Korea is still an emerging market, or so MSCI reckons. On Tuesday, the most important provider of global indices – the MSCI World and the MSCI Emerging Markets matter much more than the equivalents from FTSE Russell and S&P Dow Jones – once again declined to put it on the watch list for upgrade to developed status.

On one hand, this situation feels increasingly ridiculous. Korea is a very advanced, high-tech economy, home to key tech players such as Samsung Electronics and SK Hynix. GDP per capita measured at purchasing power parity is higher than the UK, France, Japan and many other heavyweights. How can this be an emerging economy in any meaningful sense?

Yet there are aspects to Korea that feel like an emerging market. The ones that MSCI cites are certain limitations that bother institutional investors (restrictions on trading the Korean won offshore is a key one) – although FTSE Russell has classed Korea as developed since 2009, so the importance of these is not cut and dried.

However, perhaps more significant for the long-term future of the Korean stock market is the dominance of large business conglomerates (chaebols), of which the Samsung group is the biggest. The founding families of these groups still control them – often using a series of shareholdings between different listed entities – and frequently make decisions for their own benefit to the disadvantage of minority shareholders.

Generational changes are happening in Korea

Corporate governance is a major reason for the “Korean discount” – the fact that Korean stocks trade at lower valuations than peers elsewhere – but there are signs that this is changing. Policymakers have been pushing reforms, inspired by what governance changes in Japan have done for that market, with some success.

Generational changes also mean a structural shift in attitudes is inevitable, suggested a Korea manager at a recent conference. The individuals who built up chaebols in the 1960s and 1970s put huge importance on passing on control to their heirs as cheaply as possible (Korea has very high inheritance tax). They are now largely dead, the handovers are being completed, and tax bills are being settled. Their heirs will have different priorities that may often be better served by unlocking the full value of their businesses.

So the bull case for Korea sounds easy to make. It does not depend on MSCI one day acceding to the obvious, although being added to the developed index would result in significant inflows from tracker funds. And on the face of it, Korean stocks look very cheap – the MSCI Korea stock market index is on a forecast price/earnings ratio (p/e)of eight.

Yet this reflects the huge weight in Samsung and SK Hynix (65% combined) and how fast they are expected to grow. The MSCI Korea Equal Weight is on a forward p/e of 15, which is not cheap. Most of all, note the market is up by 260% in won terms in a year. If the AI boom continues, it will go higher, but have no illusions. Right now, a Korea stock market tracker is not a valuation play or a reform play – it is entirely an AI play.

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The emerging market (EM) universe is very diverse in terms of what drives individual economies. What does China have in common with India (other than being populous and in Asia) or either of them with Brazil? Yet they are treated as a block, and recent trends are stretching these contradictions further than ever.

A top-down investing strategy often involves assigning things to groups, then buying the most compelling groups or choosing the most attractive within a group. These groups can seem arbitrary – the difference between members can be as big as the similarities. Yet in the investment business, classifications that seem easy to understand can stick around well past the point where they make sense.

Standard rules of thumb for emerging markets would tell you that the last few months have been difficult. Many emerging markets are energy importers, so will suffer from higher oil prices. Markets also tend to be affected by inflows and outflows from foreign investors. If global investors get more nervous, they would be expected to cut emerging-market exposure first and take their money home. Yet the MSCI Emerging Markets index is up by 20% in sterling so far this year. How?

AI stocks are over-represented in emerging markets indices

The explanation hinges on two points. The first is that two of the biggest markets in the index are emerging markets only in one very specific sense. South Korea and Taiwan retain certain restrictions, mostly around their currencies, that MSCI deems incompatible with being in the developed markets group. Yet in many respects, they are both wealthier and more advanced than many developed economies.

The second is that a few huge companies – Taiwan Semiconductor (TSMC), Samsung Electronics, SK Hynix – are huge beneficiaries of the AI boom and are driving their markets even more than the Magnificent Seven drives the US market. Those three stocks account for almost 30% of the MSCI Emerging Markets index. Taiwan and Korea together make up 50% of the index. In turn, TSMC is 55% of the MSCI Taiwan, while Samsung Electronics and SK Hynix account for 60% of the MSCI Korea.

These are eyebrow-raising numbers. They have worked out very well for any broad emerging-market investor. Still, we must remember that if the AI boom ends and the US market slumps, the emerging market index will do the same – it's been a play on the same theme.

If you want diversification, you will only find it in funds whose mandate does not bring in these stocks – BlackRock Frontiers (LSE: BRFI) or Barings Emerging EMEA Opportunities (LSE: BEMO), for example. Of course, these funds have lagged in recent months, held back by the lack of tech exposure or battered by the Middle East crisis. I would not say it is yet time to rotate out of broader emerging market funds. But it is something to keep in mind if the crisis passes and the AI boom falters.

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In Asia, it is the best of times, it is the worst of times. The crisis in the Strait of Hormuz is hammering energy importers hard, even as parts of the region emerge as the principal winners of the mania surrounding AI. That pushed the MSCI Emerging Markets Asia index up 15% in the first five months of the year.

Yet on currency markets things are grim. Talk is turning to the 1997 Asian financial crisis, when large trade deficits caused investor confidence to “evaporate within months”, triggering “deep recessions” and political tumult, say Swati Pandey and Claire Jiao on Bloomberg. Indonesia, the Philippines and India look especially vulnerable to capital outflows. Respectively, their currencies have shed 8.5%, 9.5% and 10.5% against the US dollar over the past 12 months.

The once-promising Philippines has been hit especially hard, says Daniel Moss, also on Bloomberg. The country was a Southeast Asian growth star in the 2010s. Now inflation is running at 7% and heading for double digits, a huge surge from 2% in January. The local PSEi share index is down 5.6% over the past three months. The Philippines' difficulties could be a taste of things to come elsewhere.

But nowhere are Asia's contradictions as stark as in South Korea. The won is trading at its lowest level against the dollar since the 2008 financial crisis, say William Sandlund and Daniel Tudor in the Financial Times. Yet puzzlingly, Korea is enjoying a record trade surplus because of insatiable demand for its computer chips. An export boom should be strengthening the won, not weakening it.

Paradoxically, one explanation may be the blistering pace of an Asian stock market boom. The Kospi index has doubled since the start of the year, driven by large runs at chip specialists Samsung and SK Hynix. That has forced fund managers to sell to avoid overexposure, with foreign investors offloading a record net $79 billion of local equities this year.

Taiwan's Taiex index has gained 58% this year, seeing it surpass India to become the world's fifth-largest stock market. Almost all of the world's high-end chips are made by Taiwan's TSMC. The island, which is only slightly larger than Belgium, now accounts for almost a quarter of the entire MSCI Emerging Markets index.

Investors in Asia should ‘buy the shovels’

When there's a gold rush, it's good if 30% of your economy is “based on shovel manufacturing”, says Joseph on Substack. Taiwanese GDP rose at an annualised pace of 23.6% in the final quarter of 2025. GDP has risen by almost a quarter since ChatGPT was launched in late 2022. Not everyone is benefiting from the boom – exporters are doing well while everybody else struggles. But there is no arguing with this modern growth “miracle”.

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What force will shape the world in the next 20 years? The answer is China's drive to financialise, according to Diana Choyleva, founder and chief economist at Enodo Economics.

In this episode of the podcast, Diana speaks to MoneyWeek's Cris Sholto Heaton about how the AI race differs in China versus the West, the transformation of the country's equity market, and the breakdown of globalisation.

You can watch this episode on our YouTube channel or subscribe to it on any podcast platform.

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MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew Van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

Should you invest in China, or is it essentially “uninvestable”? That was the gist of the debate just a few years ago. The West can never quite seem to make its mind up about the Middle Kingdom. Once derided as cheap but tacky, in 2026 China is suddenly cool. Social-media influencers show off their indoor slippers and traditional Chinese medicine, while quipping that they are “learning to be Chinese”.

Polling by Pew Research shows that, while only 28% of Britons aged older than 50 have a favourable opinion of China, that figure doubles to 56% of the demographic aged 18-34. Where older Westerners see a repressive one-party state, the young scroll TikTok and share images of the futuristic “cyberpunk” city of Chongqing (it's worth a visit, if you can handle the brutal humidity).

A warning for those wanting to invest in China

This pendulum swing is nothing new. During the 2000s, China's extraordinary growth (14% in 2007 alone) led to feverish speculation about when exactly it would become the world's largest economy (2027, according to one widely cited projection). The story remained bullish during the early 2010s, as China used a massive infrastructure stimulus package to duck the stagnation plaguing developed economies after the great financial crisis. In the process, the country built the world's largest high-speed rail network, a service whose gleaming modernity makes Britain's trains feel like a donkey and cart by comparison.

But simultaneously, a more negative narrative took hold. The first signs of trouble came in summer 2015 after a parabolic run-up in Chinese shares went into reverse. The CSI 300 index plummeted 44% between June of that year and January 2016. A MoneyWeek cover at the time depicted a dragon roller-coaster hurtling downwards. In many countries, such a plunge would herald the beginning of a devastating recession. Not in China (GDP registered an official growth rate of 6.7% in 2016, a modest fall from the previous year).

In China, where the stock market is traditionally regarded as being little better than a casino, it is state banks, not investors, that decide where credit will be allocated. But it was a warning shot to investors. The most optimistic projections for Chinese growth didn't quite pan out. Today, total GDP is still only 65% of the US level, and a mere 15% of the level in terms of GDP per capita.

Still, grown it has, and at a rate and consistency with little precedent in world history. Yet those gains haven't accrued to those who decided to invest in China. Since the start of 2008, Chinese GDP has risen by 344%. The CSI 300? 1%. You can still make money if you invest in China, of course. Local shares have zoomed 43% higher since September 2023. But as a long-term investment, the case remains unproven. Stock markets rise and fall, but most trend upwards. It is the reason investing has a better reputation than gambling. Yet China's equity graph really does resemble a roller-coaster, with long climbs followed by hair-raising plummets.

China is far from the only emerging market to exhibit a disconnect between GDP growth and equity returns, although its case is especially extreme. The exact causes are much debated.

One important factor is simply that investors adore a good emerging-market growth story. That causes valuations to rocket, front-loading years of earnings growth into current valuations (something that current buyers of expensive Indian shares would do well to bear in mind).

A second reason is that many of the gains from growth tend to be captured off stock markets, particularly by landlords. Just imagine the fairy-tale returns from holding a patch of land in Shenzhen, an impoverished collection of fishing villages that blossomed in two decades into the centre of global technology manufacturing.

China's property bubble has burst

The gains to be had from property weren't lost on the Chinese. Newly wealthy Chinese households had few other investment options. Bank deposits pay miserable returns. Foreign shares are off limits, and the local stock market is volatile. So they went massively for bricks and mortar, buying second and third homes as investments. When built, these assets were often not even rented out, lest tenants detract from the much more important objective of maximising capital gains.

What followed was a property boom for the ages. During three years in the 2010s, China used more cement than America employed in the entire 20th century. The bubble was clearly getting out of hand. In 2020-2021, officials called time by imposing stricter caps on leverage. Property developers went to the wall, most famously including giant Evergrande, which imploded with $300 billion in liabilities. In 2023, Reuters estimated there were 7.2 million unsold homes. National property prices fell 40% between 2021 and 2025. That was devastating for a middle class that holds nearly 70% of its wealth in property. The property-shaped cloud over sentiment has yet to lift. In January and February, retail sales endured their weakest two-month start to any year since 2000 outside the Covid era.

There are plenty of other concerns for those looking to invest in China. The country's fertility rate is running at close to one child per woman, making it one of the world's most rapidly ageing societies. And a 2021 crackdown on tech firms (now largely reversed) was a reminder that all businesses ultimately operate at the pleasure of the Communist Party.

How China learnt from Japan's mistakes

Since the property bust, many economists have noted parallels between China and Japan. During the 1980s Japan was regarded as the world's most technologically advanced nation. Following the crash in the 1990s, its corporations slowly began to slip behind, failing to capitalise on the rise of the internet. But it looks as if China will avoid Japan's fate.

Tokyo spent the 1990s pouring money into zombie firms; in 2021, Beijing pulled credit from property and redirected it with military zeal towards the “New Productive Forces”, official jargon for things such as electric vehicles, rare earths, batteries, green technology and AI. Chinese companies are now conquering new global markets with terrifying efficiency. One in seven cars sold in the UK this year was Chinese, up from 1.3% just five years ago. Britain's top-selling car is currently the Jaecoo 7, a brand that almost nobody had heard of until recently.

China's critics have long pointed to what might euphemistically be called the country's relaxed attitude towards other nations' intellectual property. But China's days as a mere imitator of Western inventions are ending. As economics commentator Noah Smith notes on Substack, Chinese firms now know how to do things that Western companies simply can't replicate. Nowhere else has such a dense clustering of electronics and tooling engineers. Chinese firms are opening factories in other countries, and those factories are proving more productive than the foreign competition. Soon, the Germans will be copying the Chinese.

Better ideas are only one part of the equation. The other is lavish levels of state support, especially in the form of never-ending credit lines. Chinese factories are producing too much. The country's global export dominance – the trade surplus reached $1.2 trillion last year – is a symptom of the fact that there aren't enough domestic buyers to soak up a glut of batteries, solar panels and especially cars. China's manufacturers have turned to world markets not out of strength so much as desperation; razor-thin profit margins mean they are fighting to keep the lights on. China's industrial strength and its chronic deflation are thus two sides of the same industrial-policy coin. You might argue, as Smith does, that China is simply making a huge capital-incinerating mistake. But you might also argue, as Jeremy Warner does in The Telegraph, that given the choice between wasting capital on excess industrial capacity and wasting it on unsustainable welfare, as the West does, China is making the better strategic choice. Chinese industrial policy makes a lot more sense “if your objective is that of enfeebling the US... while insulating China against the sort of supply-chain vulnerabilities we see buffeting Western economies”.

Should you invest in China?

Will Chinese shares prove a good investment over the next ten to 20 years? Given the historical record of equity returns, the jury is still very much out. What does seem less likely today than even a few years ago is a repeat of the Russian experience, where foreign investments were effectively zeroed out following Vladimir Putin's invasion of Ukraine.

In 2022, the parallels with Chinese assets in the event of a Taiwan conflict seemed obvious. But the world has changed. It is far from clear that Donald Trump's America would stand in the way of a Chinese invasion across the Taiwan strait, and even harder to believe that the UK, acting in solidarity with the US, would cut off trade with China, the world's second-largest economy, as aggressively as we have sanctioned Russia, a comparative minnow.

Taking a one- to three-year view, the Middle Kingdom looks a reasonable bet. Firstly, because China's newfound coolness might just be a foretaste of a “vibe shift” about to occur in the market. Markets have always traded on narrative as much as cold, hard facts about Ebitda, and over the past decade, the rise of social media has only amplified this trend (how else can we explain car-maker Tesla's current price-to-earnings ratio of 324 times earnings?). Secondly, unlike Tesla's stock and its ilk, China has genuine value appeal. The MSCI China index trades on a very reasonable 11 times forward earnings, which should cap downside risks if anything goes wrong.

Punting the whole pension on Shanghai would be imprudent, but a trade that ticks both the momentum and value boxes deserves to be taken seriously. In 2026 the meme winds are blowing in favour of China. Given the entry price, it seems foolish not to lean into it.

The best ways to invest in China now

Before investing in China, it's worth auditing your current exposure. Enthusiastic buyers of emerging-market funds may well discover that they already have quite enough Chinese shares. As much as a quarter of many emerging-market trackers and funds are allocated to China. And for those nervous about conflict in the Taiwan strait, note that soaring semiconductor valuations have recently seen Taiwan's share of the emerging-market sector balloon, in some cases to another fifth or more of many funds.

By contrast, investors with a bias towards developed markets may be underweight China. China accounts for a mere 2.9% of the MSCI ACWI index (ranking behind the economic juggernaut that is Mark Carney's Canada). Compare that with China's 17% share of global GDP. There are sensible arguments for why Chinese markets shouldn't take up that much of a typical equity portfolio, but a 2.9% allocation is much too low for a country that is seizing the high ground in so many of the industries of the future.

The three leading active China trusts are Fidelity China Special Situations (LSE: FCSS), JPMorgan China Growth & Income (LSE: JCGI) and Baillie Gifford China Growth (LSE: BGCG). The funds have more similarities than differences, with each having put in a similar performance over the past 12 months, and a rising tech tide driving gains of about 25%. JPMorgan pays out a 4.7% dividend.

There is a solid case for active management in China, where Western investors will want to load up on tech and consumer shares, while steering clear of state-owned banks and low-quality firms. Fidelity has the best long-run record, but its slight tilt towards small and medium-sized firms may not be the best play at a time of relentless domestic deflation. Baillie Gifford, which has more of a growth bias, fits the bill better for those seeking a tactical momentum play.

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Asian markets (excluding Japan) are still widely classed as “emerging markets”, but the description is misleading. China, South Korea and Taiwan now account for more than 75% of the MSCI Asia ex Japan index and more than 60% of the MSCI Emerging Markets. South Korea and Taiwan are high-tech economies by any standards. China is a more mixed picture, but highly advanced in many areas.

This means that Asia is a hard region to ignore. Four of the world's 30 largest firms are based there: Taiwan Semiconductor Manufacturing (TSMC); Korea's Samsung Electronics and SK Hynix; and China's Tencent. Crucially, these “fantastic four” are not just big companies, but also very well-placed. “The AI build-out is positive for Asia, with 38% of data-centre capital expenditure going to Asian businesses,” says Emily Whiting of JP Morgan.

In particular, TSMC is “one of the best businesses in the entire world”. While Nvidia and others design cutting-edge chips, it is TSMC that makes them. The market is growing strongly and chips are becoming almost a consumable, replaced every few years. That makes TSMC's forward price/earnings ratio in the high teens look almost like a bargain.

Meanwhile Samsung and SK Hynix dominate the market for memory chips, with Samsung trading on a single-digit forward multiple. SK Hynix's specialism in ultrafast, high-bandwidth memory commands a higher rating, but still only in the mid-teens.

Tencent is very different: it is mostly a domestic business, focused on entertainment, social media, the internet and gaming in China – ie, a consumption play. “Asia has 60% of the world's population and 48% of its GDP yet only accounts for 9% of the global stockmarket valuation,” says Whiting. “Demographic trends are strong, with over one billion people moving into the consumer class, to the benefit of the banking, financial and consumer sectors.”

Wider opportunities in Asian markets

This ensures that while nearly all the Asian specialist trusts have an exposure of more than 30% to the “fantastic four”, managers can find plenty to buy beyond the heavyweights. Look for value in Southeast Asia rather than China or Korea, suggests Abbas Barkhorder of Schroders. Return on equity in China has been “heading in the wrong direction since 2012 due to over-investment”, he argues.

India “remains expensive” among Asian markets, but offers some opportunities. The banking sector is attractive given “low banking penetration and private sector banks taking market share from state-owned ones”. Insurance also has scope for strong growth due to “low levels of insurance cover and a significant need for cover, given high out-of-pocket expenditure on healthcare”.

Recent performance of most of the Asia regional trusts has been very strong, led by Baillie Gifford's growth-focused Pacific Horizon (LSE: PHI) and Schroder Oriental Income (LSE: SOI). The market setback has knocked the region back by about 10%. This re-establishes absolute as well as relative value and provides an opportunity to invest for the long term.

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Vietnam is one of the world's fastest-growing markets, and this trend is expected to continue over the next decade. The economy is benefiting from growth in all three key components of GDP: rising exports as global firms diversify their supply chains from China; a major investment drive backed by both the government and the private sector; and the growth of consumer spending as the middle class expands.

At present, Vietnam is still classed as a frontier market rather than an emerging market. This distinction is about market infrastructure and access rules rather than the opportunities available – it is actually a larger and broader market than some countries that are already classed as emerging markets – but it limits how much exposure many foreign investors will have. However, FTSE Russell plans to reclassify Vietnam into the FTSE Emerging Market index in September 2026. This should mean that a range of new investors – both tracker funds and active funds benchmarked against it – will begin to put money into the market.

There are three UK-listed investment trusts that specialise in Vietnam. The largest is the £1.2 billion Vietnam Enterprise Investments (LSE: VEIL), followed by the £700 million VinaCapital Vietnam Opportunity Fund (LSE: VOF), and the £75 million Vietnam Holding (LSE: VNH). All of these trusts share a number of top holdings, which reflects the reality that emerging markets often have a limited number of large, higher-quality companies.

Vietnam's banks act as “amplified growth proxies”

All three have a lot in financials – for example, VEIL has around half. “Vietnam's economy is overwhelmingly bank-funded,” says Thao Ngo, who manages VEIL with Tuan Le. Bank credit accounts for around 145% of GDP due to underdeveloped bond and equity markets and credit growth runs at roughly two to 2.5 times the nominal GDP growth rate. “This leverage to GDP makes banks not just a proxy for growth, but an amplified proxy.” The sector enjoys a return on equity of 17%-18% compared with a regional average of 9%-11%.

