Unfortunately, this investment is not available for the investor type and location you have selected. Please consider the alternative funds or contact us to explore all your options.
Please confirm that you have read and understand the following terms of use of this website.
You are about to access the pages of Harding Loevner Funds plc, an Irish umbrella type open-ended investment company (the “Company”), which contains information about the Company and its sub-funds (each a “Fund”). These pages are for informational purposes only. It is not investment advice, nor is it intended to be relied on as a forecast or research and does not constitute an offer, recommendation or solicitation to buy or sell shares in any Fund. Access to and the information contained in these pages are restricted to persons who are residents of jurisdictions in which the distribution of the information herein is permitted. Please consult your professional advisers if you have questions about a particular investment or are unsure of the laws and regulations applicable to you.
Investment in any Fund may only be made in accordance with the terms of the relevant offering documents, and subject to the laws and regulations applicable in which the offering documents are distributed. Please further note that not all Funds are available for distribution in all or the same jurisdictions. No information regarding the offering of shares of the Funds is intended for, nor will offers or sales of such shares generally be made to, residents of the United States of America, its territories or possessions. In particular, neither the Funds nor any shares are or will be registered under the U.S. Securities Act of 1933, as amended, the U.S. Investment Company Act of 1940, as amended, or otherwise in the U.S. and may not, except in a transaction which does not violate U.S. securities laws, be directly or indirectly offered or sold in the U.S. or to any U.S. persons.
By clicking on the “I Agree” button below, you acknowledge that you have read and understood this disclaimer and wish to proceed to these pages.
Harding Loevner is not responsible for the content, accuracy, or timeliness and does not make any warranties, expressed or implied, with regard to the information obtained from other websites. These links are provided for your convenience and for navigational purposes only. They should not be considered a recommendation to buy or sell any securities. It should not be assumed that investment in the securities identified has been or will be profitable.
By clicking on the "I Agree" button, you acknowledge that you have read and understood this disclaimer and wish to proceed.
Currency Depreciation: A Rational Response to Tariffs?
By Ferrill D. Roll, CFA, Chief Investment Officer | January 16, 2025
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.
By Anix Vyas, CFA, Analyst and Portfolio Manager | October 22, 2024
An unexpected interest-rate increase from the Bank of Japan helped ignite a market firestorm during the third quarter.
The central bank’s decision in late July caused a swift appreciation in the yen, a currency shift that disrupted the widely used strategy known as the yen carry trade, where investors borrowed at low Japanese rates to purchase higher-yielding foreign assets. The rapid unwinding of these positions, combined with weaker US economic data and disappointing earnings from US technology giants, culminated in a 12% drop in Japan’s Nikkei index on August 5, while expected volatility in the US equity market spiked to a level not seen outside of major crises.
Markets recovered quickly, though, and Japan ended the quarter as the second-best performing region for small-cap stocks. As the chart above shows, the yen also topped currency returns.
For several quarters, Japan has been a particularly challenging market for investors in quality growth small companies, as stocks of cheaper, low-quality businesses tended to outperform. However, another market development in Japan in the third quarter was that style patterns reversed, with stocks of faster-growing, more expensive companies leading returns. The charts below depict the spread between returns for the fastest- and slowest-growing, highest- and lowest-quality, and least and most expensive small caps by region for both the third quarter and trailing 12 months, based on Harding Loevner’s proprietary growth, quality, and value quintiles.
Although it’s too soon to know whether Japan’s value rally is finally over, the third quarter provided a welcome reprieve.
By Pradipta Chakrabortty, Analyst and Portfolio Manager | October 17, 2024
Chinese stocks in September had their best week since the 2008 financial crisis after officials unveiled a new set of stimulus measures. The MSCI China Index surged 25% in just the last nine trading days of the third quarter, erasing 20 months’ worth of losses. Unlike other stimulus measures over the previous two years, this one was more comprehensive and included two key financial measures: a 50 basis point cut in the reserve requirement ratio for banks and a 20 basis point drop in the seven-day reverse repo rate.
There were additional measures aimed at boosting the real-estate sector, which rebounded by about 50% in late September, as seen in the chart below. The policy announcements included cutting mortgage rates for existing homeowners by as much as 50 basis points and cutting the down payment requirement for second home purchases by 15%.
