Out of
Our Minds

Ideas, arguments, and musings from inside Harding Loevner.
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Perón’s Ghost: When Self-Reliance Becomes Self-Defeating

The following is adapted from our first-quarter report for the Global Equity strategy. Click here to read the full report.

Amid the turbulence and mixed signals of the Trump administration’s tariff strategy, a discernible tilt toward economic self-sufficiency has emerged. The stated objectives of reshoring manufacturing, reducing dependence on foreign supply chains, and projecting national strength carry political appeal for many, but undoing 50 years of globalization is fraught with risk. Argentina’s mid-20th century descent under Juan Perón offers a sobering reminder of how quickly such ambitious efforts can short-circuit, swapping prosperity for prolonged isolation and decline.

Juan Perón came to power on a wave of popular support, winning democratic elections in 1946 and 1951 with an economic agenda focused on achieving independence from foreign economic and political control. At the time, British and American investors dominated Argentina’s infrastructure, utilities, and key industries, while the nation’s reliance on imported manufactured goods and its commodity-based export economy left it vulnerable to external shocks and fluctuations in global demand.

Argentina’s mid-20th century descent under Juan Perón offers a sobering reminder of how quickly such ambitious efforts can short-circuit, swapping prosperity for prolonged isolation and decline.

In response, Perón’s government launched a program of economic nationalism centered around Import Substitution Industrialization, with high tariffs often reaching over 100% for some goods to protect fledgling domestic industries. These tariffs made foreign goods prohibitively expensive and gave local producers a captive market.

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First Quarter Outperformance of Non-US Stocks At 15-year High

International markets continue to offer opportunities to own high-quality, growing businesses at levels supportive of higher future returns. Investors enjoyed a recently rare taste of that as international stocks rose in the first quarter, outperforming the US market more this quarter than it has in 15 years.

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Stop Making Sense: Echoes of Emerging Markets in Today’s US Policy

I…who took the money?
Who took the money away?
…it’s always showtime
Here at the edge of the stage
I, I, I wake up and wonder
What was the place, what was the name?
We wanna wait, but here we go again…

-Talking Heads, from the film Stop Making Sense

 

The following is adapted from our first-quarter report for the International Equity strategy. Click here to read the full report.

This quarter, global investors have had to grapple with heightened US policy uncertainty, most overtly in the realm of trade but in many other areas as well, from military cooperation to health care to the previous administrations’ industrial policy programs. As we cautioned in our fourth quarter 2024 letter, the US political climate has featured policy volatility almost from the outset of the Trump administration. But that chaos has been greater than we imagined, and the vectors of policy shifts have expanded beyond the “tariffs, tax cuts, and deportations” list that we expected.

Ex US Marks the Spot: Where future returns might be heading

Over the last 14 years, a powerful narrative around the exceptionalism of US equity markets took root. Dominant tech stocks, prolonged low interest rates, and economic stability led to higher returns for US stocks and caused many investors to question the necessity of international allocations. However, the tide has shifted in 2025; international equities have outperformed. Watch Portfolio Specialists Ray Vars, CFA, and Apurva Schwartz discuss the recent shift in market leadership and what the next decade might hold for global equity markets.

The transcript, lightly edited for clarity, follows.

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Surplus Surprise: Vietnam, Emerging Markets Top Global Trade with US

Frontier emerging markets (FEMs) fell in the fourth quarter after the election of Donald Trump in the US ushered in expectations that tariff hikes on a broad range of imports to the US will lead to inflationary pressure. Vietnam was one of the worst-performing FEMs, for good reason: the US is its largest export market. Its exports to the US account for more than 25% of its GDP, by far the largest percentage among FEMs. Exports to the US don’t account for more than 5% of the GDP in any other FEM country (though the US is the largest export market for the Philippines, which also weighed down FEMs in the fourth quarter).

In fact, Vietnam is the only FEM that has become one of the ten largest trading partners with the US. While there are other EM countries, such as Mexico, Taiwan, and India among the top-ten US trading partners, Vietnam has grown a significant trade surplus with the US, due in part to companies rerouting shipments through the country as supply chains have adjusted over the past several years, especially in the wake of disruptions during the COVID-19 pandemic.

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Currency Depreciation: A Rational Response to Tariffs?

The US dollar’s rise since September cut into international markets. Of the 7% decline in international markets in the fourth quarter, the vast majority of it can be attributed to currency depreciation against the dollar.

For countries facing harsh new tariffs from the US, weakening the currency is a highly rational response: What tariffs take away in competitive pricing from other countries, currency depreciation restores with little cost to the domestic economy, keeping products competitive in the destination market. In other words, currency depreciation negates the disinflationary effects of a strong dollar as offsets to the inflationary effects of tariffs.

If a country has few other considerations (such as high foreign debts), that trade-off is fairly painless and blunts the potency of the tariffs to alter any other policy or behavior. So far that’s not what you see in this recent spate of currency depreciation: The two countries currently facing the severest threats from additional US tariffs are China and Mexico, but neither of those currencies exhibited much weakness during the fourth quarter as seen in the above chart. However, in the longer term, we think currency depreciation may not be such a bad thing for the US’s trading partners.

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Why Own International Stocks?