VNH's portfolio is more concentrated than that of VEIL. It tilts more to mid-cap stocks than its peers, although at the end of 2025, it had around 75% in larger stocks “reflecting adaptation to market realities while maintaining conviction in Vietnam's structural story”, say the managers in the latest interim report. Their strategy focuses on high-growth companies geared to domestic consumption, industrialisation and urbanisation. The largest holding (at 10%) is Mobile World Investment Corp, which is also a major holding for VEIL and VOF. This grocery-to-electronics retailer and mobile-phone group plans to expand in Southeast Asia as well as growing further in Vietnam.

VOF looks for an extra edge in private markets. It has seven private holdings alongside 21 public investments (many of the latter were made before the firms listed). This builds exposure to sectors that are under-represented on public markets, such as consumer themes, technology and renewable energy. These are “developing quickly, but are still at a nascent stage to achieve maturity for listing”, says the fund, which is managed by Khanh Vu. For example, healthcare is an important area that is under-represented in public markets: the entire sector – comprised of one general hospital, a handful of generic drug manufacturers, and pharmacies – accounts for around 1% of the index. VOF has so far invested in three hospital platforms and successfully exited two.

At present, the three are trading on discounts to net asset value (NAV) of 15%, 7% and 23% respectively, which is broadly in line with their five-year averages. The Vietnamese market has been affected by the Middle East crisis, but the impact will hopefully be “cyclical and temporary rather than structural and permanent”, as VNH puts it. The long-term story remains the shift from low-cost exports to a higher-value economy with a growing middle class.

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Matthew Partridge: What prompted your book?

Ram Charan: I have been working in China for more than 20 years with American, European and Chinese companies; in some cases I was on boards as a director. The wake-up call was when I noticed that one US firm, which had a dominant position in the Chinese market, saw its market share begin to decline. Next, its unit costs went up and then the Chinese Communist Party basically forced them to sell their business to the Chinese.

This caused me to realise what China is trying to do – produce 90% of the global output in a sector, using a combination of subsidies, currency manipulation, and artificially cheap land and capital, and then using this to gain a cost advantage over the rest of the world. This strategy has already been applied to achieve a stranglehold over ten sectors in the past five years. This in turn creates a trade surplus, which is propelling China's military. It's a very sophisticated economic model, which essentially runs China as a conglomerate like General Electric.

The public may love it because it produces an endless supply of cheap goods. But in the longer run it means that non-Chinese companies cannot compete with China. And if war breaks out, this could become an existential issue.

MP: How likely is war between China and the US?

Ram Charan: We are already at war. The US House of Representatives Select Committee on China said it explicitly in October 2025: this is a war of mutual destruction; economic, technological, existential. The trigger will not be a single event. Cumulative economic strangulation will reach a breaking point. Xi has built something more powerful than an invasion: asymmetric chokehold capability. China can now shut down whole industries in America and Europe at will by controlling rare earths, battery components, semiconductor materials and advanced chemicals.

When Beijing announced requirements for export licences in October 2025, Donald Trump responded with 100% tariffs. The countdown has started. The real trigger is industrial collapse. When CEOs in the US realise they can't build anything without Chinese inputs, including defence systems, the political pressure for confrontation becomes unstoppable. Taiwan is the flashpoint everyone watches. But the invisible trigger is America losing the capacity to respond militarily because China controls the supply chains for defence manufacturing itself. China is stockpiling wheat, oil, commodities, and building the world's largest navy – 370 ships versus America's 290. It is expanding its nuclear arsenal to 1,000 warheads by 2030, and aligning with Russia and North Korea in a trilateral axis that can strike the US mainland in 30 minutes.

Xi Jinping is lighting proxy fires in Ukraine and the Middle East through local actors to stretch US military resources. Xi would prefer America to concede without firing a shot, but he is prepared to fight if the US does not yield. Unless America rebuilds industrial capacity fast enough to break China's chokehold, conflict is certain within the decade.

Matthew Partridge: What should the US do to combat the threat?

Ram Charan: Both the US public and firms must understand they are not competing with individual Chinese companies, but with the nation. And they can't compete alone. There must be more collaboration among both countries and firms. I have suggested that Trump create a Department of Manufacturing and Technology, whose full-time job is to co-ordinate, integrate and plan in a similar way to how the Pentagon organises the defence sector to fend off an equally powerful opponent.

Matthew Partridge: Didn't industrial policy fail when the UK tried it in the 1960s and 1970s? Witness British Leyland.

Ram Charan: British Leyland failed because bureaucrats picked products and ran factories. What I am advocating is government staying strategic, not operational. The Chips Act is an example. Government subsidises semiconductor making. Intel, TSMC, Samsung decide what to build and how to run operations. Government creates conditions for private companies to compete against state-subsidised Chinese opponents.

However, in addition to subsidies and support you will need enforcement of basic trade rules. Stop the dumping. Counter the currency manipulation that gives China a 20%, unbeatable pricing advantage. You also need to change US CEOs' psychology. They still think “cheaper currency, cheaper labour” is how you win. Move up the value chain. Import technology and equipment, not consumption goods. Scale up medium-sized manufacturers with AI and automation.

This is about national security. China has destroyed key US industries, including furniture, apparel, solar, rare-earth metals and ship components. The next targets are AI, biopharma, aerospace, advanced semiconductors, and chemicals. If those fall, America cannot defend itself. This is not industrial policy as socialism. This is industrial policy as survival.

Matthew Partridge: How can you ask other developed countries to work together under US leadership given that Trump has imposed high tariffs on them? Isn't that going to make them less likely to cooperate?

Ram Charan: I think people misunderstand Trump's approach. While it's true he has imposed tariffs, and this has created a lot of confusion, he has done this to rebalance trade between the US and the rest of the world, eliminating the large US trade deficit with most countries. Once this is achieved, his aim is to reduce these tariffs by as much as possible. Already small countries like Oman face barriers of as little as 2%. The idea is to bring countries to the table to discuss the issue, not protectionism for protectionism's sake. US tariffs will decline as the other sides reduce their barriers to US goods.

Matthew Partridge: You say that you are confident about the US because of the openness of its system and because of its big research infrastructure. But Trump has undermined this advantage with immigration controls and cuts to research budgets. Many of Trump's policies seem counterproductive.

Ram Charan: I agree that they are counterproductive. And that's honestly something I don't understand. Maybe it's due to his own ideological belief, but attacking universities is not consistent with his aim to reindustrialise the US.

Matthew Partridge: Moving from countries to companies, is it fair to say that investment in China is a double-edged sword? Many firms are being forced to give up their intellectual property (IP) in exchange for cheap labour and access to Chinese consumers.

Ram Charan: Yes, it is a double-edged sword. Not only will they steal your IP, but once a Chinese company shows signs of winning significant market share, Beijing will back it to the hilt, and give it a huge amount of resources to expand further, so it starts to drive you out of the market. The next thing, you notice you are making losses and decide to leave, or you get a call “inviting” you to sell up – as Starbucks and many others have done. Beijing's attitude, particularly in industries it has explicitly targeted, is that “until we get our own capability, you are our guest”– but once China starts to build its own domestic capacity, the Westerners are either asked to leave or driven out.

Some of the smarter companies started to work this out about ten years ago, and reconsidered their global strategy, including discreetly building up their operations in other countries, such as India. As a result, they are now doing very well, with their Chinese rivals still lagging behind due to the fact that they have not accumulated the necessary expertise that they would have gained from having a Western firm in their midst.

Matthew Partridge: What does India needs to do to become an attractive alternative to China for Western companies?

Ram Charan: In order to attract Western firms fleeing China, India needs to put its house in order. This includes smashing bureaucracy to make it easier for them to operate. India also needs to have better training in manufacturing, because manufacturing requires quality and reliability, and Indian firms have to learn to match customer specifications.

That said, India has some companies that are number one in the world. This includes Bajaj and TVS, which have done a great job of producing quality scooters, as well as other two-wheelers. So India needs to build on this to climb the value chain into products like semiconductors.

Matthew Partridge: Are there any other companies that stand to benefit from Western companies relocating from China?

Ram Charan: Every developed country will benefit from re-shoring to reduce dependence on China. Among developing countries, the other big winners will be Vietnam, Mexico and Indonesia. However, for companies, the solution is not substitution but diversification to break coercive power.

After all, Mexico and Vietnam are also proxies for Chinese production – Mexico's trade with China exploded after Trump's tariffs as Chinese companies set up Mexican operations to bypass US trade barriers. You must audit the entire supply chain. Where do the components come from? Who owns the factory? Where does the capital flow? Companies waiting for a single “China alternative” will wait forever.

Ram Charan has spent 30 years advising Fortune 500 CEOs on China. His latest book, China's 90% Model: China Has America by the Throat – Here's How to Fight Back and Win, is published by IdeaPress Publishing.

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Vietnam is one of the most exciting emerging markets, according to Dominic Scriven, founder and chairman of Dragon Capital.

In this podcast, he spoke to MoneyWeek's Cris Sholto Heaton about the challenges and opportunities that lie ahead for Vietnam, the current climate for investors and how his Vietnamese language lessons led to him founding the largest asset manager in the country.

Watch the full episode on our YouTube channel or tune in to MoneyWeek Talks on your preferred podcast platform.

About the podcast

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew Van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

The Aberdeen New India Investment Trust seeks to deliver long-term outperformance by investing in exceptional Indian stocks. Our bottom-up approach targets quality businesses benefiting from India’s structural growth. We focus on five key traits: resilient business models, strong finances, supportive industries, capable management teams, and robust practices in the field of environmental and social governance (ESG).

Stock selection drives returns, so we remain agnostic with respect to sectors and benchmarks. If a company fails our quality threshold, we don’t own it – even if it’s a market leader. We also avoid stocks priced beyond their earnings potential. The result is a focused, high-conviction, all-cap portfolio of India’s best ideas. And because quality typically holds up better in periods of volatility, the fund can offer a defensive edge in downturns.

Three Indian stocks to consider for your portfolio

Bharti Airtel (Mumbai: BHARTIARTL) is one of India’s leading integrated telecom providers, offering mobile, fixed-line, broadband and enterprise services. Known for its strong balance sheet, disciplined execution and cost control, Airtel is riding the wave of smartphone adoption and the rollout of 5G-mobile networks.

With more than 280 million smartphone data users, Airtel’s subscriber base continues to expand, driving higher average revenue per user and increasing market share. India leads the world in data generation, and Airtel is well positioned to capture this rising demand.

The country has the world’s second-largest online population and the most active market for large-language model (LLM) users, while offering some of the lowest data costs globally: an estimated £1.50 per month for between 20 and 30 gigabytes GB. In a sector that has consolidated from 12 players to three, Airtel stands out as the most commercially savvy and financially disciplined operator.

Mahindra & Mahindra (Mumbai: M&M) is a powerhouse in agriculture. From SUVs to tractors, it dominates India’s vehicle sector: it is the country’s top tractor maker with a 43% market share. Agriculture may not drive GDP growth, but as the sector is one of India’s largest employers, demand for farm machinery remains strong. Given low levels of mechanisation, we believe tractor sales could grow by an annual 10% over the next few years, providing cash flow for Mahindra’s push into premium vehicles and electric vehicles (EVs) – locally made and competitively priced.

This dual strength allows Mahindra to profit from India’s structural growth. The stock has delivered solid gains this year despite market headwinds, reflecting its excellence in innovation and execution. Mahindra is primed for sustainable growth and margin expansion, making it a compelling long-term opportunity.

Aegis Logistics (Mumbai: AEGISLOG) is India’s leading integrated oil, gas, and chemical logistics player. It has launched a two-phase $5billion capital-expenditure plan to drive long-term growth.

Aegis boasts a first-mover advantage at key ports and is expanding capacity. Fundamentals are solid too: a net cash position since 2018, a strong balance sheet, and management that consistently delivers. Meanwhile, India’s rising demand for liquefied petroleum gas (LPG), the shift away from fossil fuels, and domestic supply lagging consumption have all pushed natural-gas prices higher, benefiting Aegis.

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Vietnam ended the year by posting one of the world’s best stock market returns, with its VN index up 38%. But if 2025 was exceptional for investors, 2026 could provide the icing on the cake. September should mark a coming-of-age moment, with index provider FTSE Russell upgrading Vietnam from frontier to emerging market status. That will prompt a further wave of interest in Vietnamese equities, including from passive funds adjusting their emerging-market weightings.

It has taken 20 years to get here, says Qian Zhang, an investment specialist at Baillie Gifford. “Vietnam is now one of the best structural growth stories in emerging markets,” she says. “It’s still a lesser-known and off-index market and we remain selective, but the opportunity... is broadening for long-term, patient investors.”

Vietnam shares some of the fundamental structural drivers that favour many emerging markets, including its young population. But Zhang points to three additional attractions. “The country has spent two decades integrating itself into global supply chains through high-volume, cost-efficient manufacturing,” she explains. “A bold pro-growth policy shift under the new leadership is reigniting domestic economic momentum, and a fast-growing middle class is catalysing a shift from informal to formal consumption.”

A tough deal from president Donald Trump on “Liberation Day” might have been expected to hit Vietnam hard. The country’s trade surplus with the US has expanded significantly since the first Trump administration, with Vietnam benefiting from the president’s efforts to force the world to rely less on China. However, a deal announced in July saw US tariffs on Vietnam more than halved; in any case, point out Vietnam bulls, the economic story in the country is much broader than the narrative around exports.

“Government reforms aim to accelerate GDP growth to enable Vietnam to achieve high-income status primarily through empowering the private sector and levelling the playing field,” says Conor Finn of Barclays Bank. “Surging infrastructure spending is the most tangible example yet of the effect of the reforms.” Investment was up 43% in 2025.

Three Vietnamese trusts for investors

There will inevitably be bumps along the way (not least given the erratic nature of US trade policy, with April’s Liberation Day prompting a sharp sell-off of Vietnamese shares), but the long-term outlook is alluring, adds Thomas McMahon, an investment analyst at Kepler Partners. “Vietnam is one of the most exciting emerging markets in the world.”

Traditionally, overseas investors have struggled to secure exposure to Vietnamese equities, with tough regulation on trading in the country and limits on non-Vietnamese ownership of some companies. However, investors now have a choice of three UK-listed investment trusts that specialise in Vietnam.

“All three of these funds have strong... records and have each outperformed the MSCI Vietnam index and the FTSE Vietnam index over the past five years,” says Alex Trett, an investment-trust research analyst at Winterflood Securities. The biggest of the three, the £1.37 billion Vietnam Enterprise Investments Limited (LSE: VEIL), is currently trying to address the wide discount at which its shares have traded relative to the value of the fund’s underlying assets in recent times. Under proposals announced earlier this month, investors will be able to cash in 30% of their shares – through three separate 10% tender offers over this year – at close to net asset value (NAV), rather than at the 13% discount prior to the proposals.

“Given returns of close to 60% since April’s lows, I wonder if shareholders will want to lock in some profits or to take a longer-term view,” says Andrius Makin, associate portfolio director at the stockbroker Killik. But, he adds, “the longer-term investment case for Vietnam is still very much intact”. Anthony Leatham, an investment trust analyst at Peel Hunt, points out that the board of Vietnam Enterprise has already made good progress on the discount, which stood well above 20% a year ago, before a series of share buybacks. “We see these proposals as providing an additional driver for further discount narrowing.”

The second-biggest fund in the sector, the £750 million VinaCapital Vietnam Opportunity Fund (LSE: VOF), has also sought to reassure investors worried about discounts. It runs regular share buyback programmes aimed at managing the discount.

The third option is the much smaller Vietnam Holding trust (LSE: VNH), which has a market value of £76 million. It has posted the strongest share-price performance of the trio over the past five years and has also run regular share-buyback programmes. Unlike VEIL, which sticks to listed equities, the other two trusts also dabble in private equity.

This attention to governance and value for shareholders is important, because even small shifts in sentiment towards Vietnam can result in trusts’ discounts widening, leaving investors vulnerable. That said, the closed-ended structure of investment trusts also provides useful protection in an illiquid market. Killik’s Andrius Makin believes that despite the strong performance of the Vietnam stock market last year, all three trusts are currently attractively valued. “All three are positioned to capitalise on the growth of the domestic Vietnamese economy, which is set to benefit from a young population and the growth of the middle class, driven by increasing urbanisation,” he says. “Investors should expect to see big allocations to sectors that provide exposure to this theme, mainly real estate, financials and retail stocks.”

Readers interested in learning more about Vietnam can see Andrew interviewing Thuy-Anh Nguyen, product specialist at Dragon Capital, the manager of VEIL, on YouTube (below) or any podcast platform.

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This year’s best-performing emerging market (EM) shouldn’t really be classified as an emerging market at all. South Korea’s high-tech industrial base is a match for any of the world’s leading developed economies. Yet restrictive trading rules on the local bourse see it consigned to the same global investing basket as Egypt and Peru.

Nonetheless, the local Kospi index has rocketed 66% this year. That reflects two massive tailwinds: AI, and a closing Korea discount. For the first theme, memory-chip champions Samsung and SK Hynix are cashing in on Big Tech’s splurge on semiconductors. For the second, Seoul has begun to implement pro-shareholder reforms, a copy of similar changes in Japan that unleashed a multi-year stockmarket rally.

Emerging market winners

Korea’s gains have helped push the MSCI EM benchmark to a 26% gain for the year to date. After years of lagging the developed-markets index, that rise comfortably outstrips the 18% gain for MSCI’s equivalent index for developed markets.

Those gains partly reflect more benign financial conditions for the developing world. US interest-rate cuts and a weaker dollar tend to push capital out of Wall Street and into more exotic locales. Yet the upswing has not been universal. This year’s big winners have tended to offer exposure to one of 2025’s two winning trends – AI-focused tech and the global metals rally. Like Korea, Taiwan’s Taiex (+20.5%) is rallying on soaring demand for AI equipment, largely driven by the enormous success of local chipmaker TSMC.

The mainland Chinese CSI 300 is up a healthy 17.5%; Hong Kong’s tech-biased Hang Seng has done even better, with a 28.5% gain. The east Asian economies now jointly account for 60% of the MSCI EM index, making the index a more concentrated bet than many EM investors would ideally like.

India, the index’s third-largest component, provides some diversification. The country’s thrilling growth story resembles that of China in the early 2000s. Yet share prices have become stretched, and the BSE Sensex’s 8% gain for the year is lacklustre. While India is a global leader in IT outsourcing, local markets offer little exposure to AI.

Southeast Asia is a mixed bag. Vietnam’s VN index has rocketed a third in the same year that it won an upgrade to emerging-market status by index provider FTSE Russell. Indonesia’ IDX Composite has gained 21%.

Malaysia’s KLCI is flat, while the Philippines’ PSEi index has slipped 7% amid signs of a domestic slowdown. Thailand’s SET index has retreated 10% as investors flee political turmoil and signs of a decline in the country’s crucial tourism sector.

Metals rally helps emerging markets shine

Gold’s 60% rally this year has helped South Africa to shine. The JSE Top40 index has had a banner year, with local miners and an improved political outlook propelling it to a 40% gain. Copper champion Chile has done even better, with the IPSA index enjoying a massive 50% rally.

But not all commodities are created equal. The oil-heavy Saudi Tadawul all-share is off 13% amid weak energy prices. The US has picked fights with both the Mexican and Brazilian governments this year, but you couldn’t tell by looking at their stock exchanges, up 28% and 32% respectively.

The White House’s 50% tariffs on Brazilian imports have “backfired”, because “Brazil exports more than twice as much to China as to the US”, says Craig Mellow in Barron’s. Brazil’s strength in agriculture makes it a highly complementary trading partner. Investors also hope that next year’s presidential election could bring a pro-market candidate to power, echoing Javier Milei’s success in Argentina.

It has been another good year for emerging Europe. Poland, the region’s biggest market, is catching up fast with western Europe. A boom in defence spending has helped push the WIG20 to a 39% gain. Finally, difficult post-crisis reforms continue to pay dividends in Athens. The ASE index has rallied 41% this year and 119% over the past three years. The protracted Greek tragedy is finally over.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Vietnam: Asia's new tiger economy
In this episode of MoneyWeek talks, Thuy-Anh Nguyen, director and product specialist at Dragon Capital, gives Andrew Van Sickle the inside track on Vietnam. Having grown up in Hanoi in the late 1970s, she has first-hand experience of the country’s extraordinary transformation from a war-torn planned economy to one of the world’s most dynamic emerging markets. By 2005, MoneyWeek was highlighting Vietnam as Asia’s other Communist dynamo. Now it is growing faster than China.

Thuy-Anh tells Andrew how liberalisation triggered a growth spurt, what Vietnam did to ensure the economy maintained momentum, and how it dealt with the Donald Trump administration’s tariffs earlier this year. We also explore some of the key holdings in Dragon’s investment trust, Vietnam Enterprise Investments Limited.

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew Van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

More on Vietnam

• Vietnam: a high-growth market going cheap
• The best ways to invest in Vietnam – Asia’s communist dynamo
• Vietnam, Asia’s new tiger economy, is roaring. Investors take note

They’d make a great band name. But Chen Zhi and the Prince Group are in fact a global scourge – combining two of the worst malaises of the age: people trafficking and cybercrime. Now Western authorities are getting tough, says The Guardian. In a grand swoop last month – dubbed “the largest action ever in Southeast Asia” – the US and UK sanctioned Chen and 146 other businesses connected to his Prince Group, accusing the company of detaining trafficked workers in “scam compounds” across Cambodia – and compelling them to “engage in a range of fraudulent schemes” that have sucked billions of dollars from victims globally.