For the equity market, there are now 500 billion renminbi swap facilities for brokers and asset managers to fund stock purchases, with regulators announcing another 300 billion renminbi relending facilities to fund share buybacks. This led to a wide rally across most Chinese stocks, but the gains were more prominent in brokers and insurance companies that benefit most directly from these announcements.
By Ray Vars, CFA, Portfolio Specialist | October 02, 2024
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.
Source: Bloomberg, MSCI Inc. Data as of June 30, 2024.
The current period of US outperformance has already lasted twice as long as any prior cycle in the past 50 years, and that fact alone would seem to flash a warning. Investors also face many large and evolving risks—everything from elections and wars to potential economic upheaval from AI and the far-reaching effects of an increasingly less cooperative, multipolar world. All of this suggests that the next decade in equity markets is unlikely to look like the past one.
We are skeptical of our, or anyone’s, ability to predict market cycles, and the Harding Loevner investment process is structured to avoid attempts at timing them. We invest globally for the long term in stocks of high-quality businesses that can grow across economic cycles, and our research is devoted to understanding the enduring characteristics of companies and the competitive structure of their industries. As bottom-up investors, although we seek to understand how changes in the economic environment might impact our companies, we don’t believe in making investment decisions solely based on macroeconomic what-ifs. Still, it’s plain to see that there are certain elements of the recent investing environment that have been broadly unfavorable for international shareholders. Here are five possible changes in market conditions that could help pave the way for international markets—especially stocks of high-quality companies—to rise again:
1. The “Magnificent Seven” Stumble
Over the past couple of years, US stock-market outperformance has been dependent on a small subset of stocks—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla, a group known colloquially as the Magnificent Seven. These seven stocks have been responsible for a third of the gains in the MSCI ACWI Index since the end of 2022, and all of its returns in the second quarter of 2024. If these stocks were to falter, international markets might become relatively interesting again. After all, the market capitalization of the global benchmark may be heavily weighted toward the US, but the majority of the most profitable and capital-efficient businesses in most sectors—as measured by cash flow return on investment—are located outside the US:
Data as of December 31, 2023.
Source: Harding Loevner, FactSet, HOLT database, MSCI Inc.
In the past 50 years, there have been two periods of sustained US underperformance, both of which were preceded by US valuation bubbles. One directly followed the Nifty-Fifty era of the late 1960s and early 1970s, when a very different-looking set of companies were held up as magnificent—including bygone brands such as Sears Roebuck and Polaroid. After the subsequent crash, the MSCI EAFE Index (the MSCI ACWI didn’t exist until 1990) dramatically outperformed the US index for eight years. Later, in the early 2000s, the bursting of the dot-com bubble and the liftoff of China’s growth led to another period of international outperformance that lasted until the beginning of the financial crisis.
From a macro perspective, what investors have had in the US for the last couple of years is a good economy despite high interest rates and roaring inflation. The market is now digesting the Federal Reserve’s decision in September to aggressively cut rates to support employment levels as inflation heads in the right direction. However, with a group of largely tech-oriented stocks dictating overall market returns, perhaps a more relevant consideration for investors is whether the revenue models forming around generative AI can live up to the high expectations for profit growth that are baked into those companies’ share prices. (There is a cautionary tale in Cisco Systems and the advent of the internet.)
2. China Gets Back Up
After three decades of breakneck growth, China’s economy is now sputtering, and comparisons are being drawn to Japan’s lost decades, a period of economic stagnation that began in the 1990s and continued into the 2020s. Add in rising geopolitical tensions and how they are causing companies to alter supply chains, and there appears to be a general apprehension toward Chinese stocks. Yet, even with possible deflation and an aging population, China remains one of the most populous countries in the world and a significant source of economic activity. It accounts for nearly a quarter of the value of the MSCI Emerging Markets Index—a larger weight than any other country. Because of China’s large manufacturing base and consumer population, the health of its economy is also important to companies in other international markets, especially Europe (Atlas Copco, for example, a Swedish industrial-equipment provider that has reported weaker demand from China for compressors and vacuums used in solar, battery, and electric-vehicle manufacturing). The last time that international markets outperformed, China played a key role, and given the size of its economy and index weight today, it is easy to imagine how receptive markets would be to better news there.