For more than a decade, equity returns in international markets have trailed those of the US. There are various possible explanations, but a central one is that the US, after first staging a faster recovery from the global financial crisis, has tended to produce stronger earnings growth in the years since. Meanwhile, from an international perspective, everything from a strong dollar to geopolitical conflict to volatility in emerging markets to China’s economic slowdown have weighed on relative returns. It also doesn’t help that the arrival of ChatGPT, and the enthusiasm and competition it has inspired for generative artificial intelligence technology, has lately encouraged an almost singular focus on a handful of US tech stocks—out of nearly 2700 index constituents, a mere 0.2% of the companies in the MSCI ACWI Index.

Some investors look at the difference between international and US returns and, expecting that current conditions will persist, wonder what place non-US equities have in a portfolio today. But while it’s easy to fall into that line of thinking, history suggests it is likely wrong. The relative performance of US and non-US stocks has historically been a cyclical phenomenon, and as the chart below shows, their indexes have regularly swapped between leader and laggard over the past 50 years.

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Frontier Markets Require an Active Look

At Harding Loevner, we focus on building portfolios from the bottom up, guided by our quality-growth philosophy, and rarely comment on actions of other investors or index providers. But sometimes it’s necessary to do so to highlight meaningful developments affecting the frontier emerging markets (FEM) asset class.

In June, asset manager BlackRock announced its intention to liquidate its Frontier & Select EM ETF, which once had assets exceeding US$400 million. The company cited currency liquidity challenges in several smaller frontier markets as the main reason for its decision.

BlackRock’s decision to close its passive FEM fund underscores our long-held belief that the idiosyncratic nature of frontier and small emerging markets, as well as their volatility and liquidity characteristics, make them much better suited for an active rather than passive investment strategy.

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Our 2023 Letter to Shareholders

Three years since the first COVID-19 vaccine was approved, growth investors have felt the pain of a relative bear market compared to their value peers. In our annual letter to shareholders, we examine the current economic climate, and discuss why we believe that the types of companies in which we invest are well-positioned to navigate the challenges ahead.

In sum, this time is no different from similar periods in the past in which our taste for high-quality, rapidly growing companies has been out of step with market fashion. We foresee an eventual return of investor focus on such fundamental factors in the face of uncertain and slower economic and corporate profit growth. We therefore remain committed to our favored targets, while reinforcing our attention to the price we are asked to pay for them.

Investments involve risk and loss is possible.

The Portfolio’s investment objectives, risks, charges and expenses must be read and considered carefully before investing. The statutory and summary prospectuses contain this and other important information about the investment company. They may be obtained by calling toll free (877) 435-8105, or visiting hardingloevnerfunds.com.

The Portfolio is distributed by Quasar Distributors, LLC.

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Why Own International Companies?

When US stocks have outperformed for as long as they have—creating the world’s first trillion-dollar companies in the process—it’s easy to forget that plenty of highly profitable businesses exist a long way from Silicon Valley or Seattle.

While US companies account for just over 60% of the market capitalization of the MSCI All Country World Index, their weight is a tad misleading given that a few technology giants—Alphabet, Amazon, Apple, and Microsoft—weigh heavily on the scale. Together, those four are valued at nearly US$8 trillion, more than the next 15 largest US stocks combined.

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Beauty and the Beast

The rise in passive investing is undoubtedly among the most important developments in asset management. The mass adoption of cheap, easily accessible portfolio building blocks that mimic the performance of market capitalization-weighted indices is nothing short of a paradigm shift. Indexed assets now account for over 50% of US domestic equity funds, 40% of global funds, and, despite a later start, already constitute 30% of fixed income fund assets.1 The shift is ongoing and it’s far from clear where the upper bound, if any, might lie.

Much of the debate surrounding indexing centers on the relative merits of taking an active versus passive investment approach. But the question of how indexing might be reshaping market structure is largely unexplored. The standing assumption is that, since passive investment flows mirror the prevailing distribution of capital, index trades are bereft of information and therefore have no effect on the pricing of the underlying securities; hence the overall scale of indexing is irrelevant. But this assumption becomes more tenuous as the share of passively managed assets grows. What if passive increased to, say, 100% of all equity assets? Would those investments still have no effect on prices?

It’s unclear how the widespread use of indexing may be affecting market structure; that is, at what point the sheer quantity of assets mimicking market behavior could start to change the behavior. Maybe it already has.

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Disclosures

“Out of Our Minds” presents the individual viewpoints of members of Harding Loevner on a range of investment topics. For more detailed information regarding particular investment strategies, please visit our website, www.hardingloevner.com. Any views expressed by employees of Harding Loevner are solely their own.

The information provided is as of the publication date and may be subject to change. Harding Loevner may currently hold or has previously held positions in the securities referenced, but there is no guarantee that Harding Loevner currently owns, or has ever owned, the securities mentioned herein. If Harding Loevner owns any of these securities, it may sell them at any time.

Any discussion of specific securities is not a recommendation to purchase or sell a particular security. Non-performance based criteria have been used to select the securities discussed. It should not be assumed that investment in the securities discussed has been or will be profitable. To request a complete list of holdings for the past year, please contact Harding Loevner.

There is no guarantee that any investment strategy will meet its objective. Past performance does not guarantee future results.

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