The Chinese-born kingpin, Chen Zhi, 38 – also known as “Vincent” – has also been charged with wire-fraud conspiracy and money laundering, but “remains at large”. It could prove hard to pin him down. Chen is thought to have bought citizenship in Cyprus and the South-Pacific island nation of Vanuatu, as well as holding Cambodian nationality. Within Cambodia his power has grown. His rapid ascent to wealth has won him political influence, including reported roles advising the authoritarian former prime minister Hun Sen and his successor and son Hun Manet.

“Chen Zhi isn’t a mob boss as we traditionally conceive of them – he is (or rather was) the polished face of a state-protected criminal economy,” Jacob Sims, of Harvard University’s Asia Centre, told CNN. The “baby-faced tycoon” has risen to “the highest echelons of power in his adopted home” where “he bestows scholarships and runs philanthropy programmes, while overseeing one of the country’s largest and best-connected conglomerates”. At the height of his power, Chen and associates were making $30 million every day from their sprawling transnational criminal organisation, according to US prosecutors.

Who is Chen Zhi?

Born in 1987 in Fujian, a province in southeastern China, the now-removed website of Chen’s Singapore family office described him as a “young business prodigy” who cut his teeth setting up internet cafes and gaming centres in the provincial capital of Fuzhou, says Bloomberg. Chen subsequently renounced his Chinese citizenship, turned up in Cambodia and “began splashing enormous amounts of cash”, says CNN. His first investments from 2011 onwards were in real estate – Cambodia’s cities are dotted with Prince’s skyscrapers. But over the next decade, the group’s interests grew to span entertainment, finance and even an airline.

Assets across the region – including a Singaporean car-loan firm, and two listed companies in Hong Kong – are now on the sanctions list, says Bloomberg. Yet it seems Chen, who is married with three children and reportedly living in Singapore, didn’t see the threat coming. “As recently as the day the US charges went public,” his family office was advertising for a personal assistant for inflated pay of as much as $5,000 a month. The contrast with conditions in a cybercrime empire stretching to at least “10 forced labour camps” couldn’t be greater, says CNN. The US indictment describes “vast dormitories, surrounded by high walls and barbed wire” where incidences of violence and coercion were “frequent”.

These operations have hitherto gone largely unchallenged in Cambodia due to the “complete dismantling” of the country’s civil society and independent media. The question now is whether the US and UK can use their leverage to dismantle the lucrative industry. “This is the first time Washington and London have hit the architecture – the elite ownership, the laundering conduits, and the money itself – at the very top,” says Sims. Time will tell whether they can succeed – and catch Chen Zhi.

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Matthew Partridge: It has now been nearly 25 years since you coined the term BRICS for Brazil, Russia, India and China, and the four nations have embarked on very different trajectories. Which one do you think has been the most successful, and why?

Jim O’Neill: Without a doubt, China. Despite the problems they’ve had since 2015, China has just blown the other three countries away. I remember that in the original research note we had this graph using racing cars to illustrate when each of the BRICS might overtake their G7 counterparts. And we originally had China overtaking Japan by 2030. In fact, it did so by 2010, and today China is four times bigger than Japan and twice the size of the other BRICS put together.

Matthew Partridge: How has it managed that?

Jim O’Neill: The Chinese leadership has taken advantage of the stability provided by their political system to take a very long-term view of what they want to do. This is shown by their massive investment in the rail network and the move towards electric cars, while even their five-year plans contain many longer-term goals. For instance, in 2020 they set themselves a target of doubling per capita GDP by 2035. They are clearly going to achieve this.

Matthew Partridge: Surely the example of Russia shows that having a stable political system doesn’t always lead to wise decision-making?

Jim O’Neill: Like Brazil, Russia suffers from the so-called “commodities curse”. In 2001 I warned that both countries were so well endowed with natural resources that they would have to find a way to avoid following the example of other commodity-rich countries who became lazy and didn’t diversify their economies or think about innovation.

And we’ve seen this with all the corruption and state capture of the post-Soviet era, as well as the astonishing misallocation of resources devoted to fighting the brutal war in Ukraine. Our attempts to include Russia in the international community, even expanding the G7 to become the G8, proved spectacularly naive.

Matthew Partridge: Do you see the latest deal between the US and China as a genuine turning point in the trade war, or just a temporary pause?

Jim O’Neill: I lean towards the latter, although I hope I’m wrong. China’s huge population means that if it succeeds in doubling GDP per capita by 2035, it is going to become as big as the US in dollar terms, and much bigger at some point. The US won’t like this as it is obsessed about being the biggest – witness its anger in the 1980s when it looked like Japan would become a serious rival.

However, I have detected an increasing recognition over the past few years that the US can’t pressure China in the way that it has every other country in the past. Still, I’m sceptical that this will translate into a permanent improvement in relations – a pity, as 80% of the global GDP growth we’ve had since 2000 has come from the US and China.

Matthew Partridge: Could China fall into the middle-income trap, where growth slows to a crawl before it reaches the level of a fully developed country?

Jim O’Neill: China certainly has its problems and needs to continue its reforms. The property sector is troubling, while its demographics have passed their peak. It also needs to give people who have migrated from rural to urban areas full rights, as a two-tier social system still exists in the cities. One reason the domestic savings rate is so high is that those people have no land or property, and can’t buy either.

However, if anything, Chinese productivity might be accelerating. I recently read that while exports to the US are down something like 10% year on year due to tariffs, exports to the global South are rising sharply. China is now responsible for 20% of global manufacturing. Most importantly, it is moving up the value chain and is no longer just relying on producing low-quality goods based on cheap labour.

Matthew Partridge: What about India?

Jim O’Neill: India is such a fascinating, complex place. It is in a sweet spot demographically and it is urbanising dramatically. When I was there last year I was pleasantly surprised by the considerable improvements in urban transport and infrastructure, with airports and roads vastly improved. Digitisation has also helped people on low incomes and those in rural areas secure access to both public services and financial products. You could even say that India is where China was 25 years ago.

Still, India should be capable of growing by 10% a year, as China did at the same stage. There are some very obvious major reforms that the Indian leadership should implement. For example, the amount of waste and inefficiency in agriculture is enormous, and there are still 300 million people who can’t really read or write. China is also very protective of many of its industries, with all sorts of barriers to foreign competition and foreign investors.

Matthew Partridge: Switching topics, are you sceptical about the AI revolution?

Jim O’Neill: Given the colossal amount of wealth being created for the owners of AI, we need to make sure productivity starts to improve – and for this process to benefit the entire economy. Otherwise, you will start to see a backlash against capitalism, as shown by the victory of the populist Zohran Mamdani in New York. One exciting way in which AI could definitely benefit the public is in healthcare, especially in combating the assumption that healthcare costs are going to just keep rising forever.

Matthew Partridge: Is there a risk that the government spends huge amounts on building infrastructure for these data centres only for the expected demand to fail to materialise?

Jim O’Neill: Yes. It bothers me that, up until now, there have been few incentives to develop many of the world-leading technologies that we have, especially in the North of England, such as small modular reactors. Then Donald Trump comes over with some of his big technology pals, saying they’ll do this, that and the other, and then suddenly you’re reading about potentially 10 versions of SMRs possibly being built in Teesside. So instead of trying to do that to help cut our own energy costs, we’re doing it in order to support them.

Matthew Partridge: How did you become chair of the venture fund Northern Gritstone, and what do you hope it can achieve?

Jim O’Neill: After I finished my career as a global banker and economist, I chaired the Cities Growth Commission, which came up with the idea for the Northern Powerhouse. Later on, I served briefly as a government minister under David Cameron to help push it through.

However, during my time there I realised that there were quite a few universities in the world’s top 100, and we were taking all these brilliant students with superb research from all over the place, only for them to disappear after they had finished their studies.

Given that many of these innovations involved areas of low productivity, I recommended that policymakers should do something to encourage more spin-outs that could add economic value in these regions. And so, when the idea of Gritstone came up from the three founding universities – Sheffield, Leeds and Manchester – I was asked to be chair because of my time working on the Northern Powerhouse. And I didn’t hesitate to say yes because I thought it was very exciting. If Gritstone works, it could help boost the productivity of the North. I have found it very stimulating.

Matthew Partridge: What do you think could be done to encourage more entrepreneurship in the UK?

Jim O’Neill: Sadly, there is no magic bullet when it comes to encouraging risk-taking and entrepreneurship. Even the decision of British institutional investors to allocate more of their funds to gilts rather than domestic shares has been sensible given our low productivity growth and the poor performance of the FTSE. So, as with AI, there is no point getting them to put more of their money into UK shares unless that helps the wider economy.

That said, I would like to see institutions such as the British Business Bank given a bit more freedom to think of itself along the lines of Singapore’s Temasek (a mixture between a sovereign wealth fund and an independent global investor). It should see itself as encouraging growth investment by being a key investor as opposed to being a bank. I would also like to see more support for institutions such as Gritstone, while local authorities’ pension funds could also provide more genuine risk capital.

Finally, I have been worried by much of the pre-Budget pressure on the chancellor from certain think tanks to raise capital-gains tax to the same level as income tax. While certain forms of business taxation, especially around sole traders, could be treated more closely to income tax, when it comes to venture capital investing, it is extremely risky; you can lose a lot of money. So it’s very important that tax incentives for genuine risk-taking and rewards are retained.

Jim O’Neill is a former chairman of Goldman Sachs Asset Management and commercial secretary to the Treasury. He is currently chair of Northern Gritstone, a venture capital fund.

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How should we tackle our anaemic productivity growth? Two answers have emerged: “Build Something Now”, and “Innovate Faster”. Chris Clothier, fund manager at CG Asset Management, recently put the case for the former when he noted that Britain “ranks... last among the G7 for gross fixed-capital formation, at about 18% of GDP annually. The range for the rest of the G7 is 20%-25%”.

Perhaps the most eloquent exponents of this school of thought are two Americans of the centre-left, Derek Thompson and Ezra Klein. Their book Abundance – very relevant to the UK – posits that the left in the US has championed excessive regulations and administrative burdens, which have severely hampered America’s ability to build essential things society needs, such as affordable housing, modern infrastructure and clean-energy systems.

The result is a system where completing important projects – such as building new homes or advancing green technology – is hampered or blocked entirely by layers of reviews and regulations. They point to Republican states where the balance is right – places such as Texas have built more homes and more jobs.

Unsurprisingly, this agenda has also attracted interest from Republicans, but the message is clear: America (or the UK) needs to build more infrastructure (and create more jobs) and homes, so that people can enjoy greater abundance. This agenda is being replayed here in the growth caucus of Labour MPs, who are making similar arguments: more homes, more green power infrastructure, more nuclear power, less regulation.

The argument is echoed in another influential book released this year, Breakneck, by technology and China analyst Dan Wang, who previously worked for research firm Gavekal. He compares the US, run by lawyers who often hinder the construction of new things, with China, run by engineers and scientists who focus on building assets such as trains, industry and homes at a rapid pace. His arguments about how long it has taken California to build a high-speed rail system are echoed in the omnishambles surrounding HS2.

How to boost productivity

However, mobilising additional capital to get things built, which in turn helps boost GDP growth (through more construction jobs, for instance), is far from a panacea. Although numerous studies show that additional investment in fixed-capital projects boosts growth (via so-called multiplier effects), these follow-on impacts have declined over the years, perhaps a result of increasingly burdensome regulations.

A rival school of economists and policymakers argues for a different approach. They tend not to disagree with the idea that less regulation is beneficial, and don’t deny that investment is essential. However, they prioritise the importance of what we might call “soft capital”: knowledge and governance. You can see this approach clearly in a recent paper from the UK’s leading economic research organisation, the National Institute of Economic and Social Research (NIESR). In an ambitious collaboration between productivity and growth experts, the NIESR collated a range of views about how to kick-start productivity gains.

The professors and academics suggested more investment in skills training, prioritising vocational and technical training through retraining programmes and flexible learning, supported by the Growth and Skills Levy. They also argued that the UK should support digital transformation of the public sector, ensuring universal access to digital services and mandating digital readiness for all policies.

Low public-sector productivity growth is a crucial problem that every politician likes to talk about, but few offer practical solutions. The academics also focused on what they called fragmented decisionmaking, short-term budgeting and an “overcentralised yet undercoordinated” Whitehall machine, “blocking the very productivity gains on which the government’s economic strategy relies”.

Investment in physical assets, such as roads, and urban transport, such as trams, does get a mention, alongside a commitment to keep public investment at around 4%-5% of GDP (the average since 1987 has been under 3%). But the skew is clear. Building things won’t solve the problem – skills and innovation are crucial. The most explicit exponent of the “Innovate Faster” school is Daniel Susskind, an Oxford economist who published a superb book last year called Growth: A Reckoning.

Like many, he’s sceptical about the view that simply building many things will make much difference. Instead, he suggests that working with the same physical capital, but making that capital work harder, is the key to growth. In policy terms, that might mean significantly increasing spending on research and development (R&D), fostering innovation hubs, and generally improving the workforce’s skills.

If, like Susskind and Co., you favour boosting skills and innovating more, then you need to accept that there are no quick fixes or populist freebies. Improvements in innovation and the skills base require long periods of focused change and investment, and are very far from commanding headlines. At present, the best model for this is China. Its Made in China 2025 technology plan has transformed China into a technology superpower. The downside is that in the process, it’s also almost certainly wasting countless tens of billions backing the wrong projects and plans.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

This year marks the 30th anniversary of the launch of two competing investment trusts specialising in smaller Asian companies: Aberdeen Asia Focus (LSE: AAS) and Scottish Oriental Smaller Companies (LSE: SST). Fidelity Asian Values (LSE: FAS) was launched a year later. The long-term performance of all three has been excellent, but leadership has switched a number of times over the years.

In 2024, SST, with £380 million of net assets, led the trio and seemed set to continue its run. It had benefited from a very high allocation to India and a low one to China, but had started to shift in favour of China and Taiwan on the basis of relative valuation.

However, this shift stalled, leaving SST still with a 38% exposure to India – 10% over the MSCI AC Asia ex Japan Small Cap index – and heavily underweight Taiwan (8%) and South Korea (2%) against index weightings of 23% and 15%. These two markets have performed strongly this year, while India is still below its September 2024 peak. The result is a -10% performance over one year against 19% for AAS and 11% for FAS.

Hugh Young, who was the lead manager of AAS (£580 million of assets) until two years ago, used to say that India had terrible infrastructure but great companies, while China had great infrastructure but terrible companies and corporate governance. He also favoured Southeast Asia over Taiwan and Korea. Gabriel Sacks, who took over from him, has taken a new approach, holding just 23% in India but 18% in Taiwan and 12% in Korea.

Still, this alone does not explain his strong performance. AAS has now returned 90% over five years, which is 23% ahead of the benchmark index, 5% ahead of FAS and 24% ahead of SST. The overlap of Sacks’ portfolio with the index is just 4%, while performance has been helped by borrowings of 8% of net asset value (NAV).

Why are Asian small caps outperforming the rest of the market?

Sacks points out that “small-cap equities in Asia have outperformed the broader market over three, five and 10 years” and believes that “better diversification across countries and sectors with less concentration in a few mega caps has resulted in more market resilience”.

The key to strong future performance lies not just in a favourable economic outlook but to the potential to continue to add value from uncovering hidden gems, he argues. With that in mind, the meagre research coverage of Asian smaller companies offers an opportunity. Sacks stresses the importance of “on-the-ground expertise, first-hand knowledge and direct engagement with companies” in the process.

“Quantitative analysis is by no means guaranteed to tell us everything we ought to know,” he writes. “A business’s qualitative aspects can be every bit as influential – and maybe even more so – in guiding our choices. This is why we prefer to see things for ourselves. It is why we visit premises and facilities. It is why we meet with senior executives. It is why we enter into dialogue and ask probing questions.”

Such an approach is labour-intensive and costly, which is why many active managers focus on computer screening and index-hugging to keep charges down. This has worked over the long term, hence AAS has a 30-year annualised return of 12.2% against 5.1% for the benchmark index. Today, it looks like the obvious choice between the three trusts: it is trading on a 10% discount to NAV against just 5% for FAS and 13% for SST.

A turnaround in the Indian market would help SST, but Sacks remains cautious. “Though valuations are more palatable [than before], they are still far from bargain levels and the short-term earnings outlook appears mixed.”

That said, FAS and SST also have long-term records of clearly beating the index. So it should prove more important to be invested in one of the three than choose which one.

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My investment philosophy is grounded in diligence, discipline, and patience. At Fidelity, I benefit from a robust, on-the-ground analyst network across Asia that produces in-depth fundamental research. These insights enable me to identify good businesses led by competent and honest management teams, and to invest at valuations that offer a comfortable margin of safety. I deliberately steer clear of untested business models, highly leveraged firms, cyclical companies at peak profitability, and stocks trading at excessive earnings or cash flow multiples.

My focus is on managing absolute risk and minimising capital loss during market downturns – an approach which should help compound returns at higher rates over the long term. Consequently, the Trust maintains a contrarian, value-oriented bias, focusing on mispriced small and mid-sized businesses that have the potential to become the “winners of tomorrow” well before their strengths are widely recognised.

As bottom-up investors, we continue to uncover idiosyncratic investment opportunities across the Asian region. Here are three examples.

Three overlooked Asian stocks to consider for your portfolio

In Taiwan, we have invested in Pacific Hospital Supply Company (Taipei: 4126), a manufacturer of medical consumables. Despite being a small player, its new management is driving market share growth at a pace faster than the c.US$80 billion industry, which typically grows at a mid-single-digit rate. The business is focusing on higher-margin, more complex products and targeting quality healthcare markets of Japan, the US and Europe to drive sustainable growth. Its well-diversified customer base provides additional resilience to the business. The stock trades at 16 times its projected 2026 earnings and offers a 5% dividend yield.

In Thailand, we hold a position in Mega Lifesciences (Bangkok: MEGA), a manufacturer of generic medicines. Most of its revenue stems from ‘nutraceuticals’ or wellness drugs, with the remainder from prescription drugs and over-the-counter medicines. The company’s strong distribution network across ASEAN, together with its product pipeline and in-house manufacturing, confers competitive advantages, resulting in higher margins compared with peers. Its management is more agile and flexible than multinational competitors, enhancing its effectiveness in sales and promotions. The stock trades at 12 times its projected 2026 earnings, with a 5.5% dividend yield.

In addition, we have exposure to Hong Kong-listed Tuhu Car (Hong Kong: 9690), a Chinese vehicle-parts retailer that uses its app to direct car owners to its network of franchisee car-repair shops. It is a difficult business, but it is also light on capital and scalable, so companies that find the winning formula have high returns on capital and healthy long-term growth prospects. Tuhu is the market leader in China, where organised vehicle-parts retailing is still in its infancy. The management team is solid, and the firm should be able to grow significantly in the next 10 years. It is an early-stage company with a net-cash balance sheet, and its stock is on 15 times its earnings projected for 2026.

Emerging markets (EMs) are back. The MSCI Emerging Markets index delivered a 31% return over the first ten months of the year, compared with just 18% from the developed markets-focused MSCI World index. Such outperformance has been a long time coming. Investors in emerging-market equities have not enjoyed higher returns than from developed markets in any year since 2020.

These equities provide exposure to countries surfing trends such as urbanisation and industrialisation, and exploiting demographic advantages, such as younger populations. At an earlier stage of their development, their potential is to grow more rapidly. In recent years, however, that story has played second fiddle.

Amid global economic and political disruption, investors have steered away from equity markets perceived as being riskier. The strength of the US dollar – a safe-haven asset – has been a major challenge for many developing economies with significant dollar-denominated debts. And the travails of individual markets – including China, where a debt crisis has caused major problems – have dragged returns down.

Those headwinds now appear to be receding. The dollar has weakened notably this year, with the US reducing interest rates. That has directly benefited EMs, but also had an indirect effect, with lower returns from safer assets such as fixed-income instruments prompting investors to embrace securities that carry more risk. “A weaker dollar typically boosts purchasing power, making imported goods cheaper, and it often lowers the cost of capital,” explains Robert Marshall-Lee, chief investment officer of Cusana Capital. “This stimulates growth, investment and earnings.”

Attractive valuations have also helped win investors round. The MSCI Emerging Markets benchmark’s current constituents are priced, on average, at about 14 times their forecast earnings for the next year, compared with 23 times for the typical US stock. Goldman Sachs therefore hopes that EMs’ rally will endure. Its optimism reflects shifting macro trends, but also the strong earnings performance of many emerging market-based technology companies, which are benefiting from the AI boom.

The outlook for emerging markets in 2026 also looks bright. “The fundamentals of emerging-market economies look sound,” says Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equities Fund. “[Firms’] conservatism has strengthened their balance sheets; this, alongside supportive valuations, puts them on a good footing to deliver better growth.” Such positives have the potential to drive the outsized returns that investors are often promised from EMs. Research published earlier this year by Amundi forecasted average annual returns from emerging-market equities of 7% – against 6.4% from Europe and 5.6% from the US.

The Amundi report includes higher forecasts for individual markets – notably India, where it predicts a 7.4% average annual return over the next decade. “It offers high-quality, well governed franchises with extensive growth [prospects],” adds Marshall-Lee.

