in the mid-cap space and a number of holdings that had performed extremely well in the fourth quarter of 2024 saw heavy profit-taking, providing a considerable drag on performance. That being said, as tariff-induced volatility surged towards the end of the quarter, India's qualities as a domestically driven, relatively insulated economy came back to the fore, further supported by improving growth and earnings outlooks.

Over the quarter, the Fund made a number of changes. On a country basis, the quarter saw a notable increase in exposure to China, Brazil and Poland, with reduced exposure to Taiwan and India. In China, positions were re-initiated in our preferred banks, ICBC and China Merchants Bank, as well as car maker BYD and mobile phone/EV manufacturer Xiaomi. In Brazil, the weighting to water utility Sabesp was increased, and new positions were initiated in cash & carry wholesaler Assai and state lender Banco do Brasil. The Indian exposure was somewhat rationalised given concerns over market weakness impacting retail investor sentiment, which has been supporting market infrastructure stocks such as KFinTech and wealth manager 360One. A new position was however initiated in Chola, a leading financial services operator in India, which we see benefiting from incremental improvements in asset quality throughout 2025 as well as a pickup in growth thanks to branch investments in the past 18 months.

Overall, emerging markets are faring impressively well considering the extremely low expectations for the asset class at the outset of the year. Markets that have been in the crosshairs of Donald Trump's trade policies have managed to hold up extremely well, whilst it is the US that markets have questioned more. We see domestically focussed markets such as China and India as relatively well positioned for the current levels of uncertainty, whilst special situation markets such as Poland and Greece offer attractive diversification. Given low valuations and ownership for emerging markets, ongoing dollar weakness and contained US bond yields offer an appealing risk-reward despite the ongoing tariff headlines.

Discrete years' performance (%) to previous quarter-end:

*Source: FE Analytics, as at 31.03.25, primary share class, total return, net of fees and income reinvested. 

KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. This Fund may have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the Fund's value than if it held a larger number of investments. The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Investments in emerging markets may involve a higher element of risk due to less well-regulated markets and political and economic instability. This may result in higher volatility and larger drops in the value of the fund over the short term. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.

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