Moreover, there are scores of Chinese companies that remain solid despite the overarching environment, which is why it’s important to understand not just what is happening at a country level but also at an industry and company level. High-quality companies—those with strong balance sheets and consistent free-cash-flow generation—are better equipped to withstand, or even expand, during difficult times such as China is encountering. With the share prices of so many quality growth companies in China failing to reflect the strength of the underlying businesses, valuations in China are more compelling than at any point over the past 30 years.
3. India Continues Its Ascent
As one of the world’s fastest-growing economies, India’s profile has been rising among US consumers and investors alike. A “Made in India” tag is something shoppers now encounter quite a lot, while investors increasingly wonder about India’s potential to stand as a substitute for China’s stock market. But investing in India is also full of challenges. For starters, it is the most expensive market in the world, and much of the market’s recent gains have come from cheap stocks, which tend to be those of lower quality. These include many state-owned enterprises (SOEs) benefiting from government spending. Finding companies that can deliver long-term profitable growth and whose stocks can be purchased at reasonable prices is difficult. However, as India’s market develops further, and the fundamental weakness of SOEs becomes apparent, high-quality growth businesses should be rewarded for their superior fundamentals, and more of them may emerge over time. And while it remains unclear whether India’s infrastructure, policies, and other features of its economy are built to support global manufacturing and trade on the order of China, its population and potential purchasing power can’t be ignored, and the country’s rising global competitiveness is likely to present opportunities for investors over the long run.
4. Peace Breaks Out
Between the wars in Ukraine and Gaza and the rising tensions in the Middle East and South China Sea, fears of international conflict continue to be an inescapable theme of markets, and one in which investors are at the largest information disadvantage. Although uncertainty alone can be enough to topple stock prices, companies around the world have also had to contend with the tangible effects of geopolitical instability, such as the dangerous disruptions to vital trade routes along the Red Sea, as well as, at one point in the Russia-Ukraine war, the prospect of a European winter natural-gas shortage. And while investors cannot reasonably predict the likelihood of China’s aggression toward Taiwan escalating to an invasion, it is one of the risks that complicates the picture for AI beneficiaries such as TSMC, whose factories are situated on the northern coast of Taiwan and supply the chips used by the market’s favorite semiconductor company, NVIDIA. The absence of any more significant destabilizing developments doesn’t mean that global tensions will simply fizzle; however, wars, like market cycles, generally do end, which would alleviate at least some of the pressure on international stocks and call attention to their relatively attractive valuations.
5. AI Goes International
As AI begins to ripple through the economy, investors—including us—are trying to determine which industries and companies will be disintermediated by advances in the technology and which are impervious to the coming change. But many investors seem to be certain very early on about which companies will be the biggest long-term winners from AI. The Magnificent Seven, or more specifically, the six tech and communications-services companies that are part of the Magnificent Seven, aren’t the only businesses with revenue models tied to AI. Dutch lithography machine manufacturer ASML, French energy-management solutions provider Schneider Electric, and German software provider SAP are just some of the high-quality, non-US companies playing a key role in the transition to the AI era by either supporting the chip-production process, powering AI data centers, or allowing businesses to add AI productivity tools to their digital systems.
These are all potential factors that could reverse international performance, and there are others that they could help set in motion. For example, the persistent strength of the US dollar has hindered the returns of US dollar-denominated investors in international markets, but as international risks dissipate, the dollar may also reverse. A weaker dollar would provide an additional tailwind to investing overseas—just as it did when international markets outperformed throughout the early ’00s. For all these reasons, international markets are a rich hunting ground for high-quality companies with attractive long-term growth prospects and, because of how unloved they have been lately, enticing valuations. No one can say when or how the market inflection will occur, only that history shows it is likely to do so. If that day were to arrive tomorrow, it would be too late for investors with low allocations to non-US equities to reposition their portfolios effectively. And so, for the question we are so frequently asked—“Why international?”—the most succinct answer is this: Because nothing lasts forever.
What did you think of this piece?
You can withdraw your consent at any time. Contact us.
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.