In China, Amundi expects a more modest 6.8% a year. Key AI players such as DeepSeek and Alibaba have helped Chinese equities to perform more strongly in 2025. But there are concerns about the ageing population and its slower productivity and growth. Vietnam could be another interesting market. Reforms designed to boost the private sector, a strong domestic economy, and a wave of companies joining the stock market are all attracting attention.

One big question for many developing countries, however, is the extent to which US trade tariffs will hit growth. Still, the tariffs story varies by country. President Donald Trump has most recently focused his attention on India, threatening the country with an additional 25% penalty if it continues to buy oil from Russia, in addition to the existing 50% tariff already imposed. By contrast, hopes are rising of a trade deal with China. And relations with other emerging markets are warm.

Emerging markets: where to invest

Stay focused on the big picture, says Alex Watts, senior investment analyst at the investment platform Interactive Investor. “Emerging markets are underrepresented in global indices versus their contribution to world GDP and populations,” he points out. A well-diversified fund can help investors manage risk while accessing professional expertise in key markets. “For a very broad and low-cost approach, the Fidelity Index Emerging Markets fund is a passive option with a charge of just 0.2% a year,” notes Watt. Highly rated active funds also offering a broad exposure include JPM Emerging Markets Fund and the Templeton Emerging Markets Investment Trust (LSE: TEM).

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In the late 1990s, a young Stella Li landed in Rotterdam from China with $30,000, a container load of lithium-ion batteries and an order from head office: “sell them to survive”. She clinched a deal with Nokia, then the number one mobile-phone maker. Never one for false modesty, she told the Financial Times: “I opened the door and moved BYD to another level.”

Nearly 30 years on, the company has moved far past its roots as a battery maker to become one of the world’s most powerful manufacturers of electric vehicles. Globe-trotting Li remains so firmly at the heart of its international expansion that colleagues have dubbed it “The Stella Show”. Yet the stakes, while much higher, are just as existential. BYD sales grew by 40% last year, but it is having to grapple with both rising Western protectionism and a darkening domestic outlook in China in the teeth of cut-throat competition. It’s going to be “very difficult for BYD to continue to grow the way it’s been growing”, says analyst Tu Le of Sino Auto Insights.

“A diminutive woman with almost frenetic energy,” Li, 55, “zips across the globe furiously, rarely making it back to her current home in Los Angeles”, says Fortune. In a typical day, BYD’s “crucial ambassador and strategist” might wake up in Istanbul, fly to a meeting in Vienna and then spend the night in Germany. The carmaker now exports to roughly 95 markets, but Europe is particularly crucial to its global push. In markets such as Britain – which this year became BYD’s biggest outside China – the company has become “Elon Musk’s worst nightmare”.

At its heart, BYD – which was founded in Shenzhen in 1995 by Wang Chuanfu – has always been a partnership. While Li led marketing and expansion, Wang, 59, was the engineer behind the group’s rapid technological advancements and manufacturing prowess. He never wavered from his dream of building electric cars, even when it looked like a long shot. The pair met soon after Li had graduated from Shanghai’s prestigious Fudan University and the relationship developed romantically as well as commercially.

BYD stands for “Build Your Dreams”, but back in the early days when Li was pestering mobile-phone executives in Atlanta suburbs with her box of battery samples, she used to joke that it stood for “Bring Your Dollars”, says Bloomberg Businessweek. Her great strength then was persistence. It took her two years to win a contract from Motorola. But by 2002, when BYD went public in Hong Kong and Shenzhen, the company was on a roll. Many investors were furious when Wang bought a majority stake in a failing state-owned carmaker a year later – appalled that BYD “was wading into a market it knew nothing about”. At the time, Wang didn’t even know how to drive, but was convinced that electric cars were “a natural extension” of the battery business.

The first clunky models did nothing to dissuade the critics, but Wang continued to pour cash into product development.

Stella Li's deal with Warren Buffett

The deal that put BYD on the map was Berkshire Hathaway’s landmark $232 million investment in 2008, says the FT. Li was introduced to Warren Buffett and Charlie Munger by her friend Li Lu, a billionaire hedge-fund manager. In the nearly two decades that Berkshire stuck with BYD until completing its exit this year, it reportedly netted a return of about $7 billion. In that time, BYD has achieved what Tesla, Ford and the rest of the car industry haven’t, says Businessweek: “build an affordable electric car for the masses and make money doing it”. Jean-Francois Baril, chair of Nokia’s owner HMD Global, who has known Li for more than two decades, credits her with “bridging the East and the West”, says the FT. She’ll need all that skill to keep BYD on the road in the years ahead.

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Japan’s politics are unstable, the yen is trading at multi-decade lows against most major currencies, long-term government bond yields have soared, and inflation is picking up again. Yet corporate Japan is doing just fine. Stocks are regularly reaching new highs and seem likely to continue upwards.

On a price/earnings ratio of about 16, the market’s valuation is at the top of its 10-year range but earnings growth is coming through strongly, says Masaki Taketsume, manager of the £370 million Schroder Japan Trust (LSE: SJG). The consensus for 2026 is for an average gain of 10%.

Rising interest rates, which are expected to reach nearly 2% over the next year, should benefit financials, he says. However, a weak yen means that exporters are expected to see most of the earnings growth. This is reflected in SJG’s portfolio of 60-70 stocks, which includes conglomerate Hitachi, Toyota Motor and electrical-equipment group Fujikura, as well as bank Sumitomo Mitsui and multinational insurer Tokio Marine as its largest holdings. There is a strong weighting to mid and small caps, which account for 47% of the portfolio, against 27% in the Topix index.

Gearing of 13% of net assets show Taketsume’s optimism. A five-year return of 78% (60% over three years) is one of the best of the mainstream Japanese equity funds. Still, the shares trade on a 10% discount to net asset value (NAV).

The record of the £315 million CC Japan Income & Growth Trust (LSE: CCJI) is even better, at 91% over five years and 67% over three. Yet it also trades on an 8% discount. Its top 10 holdings include video games giant Nintendo, engineering group Mitsubishi Heavy Industries (Japan’s largest defence contractor) and tech investor SoftBank. With just 37 stocks, the CCJI portfolio is more concentrated than SJG.

Investments in Japan return to form

Until 2021, JPMorgan Japanese Investment Trust (LSE: JFJ), with £1.2 billion of net assets, and the £916 million Baillie Gifford Japan Trust (LSE: BGFD) led the sector by a mile, but their strong growth bias brought them crashing down to earth. Subsequently JFJ, with a three-year return of 67%, recovered much more quickly than BGFD (38%). However, their one-year returns of 24% are similar and about 5% ahead of SJG and CCJI. These two also trade on a discount of about 10%.

The improvement is partly due to growth returning to favour but also to some much-needed portfolio reorientation. “We had a lot less in cyclical stocks, such as carmakers and banks, so grew more slowly coming out of Covid, but that has changed in the last year,” says Matthew Brett, manager of BGFD. “There are lots companies in Japan which aren’t growing any more so we are having to look away from the index at mid-cap and smaller companies.”

SoftBank is BGFD’s largest holding – its investments in Arm and OpenAI are key to the AI story, says Brett. Rakuten (e-commerce), CyberAgent (digital advertising) and Bengo4.com (online legal services) are also AI beneficiaries. Video games should also be helped by AI, allowing them to be developed faster and more cheaply: Nintendo, Sega Sammy and Square Enix are all in the portfolio.

Pharmaceutical company Eisai has – in partnership with Biogen – the first approved drug for early Alzheimer’s disease. Robotics, an area of national strength – “Japan has a pressing need to manage a declining population” – also features, with Fanuc.

SBI, Japan’s largest stock brokerage, is the second-largest holding. It should capitalise on the growing popularity of the enhanced Nippon Individual Savings Account (Nisa), a tax-free vehicle modelled on the UK ISA. “With inflation coming back, putting money into the bank isn’t so smart any more. Real estate and the stockmarket should benefit.”

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After World War II, America and its allies put in place a set of alliances, institutions and power structures to rebuild war-ravaged countries, create geopolitical stability and generate global economic growth. This post-war order has endured – with one important change – for much of the following eight decades.

The fall of the Berlin Wall and the dissolution of the Soviet Union seemingly marked the end of any alternative to Western capitalism and liberal democracy as the main global economic system. However, in recent years, it has become increasingly obvious that the ties holding this US-dominated system together are fraying and are likely to break.

We are heading into a new world that is likely to be more unstable. In a symbol of this change, on 5 September this year, US president Donald Trump signed an executive order renaming the Department of Defence as the Department of War. This restores the name that it carried from 1789 until 1947 and points to the rising risks of conflict in the years ahead.

So how should investors position themselves for what comes next? What areas that are currently under-represented in most portfolios should they consider for diversification and protection?

Rivalry and conflict between the US and China

The main question is how the shift from a single superpower to two contending nations – the US and China – will affect global supply, demand and the efficiencies of comparative advantage. Free trade has generated huge gains since the end of the Second World War, and even more so since the end of the Cold War. This is now clearly under threat.

With the end of the post-war order comes the new “Great Game”. This name was originally given to the struggle between Britain and Russia for influence in Central Asia (Afghanistan and Persia). This time, the strategic rivalry and political conflict is between the US and China. Paradoxically, it is America that is now pursuing a more inward-looking strategy under Trump’s Make America Great Again (MAGA) banner, while China aims to build economic and political alliances through its Belt and Road (BRI) and Global Development Initiative (GDI) projects.

While America strives to bring its manufacturing base back onshore, Europe is now having to divert budgets from social welfare to rearmament. Both are now in stiff competition with China to electrify the planet and build digital infrastructures. This will inevitably lead to global competition for resources across energy, metals and critical minerals.

This is leading the two superpowers to weaponise their core strategic advantages. For America, this is the US dollar, still the world’s global reserve currency. For China, it is a stranglehold on rare earth elements and critical minerals.

China needs an alternative to the dollar

Freezing and confiscation of assets and denial of access to global payments systems is forcing non-US aligned countries to look for an alternative store of wealth and means of exchange. Herein lies the potential significance of the Brics+, the informal name for the original group of five key emerging-market powers – Brazil, Russia, India, China, South Africa – plus other countries that have begun joining them for summits and policy coordination. Some see this group as a counterpart to the G7 group of developed economies. Initiatives by the Brics+ members so far include work on a development bank, central-bank cooperation and an international payment messaging system.

Any alternative to the dollar looks increasingly likely to be a form of tokenised, asset-backed digital currency. This explains why many central banks closely aligned with the Brics+ nations have been large buyers of gold and other precious metals.

If the creation of a new currency system seems far-fetched, it is worth a quick review of the genesis of the post-war order: the Bretton Woods Agreement of 1944. China is a great student of history, and this agreement provides an template for how new world orders are created. While World War II was still raging, more than 700 delegates from 44 countries met at Bretton Woods in New Hampshire in the US to work on a new global monetary system. The goal was to create a globally efficient foreign exchange market, prevent competitive currency devaluations and promote global economic growth.

John Maynard Keynes, one of the principal economists at the meeting, proposed creating a new international reserve currency called the “bancor” and setting up a global central bank called the “Clearing Union”. However, these proposals were eventually watered down by the US Treasury in favour of a more prominent role for the US dollar, whereby the dollar would be pegged to the price of gold, and other participating currencies would be pegged to the dollar. The agreement was fully implemented in 1958, pegging the US dollar to gold at $35 per ounce.

This system functioned until the early 1970s when it became evident that US gold reserves were not adequate to sustain the peg. This caused a run on gold, forcing first a temporary suspension of the dollar’s convertibility into gold followed by complete collapse of the agreement in 1973. US president Richard Nixon also imposed a 10% tariff on all dutiable imports to force its major trading partners to adjust their currencies upwards and trade barriers downwards. Does this sound familiar?

China has already taken the strategic initiative to convene the Brics+ group of nations. It has established the Shanghai Gold Exchange – and associated physical storage – and now holds a significant percentage of its reserves in gold. It has shown little desire to replace the dollar with its own currency – internalisation of the renminbi would erode the ability to operate capital controls – but it and its allies need an alternative to the dollar.

Given China’s embrace of technology and advanced domestic digital-currency adoption, it does not feel far-fetched to envisage it launching a Bretton Woods-style gold-backed digital currency for those unable or unwilling to access the US dollar system. Crypto tokenisation is the vehicle, not the asset.

China's control of strategic resources

China’s strongest bargaining chip lies in its control of rare-earth elements (which are used in magnets, electrification, lasers and optical devices, catalysts and emission controls and radar/guidance systems), as well as critical minerals, that have broader energy, industrial and defence applications.

China has this control because, while the West focused on the comparative advantage of outsourcing its production to countries with lowest costs, China focused on building an end-to-end supply chain comprised of exploration, mining, refining and industrial manufacturing. With its looser environmental controls, it has come to dominate the global supply of these critical minerals.

In the tit-for-tat game of tariffs and sanctions, China is able to leverage its position in the one area where the US is completely vulnerable. So just as China and its allies have no alternative but to develop a competitor to the US dollar as a store of wealth and means of exchange, the US and Europe now see they have no choice but to develop alternative sources for mining and processing capacity to break this reliance. Exacerbating the situation, America’s prioritisation of its own MAGA agenda over historical alliances has left Europe and other previously US-aligned countries to build their own rather than collective resources.

If investors believe the post-war order is irretrievably compromised, they should consider investments that give exposure to these themes. Gold and precious metals for hard assets. Tokenisation and chips to enable digitalisation. Energy and power generation, rare earth elements and critical minerals, which will be in demand as both sides try to secure supply chains. And US and European defence stocks as the West joins in the new arms race.

Investors have many ways to access these ideas, including individual stocks, thematic exchange-traded funds (ETFs) or exchange-traded commodities (ETCs) that hold physical metals. Listed commodity futures and options are also becoming increasingly accessible, as major exchanges such as the Chicago Mercantile Exchange (CME) roll out mini and even micro contracts, which are 1/10 or 1/100 of the size of standard contracts and require less up-front capital. Such instruments are only suitable for experienced investors, but they offer a way to quickly add hedges or speculative positions to a portfolio – something that will become more valuable in a fast-changing world.

James Proudlock is managing director of OptionsDesk.

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The good times are rolling again in Tokyo, where the Japanese stock exchange has extended its record rally, fuelled by what UBS calls the “Takaichi trade”, says MarketWatch. But if new PM Sanae Takaichi – the country’s first female prime minister – is one symbol of the boom, another is the return to prominence of one of Japan’s most notorious traders.

Activist investor Yoshiaki Murakami was a central player in the Livedoor scandal that shook Japan to its roots in 2006 when the internet company, founded by the flamboyant Takafumi Horie, collapsed spectacularly after the exposure of a shares and accounting scam. Eventually sentenced to two years for insider trading of shares in Nippon Broadcasting System (which Horie had waged a hostile bid to acquire), Murakami’s downfall was viewed as a “victory for Japan’s traditional business community”, who regarded his “brash brand of capitalism with barely concealed contempt”, noted The Guardian at the time.

Like Horie, Murakami had risen to prominence as an enfant terrible, determined to crush established hierarchies “in the search for quick profits”. Famous for “aggressive tactics and fiery language”, the impact of his disgrace – and the wider collapse following the 2008 global financial crisis – was to bring “activist investing in Japan to a halt”, says Bloomberg. In 2009, he left the country for Singapore to concentrate on real estate investments.

Now 66, Murakami is back with a new firm, City Index Eleventh, and his tactics haven’t changed – he spots weakness in a target and tightens the screws until he gets what he wants. The latest is another prominent broadcaster, Fuji Media Holdings, which in January became engulfed in a sex scandal. “Longtime executives quit in disgrace. Advertisers fled. Earnings cratered” – and Murakami piled in, amassing a 16% stake and demanding the spin-off of subsidiaries to boost the share price. Since his investments started picking up in 2021, his companies have made ¥170 billion (£841 million) in profit, according to Citic Securities. Indeed, Murakami, his family and affiliates now control at least £2.4 billion in Japanese stocks – two daughters, Aya and Rei, are in the business.

More significantly, the originator of Japanese activism has helped spawn a new movement. A record 146 activist campaigns were waged in the country last year, disrupting “once-clubby” executive suites and helping to revive Japan’s stock market.

After graduating from the University of Tokyo in 1983, Murakami joined the Ministry of International Trade and Industry – gaining a reputation for his financial acumen and straight talk. Murakami got into the habit of checking financial results before meetings and was astonished by how many executives were ignorant of the company’s balance sheet. They simply assumed the customary practice of their predecessors – sitting on hoards of cash rather than investing. “Frustrated by the lack of urgency”, he left the civil service, “figuring he could be more effective as an investor”.

Yoshiaki Murakami's Marmite personality

Something of a Marmite personality, Murakami is castigated by opponents for “using fear as an investment strategy”, says the Financial Times. Others view him as a brave standard-bearer. “He’s Japanese – with a thoroughly Anglo-Saxon understanding of capitalism,” one broker told Bloomberg. “He was an insider who realised Japan needed to change and became an outsider to make that happen.” Murakami’s “approach was direct, data-driven and fundamentally correct in diagnosing bloated balance sheets [and] weak governance”, adds Star Magnolia Capital. “Management teams saw him as an intruder”, and the media “portrayed him as a raider”. Yet he wrote “the first chapter of modern Japanese activism”. No doubt he plans to write a few more.

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I repeatedly come back to this subject because I think it is one of the most important yet overlooked issues in global finance. The geopolitical ramifications are enormous. Something that the Trump administration appears to understand in a way that previous administrations didn’t is this: it doesn’t matter if you issue the global reserve currency; if you don’t make anything, when the tide goes out, you are going to be caught swimming naked.

During Covid, the dangers of excessive dependence on China and its supply chains for critical or strategic products became apparent. It became clear again during the Ukraine war. Russia managed to manufacture munitions much faster than Nato.

Reshoring US industry is not something that can be done overnight. It is going to take years, if not decades – almost as long as it took to unwind in the first place. But the Trump administration is at least trying to kick-start the process with tariffs, a weaker dollar and, more subtly, the managed decline of the US dollar as global reserve currency.

As a result, neutral gold’s role as a global reserve asset is returning to prominence. History’s “golden” rule will soon apply again: he who has the gold makes the rules.

My argument is that China has considerably more than the 2,300 tonnes it says it does. That figure constitutes the world’s fifth-largest reserve of the yellow metal. The central banks of the US, Germany, Italy and France are the top four holders of gold reserves, with respective 8,133, 3,350, 2,451 and 2,437 tonnes.

How much gold does China have?

The People’s Bank of China (PBOC) is China’s main custodian, but other state entities, such as the China Investment Corporation (the sovereign wealth fund), the State Administration of Foreign Exchange and the Army, also own gold. In fact, having other state bodies hold gold is one of the means by which China is able to understate its reserves.

I’m going to use a slightly more conservative methodology, which means I will arrive at a lower estimate. Even so, the numbers will shock you. Remember that China is the world’s largest importer of gold, the largest consumer and the largest producer (in 2008 its output eclipsed South Africa’s). I am going to use round numbers, as they are more digestible, and when there is a spread (between 500 and 1,000 tonnes, say), I will take the middle number: 750.

It is impossible to know just how much gold China has imported, because so many transactions are private ones, particularly those that go through London, Switzerland or Dubai. Gold transactions in Hong Kong are more transparent.

However, most, although not all, of the gold that goes to China goes through the Shanghai Gold Exchange (SGE), which opened in 2007. Withdrawals from the SGE between 2007 and mid-2025 total 29,500-30,000 tonnes, based on aggregated data from the Shanghai Gold Exchange (SGE) and World Gold Council (WGC) reports. I’m going to overlook gold that made its way to China prior to 2007, although it’s quite easy to make the argument that this amounts to several thousand tonnes.

The SGE is just a flow metric, it should be noted. It does not represent total consumption. Some of the gold passing through will have been double-counted, either as a result of reselling and recycling, or because of China’s booming money-laundering business and the circular trade with Hong Kong. Estimates for double-counting range from 10%-30%. Let’s take the middle 20% figure (6,000 tonnes), and that leaves us with 23,250 tonnes of SGE gold.

As for the undisclosed gold, consider that the PBOC likes 400-ounce bars, as traded in London. These do not trade on the SGE, which uses smaller kilogram bars and 3kg and 12.5kg ingots. (400oz is about 11.3kg.)

So London imports will not go through the SGE, unless re-smelted, and are therefore counted in addition to the numbers above. Analysts mostly concur that while reported imports via London, Switzerland and Dubai total between 3,500 and 4,500 tonnes, another 3,000 tonnes (mostly post-2009, accelerating since 2022) have gone unreported. Add the 3,000 tonnes to the 23,250 of SGE gold and our total is now 26,250 tonnes.

Gold mining in China

Around 55% of Chinese gold production is state-owned, and we know from geological records that this century, China has mined roughly 7,500 tonnes.

Between 70% and 80% of Chinese production is sold through the Shanghai Gold Exchange, so we have already counted that. The other 20%-30% goes to the state. Using estimates from the mid-range, 25% of those 7,500 tonnes (1,875 tonnes) has gone to the state. The rest has been sold through the SGE. Add 1,875 tonnes to the total, and we reach a figure of 28,125 tonnes.

By the way, I have not included overseas Chinese gold production, of which there is a lot. Some of this gold is sold on international markets and never actually reaches China. But what does reach China is sold through the SGE and has therefore already been counted. Finally, we have to add in gold held in China, whether as bullion or jewellery, prior to 2000. The WGC estimates a figure of 2,500 tonnes in privately held jewellery. Added to domestic mining and official reserves, you get a figure of around 4,000 tonnes. This brings our grand total to 32,125 tonnes.

Demand for gold

Previously, I have argued that 50% of that gold would go to the state. That would mean roughly 16,000 tonnes – almost twice as much as the US’s reported 8,100 tonnes! Let me propose another methodology.

It stems from my conversation with Konstantin Kisin in the Triggernometry podcast a fortnight ago. Last year, investors and central banks comprised a respective 25% and 23% of overall demand for gold; the figures for jewellery and industry are 47% and 6%.

These figures of course change from year to year, with demand from investors and central banks being the big variables. But if we assume demand from China roughly matches global demand, that would mean that of the 32,125 tonnes, roughly 15,100 tonnes is jewellery; 8,030 is now bullion held by investors; 1,930 tonnes went into manufacturing; and the Chinese government has 7,400 tonnes.

This assumes Chinese gold has been allocated over the last 25 years according to the global habits of last year, which is almost certainly a bogus assumption. China is such a big manufacturer that demand from the Chinese industry may well be higher than 6%.

It’s also easy to argue that because the Chinese people like gold so much, and the state has been encouraging them to invest since 2007, that both Chinese jewellery and investment demand is higher than 47% and 25% respectively.

Similarly, because of dedollarisation, demand from the PBOC could be higher than 23%. In any case, I have been transparent about my methodology.

You can make up your own minds. The upshot is that China’s stated reserves of 2,300 tonnes are a gross underestimate.

In a way, it’s actually better for investors if China has less gold, because it means they have more buying to do, and that should help drive prices higher. Meanwhile, the Middle Kingdom’s stated 2,300 tonnes only account for 7% of its $3.4 trillion of overall reserves. To get above 70% and match the allocation ratios of the US, Germany, France and Italy, at $4,200/oz gold, it would need something like 18,000 tonnes. That’s a lot of buying yet to come, in other words.

If you take my assumption from previous years (that 50% of the gold that has gone to China via imports or production went to the state), then China has 16,000 tonnes of gold. That is twice America’s reported holdings of 8,133 tonnes.

This comes just as gold, at current prices, accounts for 30% of global foreign-exchange holdings, according to Deutsche Bank. The US dollar, meanwhile, makes up 40%. The euro’s proportion lies below 20%. This is quite the move: gold’s share was just 20% at the beginning of the year.

At $5,800 – a 33% rise from today’s price of $4,340 – gold overtakes the US dollar to become central banks’ largest holding. That assumes banks don’t buy any more, of course, when they will. A recent survey by the WGC found that 43% of central banks plan to increase their holdings over the next year, while 95% of reserve managers expected global central-bank holdings to rise over the next 12 months.

I was looking for parity between the dollar and gold in terms of reserve holdings at some stage in the next decade. We could see it within the next six months on current trajectories.

Why is China keeping its gold a secret?

And gold isn’t money, according to former Federal Reserve chairman Ben Bernanke. So why does China understate its reserves? China is still in accumulation mode. While it is buying, it wants the price low.

It certainly doesn’t want to cause it to spike.

If China were suddenly to say that it actually has 7,400 or 16,000 tonnes, rather than 2,300, it would send the gold price rocketing. More significantly, it risks sending the dollar into a plunge. China has $3.4 trillion-worth of dollars. It wants to preserve their value, presumably.

In short, coming clean on gold holdings would create enormous financial upheaval. It has that card, ready to play, should it ever need to, should it ever get into conflict with the US, for example. Money is the first thing that gets weaponised in war.

But for now it doesn’t need to. China is surely happy growing as it is, making things and selling them to the rest of the world, thus ensuring that the rest of the world becomes dependent on it. Why rock the boat? It’s on to a good thing after all.

“We must not shine too brightly,” as Deng Xiaoping is once supposed to have said. I understand that what he actually said amounted to “keep a low profile”, or “don’t draw attention to yourself”. Same difference. China doesn’t want to rock the boat, particularly while it’s still accumulating gold.

This is quite a shift that is taking place, and it is happening quickly. The upshot? You really want to own gold, overbought or not.

Dominic Frisby writes the investment newsletter The Flying Frisby (theflyingfrisby.com). His latest book is The Secret History of Gold: Myth, Money, Politics & Power, published by Penguin Business and available from all good bookshops.

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Emerging markets are full of opportunities – not just the mega-caps that dominate headlines, but also the lesser-known innovators quietly shaping the future. At the Mobius Investment Trust, we think these “under-the-radar” firms offer some of the most exciting potential for long-term investors.

Our forward-looking, quality-driven approach is built on proprietary research, which should allow us to access promising opportunities overlooked by the mainstream.

In Asia in particular, the opportunities are compelling. India is benefiting from very rapid digitisation, momentum behind government reforms and a young, middle-class population. Taiwan sits at the heart of supply chains for global technology ranging from semiconductors to next-generation AI infrastructure.

South Korea, meanwhile, combines world-class innovation with ongoing improvements in corporate governance. Together, these markets provide fertile ground for finding companies with sustainable earnings, competitive advantages, and the resilience to navigate changing market dynamics.

With an active share of more than 98%, our portfolio looks very different from the benchmark. This differentiation should allow us to capture growth stories others may miss, while our active-ownership approach means we work hand-in-hand with companies’ managers to help drive improvements in operations, governance and sustainability.

To illustrate our approach, here are three examples of the kinds of companies we aim to invest in: innovative businesses with distinct market positions and exposure to long-term growth trends.

Three emerging market stocks to watch

E Ink (Taipei: 8069) is best known as the company behind the e-paper screens in e-readers such as the Kindle. The group has a near-monopoly in this niche technology. Beyond e-books, it is powering a wave of electronic shelf-labels in retailers, helping stores reduce labour costs and enable dynamic pricing. With only a fraction of the potential market penetrated and thousands of patents protecting its technology, the potential for long-term growth is significant.

CarTrade (Mumbai: CARTRADE) is a leading asset-light online platform for buying and selling vehicles in India, covering everything from cars to two-wheelers. With car ownership still low but rising quickly, and the demand for used cars accelerating, CarTrade benefits from powerful long-term trends. Its move towards high-margin online classified advertisements, including OLX, a global platform, has boosted profitability. Furthermore, the business is debt-free with a strong record of growth.

Park Systems (Seoul: 140860) is a pioneer in atomic-force microscopes, tools that allow semiconductor companies to inspect surfaces at the nanoscale. As chips become smaller and more complex, such precision is essential. Founder-led with deep academic roots, Park Systems has carved out a first-mover advantage and is well-positioned to expand alongside rising global demand for advanced semiconductors.

These are just three examples of the kinds of businesses we focus on: innovative, high-quality companies in dynamic markets, often overlooked by the mainstream, but with the potential to deliver sustainable growth over the long term.

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Andrew Van Sickle: After more than a decade of poor performance, emerging markets (EMs) have staged a comeback this year. The benchmark MSCI EM index has gained more than 20% in US dollar terms. What has brought out the bulls?

Gustavo Medeiros: I think there are three key drivers here. The first is that we had historically low valuations at the start of the year. The second is that over the last 18 months or so, earnings per share have started to climb, helped by healthy growth in several countries and buoyant industries such as AI and semiconductors.

Earnings per share in the MSCI EM Index are now expected to rise from $80 to $96 or so this year. Profit growth has eclipsed that of the MSCI World index over the past four quarters. The third source of support is the weaker US dollar.

Andrew Van Sickle: That usually bodes well for EMs, which are risky assets; a buoyant greenback, along with high US interest rates, bolsters the appeal of safer US assets. Have global investors become disillusioned with America?

Gustavo Medeiros: America has the world’s reserve currency and the deepest capital markets in the world. So the key determinant of global asset allocations will be how the biggest market is performing in absolute and relative terms. High valuations and the tariffs on “liberation day” unnerved investors, reminding them that they needed to diversify away from the US. Structural improvements in developing economies, notably lower inflation, and a shift to pro-market policies post-pandemic, have also helped bolster sentiment. There have been more upgrades than downgrades of EM sovereign debt for some time now, for example.

Meanwhile, although EMs are traditionally comparatively dependent on trade, with large shares of exports as a percentage of GDP, Liberation Day at least tempered the uncertainty. It became clear that tariffs would not fall below 10% but were also unlikely to exceed 30%. On paper Mexico and Vietnam are the most vulnerable, with exports to the US worth 25% of GDP in each case – although a pre-existing Trump-originated deal in the former, and a strategic partnership with the US in the latter, tempers risk. Their stock markets have rallied 40% this year, as have those of Southeast Asia, the next most vulnerable economies.

Andrew Van Sickle: Shall we take a closer look at the structural changes in EMs, a recurring theme for 10 to 15 years now? Everyone used to think of EMs as commodity-exporters heavily geared to global growth, but there’s far more to the story these days.

Gustavo Medeiros: Yes, there is a wide array of supportive factors. In Asia, India and Indonesia are two examples of major economies that have gained momentum through structural reform. Chinese technology, chipmaking in Taiwan and AI are also boosting EM growth. In Latin America, there are many high-quality undervalued companies that have embraced digitalisation and have enormous target markets, yet politics has obstructed the investment opportunity. A series of coming elections are likely to result in a shift towards a more free-market approach, which bodes well for profits and interest from global investors.

Peripheral Europe and central Asia should benefit from a strong boom in capital expenditure on defence, energy and infrastructure coming from Europe, a result of Europe’s attempt to become more self-sufficient. Meanwhile, a round of fiscal consolidation in Ghana, Nigeria and Egypt, following the tight squeeze imposed on Argentina by president Javier Milei, is good news for some of the smaller, more exotic markets.

Andrew Van Sickle: I remember being struck, during the pandemic, by EM central banks being quicker off the mark when it came to squeezing out inflation by raising interest rates than their developed-market counterparts. Overall economic management has improved greatly in EMs.

Gustavo Medeiros: Economic policy has been much better, much more sensible over the past five years in EMs. They raised rates rapidly to counteract the global boost to inflation and avoided quantitative easing; they were mostly restrained when it came to fiscal stimuli, too and quicker to consolidate their deficits. They clearly learnt from the debt crisis of the 1980s and 90s and opted for prudence this time. That leaves them well-positioned for strong and sustainable growth.

Andrew Van Sickle: Let’s zoom in on some of the major economies and markets now, starting with China. A drift towards authoritarianism and the fear that it could turn into another Japan have been two key bearish factors. How would you assess the situation?

Gustavo Medeiros: One simply has to factor in that China has a different political system. The key is the extent to which the private sector is allowed to flourish. And here, the news has improved over the past year. We have become more optimistic recently. Since last autumn, policymakers have been far more willing to support enterprise. It started with measures to backstop the real-estate sector, which has been a major drag on activity. Then the central bank allowed firms to borrow cheaply to buy back their undervalued stocks, accelerating a trend towards buybacks that companies had started themselves. That was a key turning point for us.

The state is also supporting developments in technology, with DeepSeek’s large language model being rapidly adopted in both the public and private sectors. The government hopes to harness AI’s potential to accelerate progress in areas where China is already leading, such as robotics, electric vehicles and cutting-edge biotechnology. The big picture is that the government used to favour particular industries, but now seems to be keen to bolster the entire private sector.

And this is very important. The main reason countries get stuck in the middle-income trap is a failure to innovate, not adverse demographics or other factors. This is clear to Beijing, which is why the leadership keeps on pushing to make their economy more productive, and keeps on pushing to be at the forefront of technological development in many industries. Beijing is also acutely aware that some sectors are oversupplied, with rampant competition rendering margins razor-thin. The banks have fuelled the boom in capital expenditure, and could now take measures to help sector leaders buy up less productive rivals and perhaps rein in lending to struggling mediocrities. The least productive companies should gradually fall by the wayside. These measures are meant to address fears over the Japan-style zombiefication of the economy.

Andrew Van Sickle: Very encouraging. Taiwan is still the second-biggest weighting in the MSCI EM index. That’s due to chip giant TSMC, isn’t it? It’s the AI story.

Gustavo Medeiros: It has the tightest grip on the sector thanks to its ability to produce cutting-edge chips economically, with cutting-edge equipment. It would take years and a vast amount of capital for another company to emulate them, so that provides the company with an enduring competitive advantage; a deep “moat”. While Google could face a threat in search and Apple would struggle if another firm comes up with a gadget that is better integrated with AI than Apple’s range, I don’t see TSMC’s lead being eroded anytime soon.

Andrew Van Sickle: Let’s look at India, which you have described as the most exciting structural-growth story in EMs.

Gustavo Medeiros: No exciting structural story goes in a straight line, and there are now some wrinkles in the case of India. Around 18 months ago, valuations became extremely overpriced, which has been a headwind. And the pace of growth in capital expenditure, having surged in prime minister Narendra Modi’s first term as investment in infrastructure galvanised investment in the private sector, has ebbed.

A bright spot at present is the banking sector. Valuations are reasonable, private banks have done well with the adoption of fintech and have been able to deliver strong growth. Meanwhile, inflation is under control and short-term interest rates have been cut. The interest-rate curve is thus steepening, which is good news for banks’ net-interest margins. President Donald Trump’s tariffs are another headwind for now, although the economy is relatively insulated from global trade, given the large consumer sector.

The long-term outlook is still favourable, however, given the demographics, the dynamic private sector (the service sector will be able to exploit AI) and the gradual evolution of a manufacturing sector in recent years. Apple, for example, have said they will make all iPhones sold in the US in India by 2030.

Andrew Van Sickle: Finally, you have described Indonesia as a structural-reform story trading at crisis-level valuations.

Gustavo Medeiros: A year ago, power was transferred to president Prabowo. He is market reform-orientated, like his predecessor Jokowi, but investors appear to have been spooked by two policies. One was free school meals. This is sensible, but it took up a large share of the budget in a traditionally low-tax, small-government economy.

Then he consolidated state-owned companies into a sovereign wealth fund in order to gather their dividends together and allocate the money to the economy more effectively. Again, sensible enough, but investors were nervous because of the recent scandal surrounding Malaysia’s 1MDB sovereign wealth fund. Just as investors were starting to digest the uncertainties, the protests on the streets of Jakarta led to the exit of experienced finance minister Sri Mulyani. She was seen as one of the safest pair of hands across EMs, so even though her successor is likely to keep her policies unchanged, her exit was another blow to confidence.

Still, the broad pro-market direction is unchanged, and the long-term structural-growth story remains compelling. Indonesia has lots of metals that will be crucial to the global energy transition, while demographics are also a tailwind.

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A dominant military, political instability and a reliance on foreign aid and bailouts are hardly hallmarks of successful economies. Yet Pakistan’s stock market is booming. The Karachi Stock Exchange KSE-100 index has returned nearly 90% in the past 12 months, compared with the FTSE 100’s 10%, dipping slightly in May when tensions escalated with India. Meanwhile, the Pakistani rupee has been relatively stable by past standards, down 4% over the year.

Market sentiment towards Pakistan improved after it secured a new $7 billion loan from the International Monetary Fund (IMF) last September and promised sweeping reforms, including raising gas and energy prices and expanding the tax base. The IMF deal has “significantly reduced the risk of any kind of near-term balance of payments crisis or debt default”, says Gareth Leather from Capital Economics.

“And by and large, the economy’s actually done quite well since then. So, foreign exchange reserves have recovered [and] exports are doing okay. The economy is broadly on the right track... I think [the equity market’s rise] reflects an easing of concerns that the worst-case scenarios are no longer likely.”

But the rally could also foreshadow a long-term bull market based on a sea change in economic management and potential. Thomas Hugger from Asia Frontier Capital believes Pakistan could become the “Vietnam of South Asia” owing to its large population, low salaries, and abundant natural resources such as gold and copper. “If the current government is really serious about it [reform], I think they could have the chance to become a mini-Vietnam, create a lot of jobs and… create a middle class, and that would be huge.”

Still, Pakistan is navigating a rocky route to recovery, having narrowly escaped a sovereign debt default in 2023 with a temporary IMF deal and funding from Saudi Arabia, the United Arab Emirates and China. Pakistan owes China about $29 billion, roughly 22% of its external debt. Some reforms, such as reducing import restrictions and removing energy subsidies, have increased inflation, which hit 38% in June thanks to high food and petrol prices. Inflation eased to 28.3% in July and 27.4% in August, according to official data.

Roller-coaster ride for Pakistan's economy

Pakistan has a chequered history of boom-and-bust cycles, anaemic growth, poor income-tax collection and a large informal economy. “Debt accumulation has been overwhelmingly used to continue fostering a consumption-focused, import-addicted economy without investment in productive sectors or industry,” say Ammar Habib Khan and Zeeshan Salahuddin in a report for Tabadlab, a Pakistani think tank. “Consumption [via] imports continues to grow, while exports and remittances remain stagnant, thus shortening the boom cycle, leading to another bust and more inflation. This cycle repeats ad infinitum.”

Furthermore, the military has enormous sway over the economy and politics. Any leader who falls foul of the military does not stay in the job very long. Former prime minister Imran Khan has been imprisoned since August 2023 on what he claims are trumped-up corruption charges. “The wild card is the army,” said Hugger. “They have their own interests, and that’s not normal and sometimes not in sync with the economy.

They want to continue to live their great life… these army generals make a lot of money, and it costs a lot of money [for] the state, and that’s the issue here.”

Leather says the army is responsible for Pakistan’s political uncertainty and military coups, which have dragged on the “broader business environment and sentiment that foreigners have towards the country”. That is one of the reasons why the economy has performed so badly over the past few decades. However, nuclear-armed Pakistan may be too strategically important to the US and China to fail, which is a disincentive to reform for the government.

Pakistan’s relations with both have warmed recently. Islamabad secured a 19% tariff on US goods, lower than India’s 25% (and now 50%), and an agreement to develop oil reserves with the Trump administration. Textiles are Pakistan’s biggest export, and the US is Pakistan’s largest export market, with exports of more than $5 billion as of 2024, and imports of roughly $2.1 billion.

Pakistan is not, however, an “especially trade-dependent open economy” compared with other “dynamic” Asian economies, says Leather. “Tariffs aren’t the end of the world in the same way they would be for, say, Vietnam. Having said that, they’re certainly not going to help… if it’s harder to export to the world’s biggest economy.”

Meanwhile, officials recently held talks about deepening ties with China, and the second phase of the China-Pakistan Economic Corridor, part of the Belt and Road Initiative.

What now? Doubts remain as to whether Pakistan can stick to the IMF reforms. “What’s happened in the past in Pakistan is that they’ve made all these promises, they’ve agreed a deal with the IMF, the… worst-case default has been avoided, but then a couple of years later, when the economy’s past the worst, they renege on these deals. They go back to their old ways, and I think that’s the danger with Pakistan, that things are looking okay at the moment. But that is typically the time when they start to renege on their promises,” says Leather. “It’s whether they can… stick with the [IMF] programme for the lifetime of it.”

But Hugger is more optimistic. “You can trade [on a] couple of weeks’ or months’ outlook, but… if you really want to make a lot of money, then you need to be a long-term investor and get it right.”

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Whatever else happens this year, Robin Zeng can claim one pivotal moment. In May, he took the contrarian bet of pushing ahead with a secondary listing of CATL in Hong Kong. It proved transformative, says the Financial Times. Shares in the company, a pioneer in batteries for electric vehicles (EVs), surged, lifting its market value to roughly $166 billion in the world’s biggest IPO of the year.

The float jump-started the wider market out of its post-Liberation Day slump, with the Hang Seng index now up 30% in the year to date. Leading the rally in confidence, amid new optimism about a trade détente between the two superpowers, is China’s battery king – now a Hong Kong citizen and vying with business magnate Li Ka-shing for the title of Hong Kong’s richest person, with a net worth of some $40 billion.

Not that he apparently cares, says The Wall Street Journal. Zeng might have built CATL into a global juggernaut – its batteries were installed in one in three EVs globally last year – but he represents a new kind of tycoon flourishing in Xi Jinping’s China: understated, philanthropic and ready to echo official state talking points. “I don’t want to be the rich guy,” he observed on the eve of the float. “I want to share these riches to create a good society.”

Zeng, 57, emerged during a turbulent period for tech executives and has learned the lessons – leveraging his know-how “and the state’s willingness to throw money at the renewable energy and EV industries” while keeping his head down. He toes the line on Xi’s vision for China, “where ostentatious displays of wealth aren’t tolerated and humility is the sentiment of the day”. His draws inspiration from the early Chinese sage Confucius, with his “lifelong learning and continuous moral improvement”.

How Robin Zeng made his money

Born in 1968 as Zeng Yuqun, he grew up in poverty in a mountain village in the southeastern province of Fujian – near Ningde, where CATL is now based. “A strong student with big ambitions”, Zeng won a place at the prestigious Shanghai Jiaotong University. He quit his first job at a state-owned enterprise in Fujian after just three months and moved to Dongguan to join an electronics manufacturer, studying part-time for a PhD in physics at the Chinese Academy of Sciences. In 1999, he started his own company, Amperex Technology (ATL), producing lithium-ion batteries. Apple was an early customer. Zeng realised his first fortune in 2005, when he sold ATL to Japan’s TDK for $100 million, says The Wall Street Journal. But he “stuck around”, setting up a car-battery division. TDK was banned from the Chinese market because it was a foreign company, so Zeng started CATL in 2011.

“The timing was perfect” – Beijing had begun prioritising EVs and was offering generous subsidies. As with ATL, Zeng built the firm’s reputation on a contract with a blue-chip Western brand, BMW. A big boost came in 2015 when Beijing told global automakers they would only qualify for subsidies if they used batteries from approved Chinese suppliers, including CATL. Within a year, revenues rose from $1.2 billion to $9 billion.

Zeng sees himself as much more than a battery-maker, says the FT. His ambition for CATL is to become “the pioneer” of the broader zero-carbon economy. He’s particularly interested in lowering the energy costs of vertical farming, telling Bloomberg that “if you solve agriculture, then you’ve solved everything”. Yet CATL remains at the mercy of politics. In January, the US added the firm to a blacklist of companies with alleged links to the Chinese military (a claim denied by CATL). That threat might have receded, but it hasn’t gone away. Moreover, entrepreneurs like Zeng are at the whim of Xi, says Desmond Shum, the Hong Kong businessman who wrote Red Roulette. “If you don’t understand this, you’ll be the first one slaughtered.”

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There are not that many people still working in investment who can remember a time when Japanese government bond (JGB) yields did not trend inexorably down. They peaked in 1990, just after the bubble began bursting, and declined through most of the following 35 years.

For the entirety of my career, shorting JGBs has been known as the “widow-maker”. No matter how low yields went, they always found a way to fall further, wiping out anybody reckless enough to bet that the bottom had been reached.

This may be why the big upward moves in longer-dated JGBs over the past year have not drawn as much attention as you would expect. Anyone who has been conditioned to expect JGB yields to be low forever will instinctively doubt that it can last. This is a brief upheaval, and they will soon head right down again.

Yet, something fundamental seems to have shifted. The 30-year JGB currently yields 2.9%, comparable to the 30-year bund at 3.1%. It had ticked up to almost 3.2% before the Bank of Japan said it would reduce the pace at which it is stepping back from quantitative easing (QE), while the Ministry of Finance indicated it would issue less ultra-long-dated debt in future.

The implications of this are significant – not just for Japan but also for global markets, because low-yielding Japanese debt has been a key funding source for many global carry trades. Borrow at low rates in one currency, invest in higher-yielding assets in another, pick up the difference in returns and hope you can unwind the trade before something – eg, typically a massive currency move – leaves you with sudden losses.

Long-dated JGBs signal uncertainty everywhere

Still, the higher yields on long-dated JGBs don’t imply that Japanese monetary policy is going to normalise any time soon. Markets are pricing in a very drawn-out adjustment – while the 30-year JGB and the 30-year bund are now in line, five-year yields are still well over a percentage point apart (0.97% vs 2.18%). This long-term distortion in global markets may gradually unwind – which is likely to be bullish for the yen over the long term – but it’s not immediate, or so the market thinks. Whether this may be too sanguine is another matter: if inflation (3.5% in May) remains high, rates should go up faster.

Instead, what long-dated bonds are signalling in Japan and elsewhere is a huge amount of uncertainty. Take the US 30-year Treasury, which now yields 4.8%. This doesn’t seem to be due to fears of runaway inflation in particular, because the 30-year inflation-linked Treasury is yielding about 2.5% (ie, the rate of inflation needed for them to return the same is just 2.3%). Rather, it simply feels increasingly reckless to lock up capital for so long. Investors worry about increased government spending, the potential for large amounts of bond issuance to fund it, politics (at the time of writing, the UK 30-year gilt had ticked up to 5.4%) and much more. They are right to be worried, and current yields still feel like very meagre compensation for those risks.

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If Xi Jinping wrote a book about dealing with Donald Trump, it would probably focus on “exploiting the US president’s greatest weaknesses” – and then “using the time gained” to strengthen China’s position, says The New York Times. “The Art of the Stall” appears to have been Beijing’s strategy. Rather than yield to tariff threats, China played the “trump card” of its control of critical minerals, while kicking thornier disputes deep into the long grass of “framework” talks. As an exercise in cunning, it cannot be faulted.

The irony, says The Spectator, is that even as Xi basks in the admiration of Western strategists, his position at home is looking ever less secure. Two years ago, the dictatorial Communist Party leader “presumptuously declared his intention to rule until 2032”. Plenty of people are now prepared to bet against that outcome. Reading the runes of what is going on in the opaque world of Chinese politics is always difficult, but of late, China-watchers have “detected subtle changes”.

In the last two weeks of May, Xi seemingly disappeared from public view – and his once ubiquitous presence on the front cover of the “People’s Liberation Army Daily” has become much patchier. His power base also appears under threat. Prominent members of Xi’s “Fujian faction” – including the vice-chair of the Central Military Commission and a senior admiral – have been arrested or investigated, while “other Xi generals have been removed from their posts”. A 40-episode drama series, Time in the Northwest, was dropped by China’s main state broadcaster after just two episodes. The piece was “an unashamed glorification” of Xi’s family – in particular his father, Xi Zhongxun. A revolutionary who rose to power under Mao before being purged in the Cultural Revolution, he was rehabilitated under the reformist Deng Xiaoping in the late 1970s.

Unshakeable loyalty

Few people have shaped Xi, who was born in 1953, as much as his father, says The Economist. Which is why a new biography of Xi Zhongxun by the American scholar Joseph Torigian conveys such fascinating, and sometimes gruesome, insights. In The Party’s Interests Come First, Torigian shows that, throughout his life, “Xi has been loyal to two groups that demand absolute obedience: the party and the family”. Both were often strict, yet that never dented his loyalty. As a boy, Xi washed in his father’s bathwater and practised deference at every turn, having been taught that “children who did not respect their parents were doomed to fail as adults”. Even when Xi was in his mid-30s and a rising star in the party, the ordeals continued. Torigian relates how Xi Zhongxun – then in his 70s with rotten teeth – “extracted some half-masticated garlic ribs from his mouth and gave them to his son to finish”. Xi accepted “without hesitation or complaint”.

After the hardships the family had endured during the Cultural Revolution, this probably seemed tame. When Xi Zhongxun was kidnapped, held in solitary confinement and tortured, his family was forced to denounce him. One daughter committed suicide, while the teenaged Xi was branded a traitor and forced to wear a heavy steel cap in front of a baying crowd. “His mother joined in the jeering.” Shortly after, Xi was “sent down” to a desolate part of the country, where he lived in a cave.

Xi’s rise began when his father became governor of Guangdong province, a “Special Economic Zone”, under Deng. But expectations that he would become an economic reformer proved premature. “His experience of injustice has not taught him that arbitrary power is undesirable; only that it should be wielded less chaotically than it was under Mao, by someone wise like himself,” says The Economist.

Might his time be up? Similar rumours have circulated before and come to nothing, says The Spectator. But given “the dire problems facing China” and the “indifferent performance” of its autocratic leader, it’s quite plausible that “CCP elders are casting around” for a more liberal successor. “If so, the consequences for Taiwan, and US-China relations, could be dramatic – and possibly beneficial to both.”

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It has been 50 years since Vietnam was reunited after a 25-year war that devastated the country. For the next 15 years, the communist regime made a bad situation worse by encouraging their opponents – the skilled, the educated and the ethnically Chinese – to flee, mostly in small boats. Between 200,000 and 400,000 refugees are thought to have died at sea.

However, in the late 1980s, the government performed a sharp U-turn and turned Vietnam into a very capitalist country under autocratic rule. Since then, GDP per capita has risen from $270 a year to $4,300 in an economy that has grown from $6.3 billion to $430 billion, notes Tod Davis of brokers Deutsche Numis.

Wider signs of social progress are equally impressive: the population has increased from 44 million to 100 million, male life expectancy at birth has risen from 61 to 75, literacy has risen from 57% to 96%, and the poverty rate has fallen from 78% to around 3%. Davis puts this transformation down to “the resilience, grit and determination of the nation – making it, for me, the number-one destination in Asia for investment over at least the next ten years”.

A prosperous future for Vietnam

With the economy growing at 6% per annum, “Vietnam is likely to become a high income nation similar to Taiwan and South Korea, with a GDP per capita of $12,500 within 20 years”, says Brook Taylor, chief executive of VinaCapital, the manager of the £700m Vietnam Opportunity Fund (LSE: VOF). He regards Vietnam as culturally more similar to these countries than the very different countries of Southeast Asia.

Sceptics will worry about the prospect for capitalist growth in a communist country, but “prosperity for everybody provides the legitimacy for one party government, as in Singapore”. There is “some correlation between democracy and prosperity”, but “which comes first?” Taylor asks.

“South Korea and Taiwan became democracies as the result of development.”

Vietnam has key advantages; a diaspora of around five million Vietnamese around the world, a high participation rate for women in the workforce, agricultural and mineral wealth and “a very pragmatic mindset”. The country’s 2,000-km coastline is a significant asset. “The wealth of China and the US is concentrated on the coast.” Surveys also assess it as “the third least-corrupt country in Asia, after Singapore and Malaysia”.

The threat of tariffs is the current worry (America’s trade deficit with Vietnam is its third-largest), but this may be exaggerated. VinaCapital expects the US to settle for a 20% tariff in the end, probably with a high-tech exemption. This would reduce GDP growth from 7% to about 6% for 2025. Yet this may still translate into corporate earnings growth of 20%, for a stock market valued at just 10.4 times expected earnings.

Private markets

VOF is managed by Khanh Vu, who left Vietnam by boat in 1978, but returned in 2010. His concentrated portfolio is invested in 25 stocks, focused on sectors that benefit from the evolving economy. Real estate accounts for 22% of the portfolio: urbanisation is still just 41%. Financials are 19%: only 43% of the population have bank accounts. Consumer and health care are 20%: domestic consumption is 65% of GDP and the middle class is growing. Industrials and technology account for 11%: internet penetration is 79%. Ten of the holdings are currently private, but 80% of the listed stocks also began as private equity, in privatisations or as private placements.

While Vietnam has 1,700 listed companies, screening for size, liquidity, low debt and growth reduces VOF’s scope greatly, to 25-30. Of the 15,000 private companies, Vu regards 100 as investable. Investments are typically held for three to five years, “but over ten years if justified”. However, Vu actively trims investments that perform strongly, or even sells out.

Vinamilk, one of the largest constituents of the Vietnam index, was held for 17 years until it exited between 2017 and 2021. Since then, the shares have performed poorly.

These disposals have enabled new investments – including reinvestment into a bakery company that was VinaCapital’s first investment – but also returns of capital. The trust has handed $764 million back to investors since 2011 – equivalent to its net assets then – including $92 million of share buy-backs since mid 2024. It has paid dividends since 2017 and the shares now yield 2.8%.

Focused exposure

Over the last three years, the market has been poor. At the end of April, VOF’s net asset value (NAV) was down by 10% in US dollar terms. Dragon Capital’s £1.2 billion Vietnam Enterprise Investments (LSE: VEIL) had lost 25% and Dynam Capital’s £80 million Vietnam Holding (LSE: VNH) had fallen by 10%.

However, the numbers are better over five years: the NAV return for VOF has been 68%, with VEIL on 58% and VNH returning 109%. There are points of differentiation (such as VOF’s greater focus on private markets and VNH’s tilt to smaller stocks), but the investment stories for all three are compelling. At present, VNH trades at a 5% discount to NAV, while the other two are on around 20%.

Vietnam is classified as a frontier market rather than an emerging one, so any exposure in an emerging-market fund is off-benchmark and typically small, making these specialist funds look more compelling. It is normally wise to be sceptical about single-country funds: investors can easily get sucked in at the high only to see the country fall out of favour. Being cautious about investing based on a country’s economic record is also wise (China has proved a miserable place to invest over the last 15 years). However, given the sharp setback in Vietnam’s market this year – due to the threat of tariffs – despite the excellent outlook and an investor-friendly approach, it may be the exception that proves the rule.

For investors wanting to hear more about Vietnam, Dragon Capital is holding a Vietnam forum and lunch with Dragon’s founder Dominic Scriven and VEIL’s lead portfolio manager Tuan Le in London on 18 June. There is no requirement to be a VEIL shareholder – all are welcome. For more details and to register, go to veil.uk/2025-annual-general-meeting.

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There is one very odd fact about commercial aviation. Although it has grown hugely, and we all fly far more frequently than ever before, it has hardly advanced technologically for 60 years. Sure, the aeroplanes are a little safer, slightly quieter, and they use less fuel, but those are all minor modifications. In the one respect that matters to passengers – how quickly you can get to your destination – it has gone backwards. You can no longer fly faster than the speed of sound, as you could when Concorde was still operational.

That might be about to change. We are on the cusp of a new era of aeroplane travel, with a whole series of technological advances making it possible that a commercial supersonic jet might be back on the market soon.

The trouble is, China may get there first. Its hyper-aggressive aeroplane maker Comac has unveiled plans for a supersonic passenger jet, the C949. It has already launched the C919, a competitor to the Boeing 737 and the Airbus A320 family, and it has plans for a C929 competing with the Boeing 787 and the A330. It’s now started work on the C949, a supersonic aircraft that it claims will be able to travel at 1.6 Mach.

It would be easy to dismiss that as marketing hype. But consider China’s advance in EVs, smartphones and AI. Its commercial science and engineering is far more advanced than most people have yet realised. It’s perfectly capable of making a quality jet that can travel that fast, and do so safely. It may well do so before any of the major Western aerospace firms.

Yet the West can’t afford to lose this race. A cheap, reliable and quiet supersonic aeroplane could easily turn into a “killer app” to knock out Boeing and Airbus. After all, if they were offered the choice, and so long as there was not much difference in price, who wouldn’t want to get from London to New York in three hours instead of six, or from Paris to Shanghai in six hours instead of 12? Travel within most of the US, Europe and Asia would involve a connection of an hour or less; even Australia would be no more than a 12-hour, non-stop flight from anywhere. It would transform the industry.

The West must accelerate innovation in commercial aviation

If China gets there first, it will create a huge new hi-tech manufacturing industry. It will generate lots of jobs, just as it does in North America and Europe, a network of well-paid suppliers, and plenty of spinoff start-ups. With a jet that’s faster than sound, China could leapfrog both its main rivals in a little more than a few years. Just as significantly, it could lock the world into a critical infrastructure controlled by Beijing.

Both the US and Europe should be spending a lot less time bashing China with tariffs and more time working out how to maintain European and US leadership in core industries. If China is close to developing a commercially viable supersonic passenger jet, then perhaps there should be a Boeing-Airbus joint venture to get their own aeroplane onto the market at the same time, or preferably before the Comac version takes to the skies; or a government-funded collaboration on the core technology, which could then be licensed to both companies to build their own jets; or an entirely new firm to build a new generation of aeroplanes.

There are a range of approaches that could work. But the West can’t afford to lose this race. Commercial aviation is one of the few industries left where the US and Europe are clearly dominant. Travel that’s faster than speed could easily turn the entire industry upside down. Right now, the West is doing nothing to stop that from happening.

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Asia is poised to drive global economic growth and is expected to account for more than half of the world’s GDP growth by 2025. There are major demographic dividends in Asia yet to be fully realised, led by giants such as China and India, while dynamic Southeast Asian economies, including Indonesia and Thailand, are also growing rapidly.

The focus on dividends is increasing across corporate Asia: 50% of the Asia-Pacific ex-Japan region is now yielding more than 2.5%. We believe the risk of dividend cuts is low in Asia owing to robust earnings and strong balance sheets, which provide good support for growing dividends.

We look for high-quality and dividend-paying companies in Asia that operate in growing industries and have a sustainable competitive advantage. We are actively investing in the future of AI and see real potential winners in the Asian technology hardware and semiconductor supply chain names.

Taiwan’s chip champion

TSMC (Taipei: 2330), the fund’s largest holding, is a global leader in producing semiconductors that are key building blocks for supporting the use of AI. Over the past few decades it has secured a sizeable advantage when it comes to production. It leads the global market and has built relationships with key customers.

It would be difficult for potential rivals to enter the market as they would need to spend huge amounts to replicate TSMC’s production system. Demand for its products, moreover, is strong. TSMC can therefore generate robust free cash flows. This helps support growing dividends, and the group’s shareholders have enjoyed good capital and dividend growth to date.

Taiwan-based Sunonwealth (Taipei: 2421) makes cooling fans for data centres. It supplies clients in industries such as IT, automotive electronics and network communication. A niche player, Sunonwealth is a preferred partner for customised cooling solutions, which enhances its market position.

It has also developed the first-ever MagLev motor fan, the world’s smallest and thinnest magnetic levitation motor fan, showcasing its innovation. As AI technology becomes more complex, the need for advanced cooling solutions grows. This makes Sunonwealth a vital part of the AI supply chain.

The company’s strong balance sheet and cash flows have historically supported a healthy dividend payout and an attractive yield.

Accton (Taipei: 2345) is a Taiwanese firm that makes high-speed networking switches for US heavyweights such as Amazon and Facebook, as well as others, including HP, Nokia, and Ericsson. The company boasts a strong research and development edge, a broad product range and a solid record of over 30 years.

The business also has high barriers to entry, deterring rivals. This is due to complex technical designs, close relationships with high-profile, established companies, long qualification times and cost competitiveness driven by the advantages of scale.

It has not only diversified its key customer base beyond Amazon (it now has Intel and Meta on its books) but has also extended the range of its switch business, which now focuses on AI accelerators too. Accton’s consistent improvement in profitability underpins its ability to deliver steady income growth over the long term.

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Last year was a “relatively quiet if depressing” one for China, says James Palmer in Foreign Policy. This year could be “a lot stormier”, especially when it comes to relations with the US. With Donald Trump about to start a second term as US president and threatening to saddle China with tariffs of 60%, the “leadership in Beijing is readying for a ferocious economic struggle”.

It is not in a good place for a trade war, says William Pesek in Nikkei Asia. Although China under Xi Jinping has made progress in transitioning from cheap exports to higher-value sectors, Xi has “slowed things down by prioritising control over change”. Cracks in the economy include manufacturing overcapacity, the ongoing property crisis, “shaky” local government finances which are hindering investment, record unemployment and falling confidence.

Xi Jinping's three-pronged US strategy

China has plenty of leverage – the US imports roughly $430 billion annually from China and exports close to $150 billion – and it is sending a clear signal that it is ready to strike back, says Alexandra Stevenson in The New York Times.

On 2 January, China added 28 American firms to an export control list. It has also announced an antitrust probe into Nvidia and banned the export of rare minerals to the US.

Xi’s planned three-pronged US strategy – “retaliation, adaptation and diversification” – is defined by “clarity and determination”, adds Evan Medeiros in the Financial Times. Though the effects have been patchy, “vigorous fiscal and monetary stimulus to help businesses and now consumers” began in late 2023 with a “possible trade war in mind”. Beijing is considering unilateral tariff cuts on imports from non-US partners. Nevertheless, China’s economic crisis hasn’t changed Xi’s “commitment to a directed economy and officials’ unwillingness to tell him no”, says Palmer. He has reportedly said that he “doesn’t see what’s so bad about deflation”. If Trump’s tariffs don’t lead to a “rethink”, they could ironically help Xi by providing a “convenient scapegoat” for public anger.

This stand-off couldn’t come at a worse time, says Thomas Friedman in The New York Times. The world faces “three epochal challenges” – “runaway artificial intelligence, climate change and spreading disorder from collapsing states”. The US and China are the world’s two AI superpowers, two leading carbon emitters and have the two largest navies – in other words, they are the only powers that offer any hope of addressing these challenges. We need an “updated Shanghai Communiqué” (the Nixon-Zedong era document which set out the principles for the normalisation of US-China relations).

That would help govern the new realities and ensure that AI cannot be “used for destructive purposes by bad actors”. Strategies to get the world to net zero by 2050 are also needed to reduce the effects of climate change, which will increase disorder in failing states, an issue that constitutes a “big common enemy”. From Syria to Venezuela, “more and more nation-states are falling apart” with migrants “scrambling to get to zones of order”. “If competition and collaboration give way entirely to confrontation, a disorderly 21st century awaits.”

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South Korean president Yoon Suk Yeol has been suspended following an impeachment vote in parliament. The move follows Yoon’s decision to declare martial law earlier this month in a bid to end the grinding political deadlock in Asia’s fourth-biggest economy. Yoon’s attempt to use the army to seize power failed and he now faces allegations of high treason.

Even before that saga, the economy was looking “grim”, says Daisuke Wakabayashi in The New York Times. The local Kospi share index is down 6.5% this year and has been one of the world’s worst performers. The won has underperformed other currencies in Asia, hitting its lowest level since March 2009 on 19 December, after the Federal Reserve announced an interest rate cut, say Jihoon Lee and Yena Park in Reuters. Korea is also highly dependent on exports – it recently started selling more to the US than China for the first time in more than two decades – leaving it vulnerable to Donald Trump’s tariff plans.

There was a “dramatic” market reaction to Yoon’s shenanigans, says Lex in the Financial Times. The won hit a two-year low against the US dollar, equities sold off and sovereign credit default swap premiums spiked.

The coup’s swift failure restored market calm and the Kospi climbed back to where it was on the eve of Yoon’s martial law declaration. But the “stunning abruptness” of the chaos has left investors on edge, and a “drawn-out political struggle” probably lies ahead. Expect Korean stocks to remain under pressure for some time.

What does this mean for South Korea's economy?

Yoon was elected in 2022 promising economic “renewal” and a “deregulatory big bang”, says William Pesek in Barron’s. He has lobbied hard for index compiler MSCI to upgrade his country from emerging-market to developed-market status.

Investors hoped he might end the long-standing “Korea discount”, which sees local shares trade at lower valuations than those in comparable countries. Yet Yoon’s gambit has undone those efforts, making his country resemble “a frontier market hellscape”. The chaos has only vindicated critics who say the Kospi still isn’t ready for “global prime time”.

Of course, political chaos isn’t rare these days even in developed economies. A more prosaic factor causes the Korea discount, says Anshuman Daga for Breakingviews. In Korea, a director’s “fiduciary duty is to the company, rather than to those that own its stock”. The resulting dearth of “shareholder protections” makes Korea an unattractive place to invest.

Yoon had sought to address the problem with his “corporate value-up” policy initiative. Yet so far just 12% of Kospi firms have announced plans to improve shareholder value under the programme.

South Korea has also been the “ultimate exemplar” of prosperity built on US-backed globalisation, says John Authers on Bloomberg. As Pax Americana weakens, once “stable and healthy democracies” from Europe to Asia are coming under strain.

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When Vietnamese property tycoon Truong My Lan was sentenced to death in April for masterminding what is claimed to be the world’s biggest bank fraud, the verdict sent shockwaves through the country. Having lost her appeal this month, the 68-year-old is now in a race against time, says the BBC.

Under Vietnamese law, Lan could get her sentence commuted to life imprisonment if she can raise 75% of the $12 billion she’s convicted of embezzling from the Saigon Commercial Bank to repay victims. She urgently needs $9 billion – an eye-watering sum to raise, and with many of her assets frozen, she may have to call upon friends. She’ll soon find out if any are willing to stand by her.

During her trial, parts of which were live-streamed outside the court in Ho Chi Minh City, Lan was sometimes defiant. But in recent hearings, she has appeared more contrite. Perhaps “the gargantuan scale of the fraud” has finally sunk in, says CNN. Lan – who chairs developer Van Thinh Phat, which owns some of the most prized hotels, luxury residences and offices in the city – is the most prominent of 86 defendants (including her husband and niece) found guilty of syphoning $44 billion from the bank over more than a decade via “a web of thousands of shell companies”.

By comparison, Malaysia’s long-running 1MDB state fund scandal, often described as one of the world’s biggest financial crimes, involved the looting of just $4.5 billion. Even crypto scammer Sam Bankman-Fried’s $8 billion fraud is “dwarfed by Lan’s case”. Her arrest in October 2022 “sparked a week-long run” on the Saigon Commercial Bank – the fifth largest in the Communist-run country. Tens of thousands lost their savings.

Vietnam has been plagued by corruption for decades, but the “scale of the case is shocking”, Linh Nguyen, of consultancy Control Risks, told the Financial Times. “It has damaged the sentiment of not only foreign investors” but of “the business community in general”. The involvement of several central bankers and state officials hasn’t helped.

The government’s ensuing corruption crackdown, known as the “blazing furnace”, has been just as damaging – leading to “a stark slowdown in government activity”, including approvals for projects and licences, at a pivotal time for Vietnam. The country had hopes of emerging as a global manufacturing hub as Western companies shift factories away from China.

Truong My Lan's road to riches

Lan herself comes from humble beginnings. Born into a Sino-Vietnamese family in Ho Chi Minh City, she started out selling cosmetics on a market stall alongside her mother, before taking advantage of the “Doi Moi” economic reforms of the 1980s to get into property, says the London Evening Standard. A talented businesswoman with fingers in several pies, her wealth “skyrocketed” after she married Hong Kong investor Eric Chu in 1992 and founded Van Thinh Phat, says CNN. By 2011, she was “a powerful yet low-profile business figure in Ho Chi Minh”. That changed when Lan became involved in the merger of three struggling banks to form the Saigon Commercial Bank, later assuming effective control via illegal proxies. “She was well on her way to riches, high status and, eventually, infamy.”

Lan’s manipulation of the banking system continued for a decade before the scam was uncovered when Vietnam’s property bubble burst and the bad loans started stacking up. When state auditors discovered the fraud, she attempted to bribe them into silence, says the FT. “Because of this case, the dreams, hopes and physical strength of myself and dozens of people here have been affected. That was the most terrible experience for me,” she said during the appeal hearing. But attempts to portray herself as the victim of a witch hunt have fallen on deaf ears. At best, she now faces the rest of her life behind bars.

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Global markets reacted immediately to Donald Trump’s election victory. Japan was no exception, with key indices enjoying a lift. While the initial impact will fade quickly, concerns over the pursuit of protectionist trade policies are set to linger. It is necessary to judge carefully how policies announced at the time of the election are actually implemented; how might they affect individual companies?

In this environment, mid-caps focused on the domestic economy – which are generally well insulated from external macro factors and beneficiaries of reshoring – represent attractive opportunities. Meanwhile, Japan-specific developments, such as reflation and corporate-governance reforms, are multiyear structural factors creating new investment ideas.

Where to invest in Japan

Miura (Tokyo: 6005) is a global leader in so-called once-through boilers, which offer superior energy efficiency. The company has an excellent business model based on the provision of contract-based maintenance services, which are conducive to recurring and stable profits. I have been impressed with the strategic changes that the company has implemented, particularly its efforts to reduce its dependence on the Chinese market and to broaden its product line-up.

Miura recently acquired a major player in the US, Cleaver-Brooks, which will provide a new growth driver for the firm. Following the US election, the issue of tariffs is likely to dominate headlines for months to come and it makes sense to hold reshoring beneficiaries such as Miura that can deliver stable earnings.

Ryohin Keikaku (Tokyo: 7453) runs the Muji brand of general merchandise stores and is a company I have actively engaged with for many years. Management is executing its strategy incredibly well and the business is generating double-digit growth rates at home and in China, where a combination of internal initiatives and macro factors are supporting a pick-up in demand.

In Japan, strong sales growth, underpinned by successful new products and price hikes, is leading to lower discounts and higher profit margins. At the same time, the reflation story in Japan, fuelled by a shift in price and wage-setting behaviour, is supporting a pickup in consumption that Ryohin Keikaku is well positioned to capture through new store openings and popular product lines. I expect the company to deliver double-digit profit growth through fiscal 2027. A forward price/earnings (p/e) ratio of around 13, excluding cash, leaves plenty of upside potential.

Sanrio (Tokyo: 8136) sells Hello Kitty and Friends merchandise and operates Hello Kitty theme parks, with around 70% of sales generated in Japan. Hello Kitty was created in 1974 and remains a popular and beloved character in Japan and globally, as evidenced by the inbound tourists that visit the company’s parks. Moreover, Sanrio is ideally placed to capture the structural growth of the Japanese character intellectual property (IP) market and its character diversification strategy is helping to reduce earnings volatility.

The company’s strategies in the licensing business are working very well in both North America and China, which are contributing to an improvement in overall profitability. Sanrio recently upgraded its full-year guidance and I expect it to deliver double-digit profit growth over the next two to three years, justifying its valuation premium.

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“An abortive coup in South Korea was probably not on anyone’s bingo card for 2024,” says Robyn Mak on Breakingviews. “Enter President Yoon Suk Yeol”, who made the shock decision to declare martial law on 3 December, only to “make an embarrassing U-turn” within six hours after both his own and opposition parties forced their way into parliament to vote against his decree.

The main opposition, the Democratic Party, and five other parties submitted a motion the next day, calling for Yoon’s impeachment. This is the first time a president has used his emergency powers since South Korea’s military dictatorship fell in the late 1980s.

Analysts described the move, apparently designed to “rally” right-wing forces behind him, as an “act of desperation” from an “isolated and impulsive” leader “boxed in” by a slowing economy, sliding approval ratings, scandals and an opposition-controlled parliament, say Christian Davies and Song Jung-a in the Financial Times.

Yoon, a former prosecutor, claimed to be acting to protect the nation from North Korea and the “den of criminals” in the National Assembly, which recently slashed roughly $2.8billion from his budget, which proposed increased funding for the presidential office, the prosecution, the police and the state audit agency, reports AP.

Can South Korea avoid a deeper crisis?

The “dramatic move” to impeach Yoon is in keeping with South Korea’s culture of “revenge politics” (misbehaviour followed by aggressive criminal prosecutions are “all too common”, says The Economist). The week’s events expose both the “vulnerabilities and resilience” of the nation’s democracy, Stanford professor Gi-Wook Shin tells the Financial Times. It laid bare problems such as “polarisation, potential executive overreach and weakened public trust”, while the speed of the response – public protests and parliamentary rejection – demonstrated “strong institutional checks” and “civic engagement”.

“The crisis in the $2trillion economy, a major US ally and chip-making hub”, may have far-reaching effects, says Robyn Mak. Even before 3 December, the “export-dependent economy looked vulnerable to slowing global demand”. Yoon’s “imminent impeachment” may “reshape” regional dynamics. Yoon strengthened ties with Japan and the US, and was pushing for less trade dependence on China.

The foreign-policy implications of a change in power would be “vast”, says The Economist. They come at a sensitive time as a protectionist US president takes office and North Korea is increasingly hostile to the South. The Democratic Party, unlike Yoon’s People Power Party, is “deeply sceptical” of Japan due to its “colonial-era atrocities”, favours engagement with North Korea, and has opposed military aid for Ukraine.

If Yoon is swiftly impeached and a “deeper crisis” is avoided, there is “reason to be more upbeat”, says Capital Economics’ Thomas Matthews. Korea’s listed companies have seen rapid growth in earnings per share over the past year and its large tech firms are “well positioned” to benefit from the enthusiasm for AI. Investor sentiment could eventually turn “quite sharply” positive.

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India's stock market party is on pause. The local NSE Nifty 50 index is off 8% since a September record amid concerns about a slowing economy and toppy valuations, says Bloomberg. GDP is growing at an annual pace of 5.4%, but that is soft by recent standards.

Inflation and a weak jobs market are taking their toll on India’s 500 million-strong urban population. Consumer goods companies report that the middle classes are cutting spending on everything from cars to soap. Foreign investors pulled a record amount of money out of equities in October, with further net withdrawals in November.

Why India's stock market has thrown investors into a frenzy

The market increasingly rests on domestic savers, says The Economist. Five years ago, just one in 14 Indian households held shares; today it is one in five. India hosted 258 initial public offerings (IPOs) – 30% of the global total by number – in the first three quarters of 2025.

There is much to celebrate in the country’s “astonishing stock market revolution”, but there are also risks. “Most Indian speculators will never have experienced a downturn”, leaving them dangerously exposed “when one arrives”.

Foreign fund managers are worried about an investment bubble, says Craig Mellow in Barron’s. IPOs are being “advertised on billboards”, while cricket stars hawk “mutual funds”. Still, with “more than 5,000 stocks on offer”, there are “pockets of value” to be found in India for those who do their research.

Some of the frenzy over Indian shares has come from the narrative that the country is “the next China”, says Arthur Budaghyan of BCA Research. This is an oversimplification, he warns. Repeated failure to pass rural land reform will hinder the sort of “breakneck urbanisation that drove China’s period of super-growth”. There is “a blue sky” ahead, “but they may have to go through some storms first”.

During a four-year rally, the Nifty index has more than tripled, says Lex in the Financial Times. More than $35billion in net foreign capital has flowed into Indian stocks over the same period. But on nearly four times book value, compared with an emerging markets average of less than two, Nifty valuations are looking stretched.

India-focused UK funds have been popular with investors over the past year, even as their China-focused peers suffered “consistent outflows”, says Dave Baxter in the Investors’ Chronicle. The fundamental case for India remains compelling: “strong demographics”, a “growing middle class” and a “business-friendly government”.

But further gains depend on continued good news. India “has been a fantastic growth market”, says Rob Morgan of Charles Stanley. But its record is punctuated with some big drops, usually when valuations got ahead of themselves and “sentiment suddenly turned sour”.

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“India: too expensive or the world’s best growth story?” asked one of the attendees during the emerging markets session at MoneyWeek’s reader conference earlier this month, concisely summing up the dilemma for investors. India has one of the simplest and most compelling narratives of any long-term bull market: young demographics, vast potential for catch-up growth, unusually large and high-quality stock market by EM standards, and a record of considerable progress in recent years. Yet it’s still hard to feel entirely comfortable about paying 25 times earnings for it.

This is not a new dilemma. India has long been an expensive market relative to its peers. The chart shows the price/earnings ratio for the broad market stretching back almost 30 years: ignore the trough and spike in 2020/2021– caused by the pandemic panic and subsequent impact on earnings – and note that the market actually looks cheaper than it did at the end of the last decade, even though it has more than doubled since then. It has rarely dropped below 15 since the start of the 2000s, meaning that it has usually been at the upper end of the EM peer group.

There have been weak patches, accompanied by the kind of events that always worry EM investors: the market struggled in the early 2010s amid high inflation and a series of political and corruption scandals, and again towards the end of the decade amid a sharp economic slowdown and problems in the shadow banking sector. Yet, in both cases, earnings growth eventually came through and the market went on to new highs.

Is investing in India too risky?

Still, there are growing reasons to wonder if another tricky spell could be on the way. The government did unexpectedly poorly in the general election in June, which could hurt the prospects for further economic reforms. Company earnings suggest that weak consumption growth is spreading from the rural poor (who have benefited least from the boom of the last few years) to urban residents – exactly the opposite of what we would hope to see. Rising delinquencies at microfinance lenders may be a sign the credit cycle is souring. Now the decision by US prosecutors to lay bribery charges against billionaire Gautam Adani, a close ally of prime minister Narendra Modi, recalls those early 2010s scandals that helped shuffle the previous government out of power.

It’s impossible to say what the consequences of the Adani case will be. There is no prospect of him facing any direct legal risks within India. However, the country depends heavily on a handful of large business groups, of which Adani’s is the newest, to undertake major projects. This requires a lot of foreign capital. The charges may make it harder for Adani to raise funding overseas and potentially affect the speed and cost of financing for other projects as well. Less investment will hinder growth. That may mean weaker earnings, which would surely take some momentum out of the market. It’s too soon to call the top, but after such a strong run, the odds of a setback are clearly rising.

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China has announced a ¥10trn (£1.08 trillion) stimulus package, but investors are “disappointed”, say Samuel Shen and Tom Westbrook on Reuters. Since September, Beijing has unveiled interest-rate cuts and an “unprecedented” ¥800 billion stock market rescue package.

The CSI 300 share index jumped 25% but has lost momentum in recent weeks as markets have awaited more details on stimulus plans. The new ¥10 trillion package addresses local government debt, but included “no measures to facilitate bank recapitalisation and/or boost consumption”, Nomura analysts tell the Financial Times. The emphasis is on “stabilisation rather than stimulus”.

China needs to tackle hidden debt

China’s central government has relatively low debt levels, but the same cannot be said for provincial administrations, say Meaghan Tobin and John Liu in The New York Times. Local governments have borrowed heavily for years to finance infrastructure projects and hit official growth targets.

Covid didn’t help – debt levels in many provinces doubled from 2018 to 2023. Local officials got around borrowing limits by using off-balance sheet “local government financing vehicles” (LGFVs). LGFVs are “quasi-commercial infrastructure firms” that enjoy state backing, says The Economist. LGFV's debt is thought to have been $8.6 trillion by late 2022. The new stimulus will allow local governments to refinance these debts at a lower interest rate, yielding ¥600 billion (£65 billion) in savings over five years. But that amounts to “less than 0.1% of China’s expected GDP” over the period.

Total central and local Chinese state debt is just over 50% of GDP, says Jacky Wong in The Wall Street Journal. But add in LGFVs, and public debt “has risen from 73% in 2019 to 102%”, according to Morgan Stanley estimates. China’s local governments are “responsible for the bulk of public spending from infrastructure to education” but they “lack reliable revenue sources to match”. They used to rely on land sales to make ends meet, but a sluggish housing market has slashed that income.

With Donald Trump vowing to impose 60% tariffs on China, investors think further stimulus could be coming. Goldman Sachs thinks a 60% tariff could cut Chinese GDP by 2%, compared with a 0.65% hit from the 2018 trade war.

There is a “mismatch” between investors’ expectations and Beijing’s priorities, warns Nicholas Spiro in the South China Morning Post. Markets think Trump’s tariffs, which will hit Chinese exporters, will force officials to stimulate domestic consumption to compensate. But the government does not want to overheat the economy or send debt levels soaring again. As Robin Brooks of the Brookings Institution puts it: “China has only one option in response to tariffs: allow the [yuan] to fall hard and fast... Markets should stop chasing China stimulus.”

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The inauguration last month of former military general Prabowo Subianto as Indonesia’s new leader caps “a remarkable turnaround” in his fortunes, says the Financial Times. An erstwhile commander of the country’s “feared” special forces, Prabowo was “once banned from the US for the alleged kidnapping of democracy activists”, which he denies.

Indeed, his chief leitmotif these days is social liberalism. Prabowo’s “Red and White” cabinet swept to power on a ticket of offering free school lunches, which alone is expected to cost $28 billion. He also aims to raise economic growth to 8% – fuelled by a big rise in debt.

These plans have spooked financial markets, more used to Indonesia’s historically conservative approach to fiscal policy, says The Diplomat. Step forward, Prabowo’s trump card. The new president has taken the precaution of retaining Sri Mulyani Indrawati as finance minister in the hope that her “trusted” presence will stabilise the economy and calm foreign investors. They, in turn, hope that Sri Mulyani will live up to her reputation as Indonesia’s “Iron Lady” and keep the brakes on some of Prabowo’s “riskier ambitions”. At 62, she becomes the first person to hold the position under three presidential administrations.

The “highly respected” former World Bank director has been featured on Forbes’ rankings of the world’s most powerful women – a rare feat given the low profile of Indonesian politicians on the world stage. She is, says the South China Morning Post, nothing less than “the face of the Indonesian economy”. During Sri Mulyani’s first stint as finance minister in 2005, foreign investment nearly doubled within a year as she took on corruption and mismanagement so effectively – starting with her own department. “If you are corrupt, you are going to have to deal with me. I am not going to let you work here and I will put you in prison,” she told staff.

Hostility towards those who cheat the system was instilled in Sri Mulyani from an early age, says Worldfinance.com. For most of her early life, Indonesia was ruled by Suharto – “one of the most dishonest autocrats of all time”. Born to academics on a modest income, and one of nine siblings, Sri Mulyani won a scholarship to study economics at the University of Indonesia. It was there she had her “first experience of cronyism” – observing that classmates, including the president’s daughter, were fast-tracked into high-flying business roles and cabinet positions out of reach for other students. “That feeling of exclusion was very strong,” she told Bloomberg in 2017.

Sri Mulyani went on to pursue her studies at the University of Illinois – a connection that later helped her secure a role as an executive director of the IMF – returning home to work as a lecturer just as the 1997 Asian financial crisis began. It was a tumultuous period that culminated in the deposition of Suharto and the emergence of the democratic Indonesian state. Sri Mulyani’s reforms, from 2005 onwards, were key to shaping it.

Can Sri Mulyani Indrawati make it to the top?

Sri Mulyani’s anti-corruption drive proved a double-edged sword for her personally and “didn’t win many friends”, noted The Wall Street Journal in 2010. In particular, she came up against the vested interests of Indonesia’s powerful Bakrie family, who were rumoured to have forced her decision to resign in 2009. A new role as a World Bank managing director beckoned before she was lured back to the finance ministry in 2016 by former president Joko Widodo.

Many, including The Jakarta Post, have speculated that Sri Mulyani could, and should, go all the way to the top, notes the Australian Lowy Institute – even if her technocratic style, “more familiar to the halls of Brussels”, is at odds with Indonesia’s vibrant, flamboyant democracy. For the moment, she is ruling it out. Time will tell.

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Forget the Budget. Forget the US presidential election. In the end, neither will make much difference to companies or to investors one way or the other. Something far more significant is happening, even if few are paying much attention to it. A new wave of Chinese consumer brands is starting to push out into global markets.

The coffee market might already look hyper-competitive, but it is about to get a lot more crowded. Last week, China’s largest chain, Luckin Coffee, said it was planning to launch in the US market next year. It has already started advertising during sports events and has built up a list of initial locations in cities with lots of Chinese students and expats. It plans to undercut the big US chains by selling coffee in the $2-$3 price range, instead of the $5-plus for the big cups that have become the norm at Starbucks and many of its rivals.

As the younger, more prosperous Chinese switch from tea to coffee, Luckin has steadily turned into a huge business, with more than 20,000 outlets, far more than the 7,000 Starbucks has in China, and closing in on the 38,000 it has globally. It is profitable and growing quickly, while Starbucks has stumbled from crisis to crisis, switching one chief executive for another, and redrafting turnaround plans, even while the share price struggles. Luckin may well be pushing at an open door, with lots of money to spend, and a pitch to customers who are looking for something different.

Likewise, in the electric-vehicle industry, emerging Chinese colossus BYD last week overtook Tesla, recording higher revenues in the third quarter than the US market leader. The US and the EU may be slapping punitive tariffs on Chinese electric cars, but so far that has not slowed down their rise. With Tesla surpassed, Volkswagen and Ford may well be next in line as customers find the Chinese-made vehicles are often better than Western models, and certainly a lot cheaper. Chinese fast-fashion brand Shein has also expanded globally, and plane manufacturer Comac is ramping up production and could soon be as familiar as Boeing and Airbus. China’s home-grown brands have been building and growing over the last two decades and are now ready to expand into the global market.

Complacent Western giants are not nearly ready for them. Starbucks, as noted, is in crisis. Our car companies are dependent on subsidies for their electric vehicles and are relying on their governments putting punitive sanctions on their Chinese rivals. Boeing and Airbus have allowed quality issues and delivery delays to undermine their reputations as if the industry was still a cosy duopoly. The list of industries where China poses a real threat is likely to get longer over the next few years.

Why are Chinese consumer brands so popular?

China’s emerging brands have two things on their side. First, a vast domestic market, with more than 1.4 billion people, and 145 cities with more than a million people, mostly speaking the same language, and all using the same currency and the same payment systems. It is a strong base and one that can be used to fund expansion overseas. Next, and perhaps more importantly, many of them have developed their own distinct offering. The coffee chains have far more sophisticated apps than their Western rivals. The car companies have lower costs and often better design and technology. Western multinationals often still think of China as a country where they can offshore manufacturing. They are ignoring that it has grown richer and is bubbling with fresh ideas, some of which will be very successful.

The overall Chinese economy might be slowing down, but that should not fool anyone that the competition from Chinese companies is about to disappear. Even without any further growth, China is still the second-largest economy in the world and it has turned into a thriving laboratory for new entrepreneurial ideas. Investors spend a lot of time fretting about interest rates, tariffs, employment and all the other things that impact corporate profits. They are blind to the challenge to Western consumer brands from Chinese rivals. The fight has only just begun.

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Japan’s ruling coalition lost its majority in its latest general election, throwing the country “into the kind of political instability not seen for decades”, says Adam Withnall in The Independent. Amid deep voter apathy – turnout was just 53.8% – prime minister Shigeru Ishiba’s Liberal Democratic Party (LDP) and its junior coalition partner Komeito ended up with 215 seats in Japan’s Diet, down from 279 and “well short” of the 233 needed to form a government. It is the worst result for the LDP, which has ruled Japan since 1955 with only two short breaks, since 2009.

A chastened Ishiba conceded that the result reflected ongoing public “distrust and anger”, say Tamayo Muto and Sayumi Take in Nikkei Asia. Since last year, the LDP has been “dogged” by a scandal in which senior party members were illegally given money for campaigning out of a secret slush fund. Ishida was elected party leader in September largely because of his promise to hold individuals accountable, and he called a snap election three days later to try to capitalise on his honeymoon period, says Julian Ryall in The South China Morning Post. Then, in the final week of the election campaigning, it was revealed that some of these individuals, who had been forced to stand as independents, were receiving party money anyway.

How will this impact markets in Japan?

Ishida also U-turned on a number of key policies, including creating an Asian version of NATO and supporting same-sex marriage, says Gearoid Reidy in Bloomberg. It’s hard to understand how such an experienced and popular politician could have made so many missteps. Ishiba is now saying that he does “not envisage forming a coalition” in the 30 days before the next Diet must be convened, indicating that he would “try to make deals for individual pieces of legislation” instead, says Richard Lloyd Parry in The Times. This will use up “considerable time, effort and political capital”, notes Ryall, and “paralysis” in the Diet will only erode his support still further. Hardly any investors seemed prepared for this “upset”, says John Authers on Bloomberg. Japan is “usually stable to a fault.

Instability changes its offer completely.” When the LDP last lost power in 2009, Japan went through three prime ministers from opposition parties in three years. If something similar were to happen now, it would be a “big problem” for Japan, which is trying to “manage the transition away from decades of inflation”. Despite the LDP’s “drubbing”, the structural reforms kicked off by former PM Shinzo Abe in 2012 are likely to continue to pay off, says Una Galani in BreakingViews. Of late, the Nikkei 225 has hit levels not seen for more than 30 years.

While politicians “bungle”, Japanese CEOs are likely to “stay focused on growing high-return businesses, offloading underperforming ones and shrinking the piles of assets on their balance sheets”. Japan’s next government may try to “shore up its popularity by boosting fiscal spending and trying to delay raising interest rates”, but this would be “unlikely to distract” CEOs and their “pushy” shareholders too much. “If there is any hesitation, the yen, which dropped to a three-month low on 28 October, will at least provide stocks with a short-term boost.”

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“Markets are not efficient,” says Joe Bauernfreund, manager of the £1.3 billion AVI Global Trust (LSE: AGT), “as many companies are overlooked by investors.” This leads to a portfolio that is very different from a conventional global fund, but with comparable returns. If market leadership changes, AGT could move into pole position. It invests in “overlooked companies trading at wide discounts to intrinsic value”. These fall into three categories: family-controlled holding companies (41% of the portfolio), closed-end funds trading on wide discounts to net asset value (NAV, 30%) and Japanese, mostly smaller, companies (23%). “People are sceptical about investing in family-controlled companies, but we take the opposite view,” says Bauernfreund. 

Families can think longer-term than hired management and provide a strong culture. For example, News Corporation’s 60% holding in Australian property group REA accounts for 70% of its valuation, leaving the rest of News Corporation just four times cash flow compared with 17 times for The Washington Post. Schibsted, a 200-year-old Norwegian publishing business, spun off its international classifieds business Adevinta in 2019, after which the valuation of the rest of Schibsted increased from six times operating cash flow to 20 times. 

AGT seeks to unlock discounts at investment trusts by buying sizeable stakes and engaging with management. The share price of Hipgnosis, which owned and managed a large portfolio of songs, collapsed as a result of governance and accounting problems. AGT bought into the company, then helped vote directors off the board and install new ones who sold the company to private equity after a bidding war.

Potential in private equity

Oakley Capital, a private equity trust, is held because, despite a highly successful performance record, its shares still trade on a 28% discount to a very conservatively stated NAV. Chrysalis (4.5% of the portfolio) trades on a 36% discount, but is a much more troubled private equity trust whose fortunes AGT believes are on the turn. In Japan, “large caps are not particularly cheap, but smaller companies are anomalously so”. AGT invests alongside the £200 million AVI Japan Opportunity Trust, encouraging management to realise shareholder value. 

The attitudes of management to corporate governance and shareholder value have steadily improved since the reforms of former prime minister Shinzo Abe 12 years ago, but Japan is still “a great place to find bargains”. The largest Japanese holding (5% of assets) is in SoftBank, although it is hardly a small firm. “We can afford to be patient,” says Bauernfreund’s colleague Tom Treanor. The wait for improvement can be painful, as it was with Entain (bought in late 2023), “but the shares have now recovered and it was our top contributor to performance in August”. 

“To avoid value traps, we buy durable businesses growing in value”. The trust is always fully invested, but the managers can supplement this with gearing – borrowings are currently 7% of net assets – which indicates that the team is not short of attractive opportunities. The top 10 holdings make up 50% of the portfolio, led by News Corporation (8%, the Murdoch family vehicle), Oakley Capital (6.7%, private equity) and D’Ieteren (6%, an industrial company based in Belgium). “We don’t have to own everything – just a small number of special situations with a pathway to strong returns,” says Bauernfreund. 

The weighted average discount to intrinsic value is 35%, above the long-term average of 25%. This suggests that there is plenty to go for in the shares, which trade at a 10% discount to NAV. With high exposure to Europe and Japan relative to the index, but low to North America (just 21% of net assets) and scant overlap with other global funds in terms of holdings, AGT complements rather than competes with them – hence its inclusion in MoneyWeek’s Investment Trust Portfolio alongside the growth-orientated Scottish Mortgage.

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Excitement over a Chinese stimulus “bazooka” is starting to wane, say Wataru Suzuki and Stella Yifan Xie for Nikkei Asia. Beijing has unveiled a series of stimulus measures designed to reinvigorate the world’s second biggest economy, sending the local CSI 300 index soaring by more than a fifth. Markets have been pinning their hopes on a rumoured ¥1 trillion-¥3 trillion (£107 billion-£322 billion) in “fresh fiscal spending”, but details are lacking.

Finance minister Lan Fo’an merely said there is “relatively large room” for new state borrowing. Fo'an plans to use it to help cash-strapped local governments and to stabilise the property market, says Keith Bradsher in The New York Times. Investors want numbers, but for that, they must wait until later this month, when the standing committee of the national legislature is expected to “sign off” on new debt issuance.

How are investors reacting to the Bazooka stimulus? 

Markets are hoping for a bazooka stimulus to rival China’s massive response to the 2008 global financial crisis, says Mohamed El-Erian on Bloomberg. They are likely to be “disappointed”. Not for the first time, foreign money managers are “grossly” oversimplifying the Chinese economy. Officials have always shown a preference for “limited stimulus”. They are well aware that a huge fiscal bazooka would only exacerbate the “serious imbalances” and debt that caused this slowdown in the first place. China wants an “insurance policy” against a serious economic crunch, not a bazooka that will fire up another unsustainable boom.

The stock market rally is part of a strategy designed to raise economic confidence, says Ambrose Evans-Pritchard in The Telegraph. These state-sanctioned “boomlets” usually run for two months before regulators step in to cool things down. That said, with global interest rates falling, the current rally may have a little more “staying power”. Stocks “could have a pop for a while, but the risk is what we saw coming out of Covid”, says Bill Bishop of the China Sinocism newsletter. “There was quite a rally for a couple of months but then people realised that the economic policies hadn’t changed.” On 11 times forward earnings, Chinese shares are temptingly undervalued, says Chan Ka Sing for Breakingviews.

The equivalent rating for Indian shares is 20. But the Shanghai market trades heavily on sentiment – much of this rally “has been fuelled by fast money betting” on the latest government announcements. “Chinese stocks have become more of a trade than a long-term investment.” The market’s long-term record is disappointing, agrees Buttonwood in The Economist. Over the past 15 years, Chinese GDP has “quadrupled” in nominal terms, yet the CSI 300 is up “less than a quarter” over the same period. Should long-term “buy and hold” investors pile in? “The answer is clearly still ‘no’.”

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It’s often claimed that China’s leaders take a long view, unlike the short-term thinking that prevails in Western economies. Looking at the markets, we might doubt how well that’s working. Late last month, the government abruptly unveiled a series of schemes aimed at supporting consumption and housing, bailing out indebted local governments and banks, and boosting stocks. The CSI 300 index rallied 32% in two weeks, then fell 7% – the biggest one-day drop since 2020 – when some details didn’t meet expectations.

Pessimists may see this as part of a pattern that’s been evident in China over the last few years: exceedingly rapid pivots that keep wrong-footing markets and leave them struggling for long-term direction. Take, for example, the sudden reopening from zero-Covid policies in early 2023, after giving every sign that progress would be very slow. Or the abrupt crackdowns on various sectors from education (virtually overnight) to tech (more telegraphed, but also longer and more severe than expected) to property (understandable and overdue, but the full consequences seemingly weren’t appreciated). In general, the consistency of policymaking has become much worse over the past few years. It’s worth keeping that in mind when considering whether this is a turning point.

Will structural reforms fix China's consumption?

Let’s start from the widely acknowledged position that consumption is too weak in China. The government can try to boost short-term growth. It can even target this carefully: by handing out stimulus payments as vouchers, money will flow to local restaurants or Chinese-made white goods, rather than European luxury goods. There is also a strong case for the central government to use its balance sheet to back more fiscal spending. One long-standing problem is that Beijing expects cash-strapped local governments to shoulder the burden. Local governments typically depend on selling land for property development for much of their revenue and are thus exceptionally poorly placed to respond in a property downturn.

Yet until China fixes the structural problems that keep consumption as a relatively low share of the economy, this can only amount to a short-term boost. While that may well be helpful to get the economy out of its current slump, it would be even more encouraging to see faster progress on difficult issues such as the hukou system (household residency permits, which worsen the gap between the wealth of urban and rural residents), social security and land rights, all of which could unlock more consumption from poorer households.

On the plus side, Chinese stocks still do not look expensive. The MSCI China index – mostly stocks listed in Hong Kong – is on a p/e of 11, although the MSCI China A – Shanghai and Shenzhen-listed shares – is a bit higher at 13.5. If growth picks up, this rally could run, even without reforms. There are plenty of cheap tracker funds to follow it, while trusts such as Fidelity China Special Situations (LSE: FCSS), JPMorgan China Growth and Income (LSE: JCGI) and the tech-focused Baillie Gifford China Growth (LSE: BGCG) are on discounts of 10%-15%.

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“China’s real-estate collapse may be morphing into something much larger: a deflationary economic bust,” writes investment strategist Ed Yardeni. “Buying a home was one of the primary ways that Chinese citizens used to invest and build wealth but new home prices have fallen by 5% year on year, marking the 13th month of consecutive declines. So the housing bust has taken a toll on Chinese consumers’ confidence, now at near-record low.”

According to the People’s Bank of China, 96% of residents own a home and 20% own more than one, yet the population is ageing rapidly, reducing demand and hence construction activity. Average house prices soared from £321 per square metre in 2005 to £737 in 2020, leading to a housing price-to-income ratio of 29. As a result, household consumption accounts for just 37% of GDP, compared with 68% in the US, according to economist Diana Choyleva. “More spending is crucial to revive China’s flagging performance.”

While households respond to falling property prices by increasing savings, the response of the government is to stimulate industrial production, rather than consumption, says Yardeni. So output rose 5.1% year on year in July, while retail sales growth of just 2.2% was far below the 10% achieved historically. With money supply now contracting for the first time this century, “Chinese nominal GDP growth could turn negative over the next six months”, says Yardeni.

Is China being overlooked by investors?

Against this economic background, it’s not surprising that ten-year government bond yields have plunged to 2.2% and that stock prices, especially for property shares, are on a downtrend, having fallen over 40% in four years. Most Asian fund managers are cautious; Schroder Asian Total Return trust is “significantly underweight” with an allocation of 15% to China (including Hong Kong) compared with 33% in its benchmark index.

Invesco Asia Trust takes a contrarian view. Managers Fiona Yang and Ian Hargreaves are overweight China. “Green shoots in China are being overlooked [with] abundant household savings, solid balance sheets and supportive policy announcements recently,” they say. “Should attitudes towards China start to improve, they will be doing so from a low starting point, with deeply discounted equity valuations likely to be very sensitive to signs that corporate fundamentals are starting to improve.”

Invesco Asia has £240 million of net assets while its shares trade at an 11% discount to net asset value (NAV) and yield 4.3%. Performance in the last year has been flat, thanks to its caution about booming India and prematurely favouring China, but the shares have returned a respectable 36% over five years. 

“IAT’s contrarian approach means investors are likely to get a differentiated portfolio to what is available elsewhere while the contrarian approach has been successful over the longer term,” says Kepler, a broker.

Ongoing geopolitical tensions

“Geopolitical tensions linger,” admit Yang and Hargreaves, but China appears to prefer bullying and threatening Taiwan to the risk of an actual invasion. Whoever wins the US election, tension between America and China is likely to continue. 

“At its core, the US-China rivalry is a clash of ideologies,” says Choyleva, “with America seeking to create a united front against China’s expanding reach and to confront its economic practices,” such as its predatory industrial policy and intellectual property theft. 

Perhaps China is just following the doctrine first espoused by UK prime minister Lord Palmerston nearly 200 years ago: “We have no eternal allies and we have no permanent enemies. Our interests are eternal and permanent, and those interests it is our duty to defend.” If economic adversity is mellowing China’s confrontational approach, Invesco’s strategy could pay off handsomely.

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Shigeru Ishiba, Japan’s new prime minister, has announced plans for a snap election on 27 October “in a bid to secure a public mandate” after his surprise victory in the ruling-party leadership contest, says Leo Lewis in the Financial Times. In electing the 67-year-old Ishiba out of a nine-strong field, the Liberal Democratic Party (LDP) has signalled its desire to “mollify an angry public”, says The Economist. His win reflects the “sense of crisis” within the LDP, which has ruled Japan with “only two brief interruptions” since 1955. A run of political scandals and public disaffection over rising living costs caused the party’s approval ratings to plummet, leading Ishiba’s predecessor Fumio Kishida to announce that he would step down in the summer. Although the party is “not yet in danger of losing power, many in the LDP worry about losing a big chunk of seats”. 

Ishiba is a controversial figure within his party, but popular with the public. He has been outspoken throughout his 38 years in parliament and his genuine nature and respect for the electorate has “endeared him to voters” while making him an outsider within his party. Some still regard him as a “traitor” for switching parties for several years in the 1990s, and four previous bids for the leadership failed. So what does he stand for? A “Tokyo native” and one of only two contenders who doesn’t speak English, Ishiba has “both establishment and rebel credentials”, says Charlie Campbell in Time Magazine. He worked briefly as a banker before going into politics after the death of his father, who was also a lawmaker and cabinet member. He is seen as progressive (he supports giving women the right to keep their surnames after marriage and to be empresses) and was the most outspoken detractor of former nationalist leader Shinzo Abe, but he also became known for “flip-flopping” on issues according to the public mood.

What's next for Shigeru Ishiba?

The market reaction to Ishiba’s victory was extreme, but “reflected fragile investor sentiment” regarding a man who has “expressed support for a vaguely defined, more distributive ‘new capitalism’, but has never focused on economic matters”, says Lewis. So far, he has signalled that he will “stick to the policies of his predecessor”, which are still, essentially, “the policies of Abe”, although he has talked about raising corporation tax. He has also promised to revitalise rural areas and address population decline, although how he plans to achieve this is unclear. 

Security is set to be a major focus. Ishiba took office on 1 October and formed a cabinet “made up of numerous security and defence experts in line with his calls to strengthen regional military alliances”, reports France 24. Relations between Tokyo and Beijing are being “tested by China’s territorial ambitions” and Japan also faces a potential threat from nuclear-armed North Korea, says Nicola Smith in The Telegraph. Although Ishiba, a former defence minister, believes in a strong military to counter the Chinese threat – he has said that an emergency in Taiwan would constitute “an emergency in Japan” – he also “chooses his words carefully” and has “called for deeper engagement and more diplomacy with Beijing”. 

Officials in Washington are “nervous” about some of Ishiba’s ideas, most notably his proposal of an “Asian Nato”. He has “long bristled at subordination to the US” and criticised the inequality of the US-Japan alliance. “It is an uneasy thought” to imagine earnest, serious Ishiba discussing his wish to reshape the alliance with a “mercenary, isolationist Donald Trump”, should Trump win the US election, says the Financial Times. However, to succeed as the leader of a divided party, in the short-term at least, he will need to be pragmatic and leave his own “political projects” on hold.

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The world’s capitalists are feeling cheerful, says John Authers on Bloomberg. Why? Because the “politburo of the world’s largest communist state” is warming to the idea of more welfare spending. There are “enough ironies… to sink the Titanic”. Chinese stocks leapt 8.5% on 30 September for their best day since 2008. Over five sessions the CSI 300 index has risen an astounding 24%. In Europe, luxury shares, which are highly exposed to Chinese consumption, also rallied strongly.

Why are Chinese stocks rising?

The excitement came after a statement by the politburo suggesting Beijing is open to using fiscal stimulus to “prod consumers to start buying stuff again”, something economists have been advising for years to little effect. Stronger social support policies are also on the table. There are as yet “no numbers”, but the declaration of intent from political leaders has been enough to trigger a surge of confidence in stock markets.

“Gone is the equivocation on deleveraging, moral hazard and provincial indebtedness, a staple of previous politburo meetings,” says Marko Papic of BCA Research. “This is Beijing’s ‘Whatever It Takes’ moment,” he says, a reference to Mario Draghi’s famous declaration in 2012 during the euro crisis. Investors are dreaming of a repeat of China’s “massive” 2008 stimulus, which helped the country avoid the worst of the global downturn, says James Mackintosh in The Wall Street Journal. But that splurge also left the economy with many of its current problems, including local government debt, overcapacity and excess housing.

China’s central bank had earlier unveiled a series of measures designed to tackle the housing slump, including easier monetary policy and cuts to mortgage rates for existing housing, says Anthony Anastasi for the South China Morning Post. But making credit cheaper doesn’t address the country’s fundamental “structural imbalance” – consumption is too low, while investment and savings are too high. High investment was a good strategy when China needed to build out its infrastructure and factories, but now all those factories are pumping out products that local households don’t have the cash to buy. What’s needed is a rebalancing towards consumption.

That is why the politburo’s hint of big fiscal stimulus to come has excited markets, says Reshma Kapadia in Barron’s. With the official 5% growth target “in jeopardy”, officials seem to have become “alarmed enough to shift out of slow gear”. For markets, the big question now is whether political statements are followed up with significant cash.

Some foreign investors are cautious, says the Financial Times. “We have seen these fits and starts, where China puts in place some kind of stimulus, and it has not resulted in a long-term constructive recovery,” says Saira Malik of asset manager Nuveen. “We’d be looking for more follow-through in terms of a pick-up in economic activity.” Others caution that a more immediate threat to the rally is coming into view: a possible Trump victory in the US presidential election and the prospect of a renewed US-China tariff war.

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