Dear Investors and Friends,

 

As we draft this quarterly letter, we find ourselves continually revising our commentary as conditions change rapidly. In April to date, markets first sold off significantly, then partly rebounded, only to fall again. This extreme volatility—its underlying causes, as well as our thoughts and reactions—is perhaps worthy of discussion. Thus far in April, Variis’ strategy has performed similarly to the MSCI Emerging Markets (EM) Index (which is down 5-6%), reflecting both our low exposure to tariff-impacted exporters and the indiscriminate selling pressure in the market.

 

As we write this, the scale of the market dislocation at the recent trough (prior to the brief 9 April reprieve) has been striking:

• The Nasdaq fell about 25% from its February highs.

• EM markets declined roughly 15% from their March highs.

• WTI crude oil prices dropped from the mid-$70s to the $50s.

• The Dollar Index fell about 8% year-to-date versus major currencies.

• U.S. bond yields rose, inverting their normal safe-haven response—US long bond yields notched their largest weekly increase in 38 years.

• The implied probability of a U.S. recession doubled in a matter of days to ~70%.

• Most of Taiwan’s stock market was down the maximum 10% limit for three days in a row.

We hope that the value of sharing our thinking with clients in the heat of the moment is significant. It is during such periods of stress that the true nature of things is revealed.

 

The immediate trigger of this market disruption was President Trump’s announcement on 2 April of sweeping “reciprocal tariffs” as part of a major escalation in U.S. trade policy. The magnitude and scope of the tariffs far exceeded market participants’ expectations. At the time of writing, implementation of reciprocal tariffs on countries other than China has been paused for 90 days to allow for negotiations. There are now widespread concerns about disruptions to global supply chains and an increased risk of recession. In the days following 2 April, the U.S. administration largely raised the ante on China in particular, taking the effective tariff rate to a reported 145%.

 

Each member of our team has been investing in EM for 20–30 years. We have witnessed a lot: the 1997 Asian Financial Crisis, the 1998 Russian Financial Crisis, the 2000 dot-com bust, the 2001 Argentine Economic Crisis, the 2001 Turkish Lira Crisis, the 2002 Brazil Currency Crisis, the 2008 Global Financial Crisis, the 2018 Turkish Lira Crisis, the 2018 Argentine Debt Crisis, the 2020 COVID-19 EM stress period, the 2022 Russian invasion of Ukraine and ensuing sanctions, and now the 2025 “Trump Tariff Tornado.” This is simply to say that this Tornado is not our first rodeo.

 

In this letter, we first discuss how we expect our strategy to fare during periods of heightened uncertainty and market disruption. We then provide our assessment of the ongoing reordering of the global trade system and discuss the impact on specific companies and our actions.

 

Variis in the context of a market disruption

 

We believe that our process is well-suited to creating value during market dislocations. Our strategy is to invest in a concentrated yet diversified collection of 20–30 high-quality, attractively priced Emerging Markets businesses. We select these investments from our Focus List — a curated list of around 100 exceptional, less-cyclical businesses with strong stakeholder alignment and outstanding management.

 

Erratic policymaking introduces heightened uncertainty, and markets price in this uncertainty primarily through higher discount rates. This particularly impacts long-duration growth businesses with cash flows weighted toward the outer years. As a result, high-quality growth businesses are experiencing share price declines—rightly or not—which in turn creates opportunity. All 100 names on our Focus List have clearly defined Bull, Bear, and Base-case valuation scenarios. We are currently stress-testing our models: if growth remains resilient and pricing power stays intact, the present dislocations may present meaningful upside to our valuation estimates. Our disciplined framework highlights in real time where the opportunities lie and enables us to act decisively during periods of market stress — when prices approach levels where risk-reward is heavily skewed in our favor and downside risk (as defined in our bear case) is increasingly limited.

 

The current turmoil clearly illustrates why a global EM approach makes more sense than a single-country or regional fund approach. For example, two of our investments — Raia Drogasil in Brazil and FEMSA in Mexico — were barely down at all following the 2 April announcement. Meanwhile, several others (arguably with no greater fundamental exposure to recent events) fell around 25%. Across our Focus List, we see other similarly extreme examples. The flexibility to take advantage of dislocations across countries is a major benefit of a global EM strategy.

 

Understanding the tariffs and why their magnitude and scope were unexpected

 

On 2 April, the Trump administration introduced a formula to calculate so-called “reciprocal tariffs,” aimed at addressing trade imbalances with other countries. It was presented as a method that fully accounts for tariffs, non-tariff barriers, and other trade practices. In reality, however, the calculation is relatively straightforward and centres on the U.S. goods trade deficit with each individual country.

 

There are several surprising aspects of the reciprocal tariff regime:

• Some of the highest tariff rates were assigned to smaller economies.

• There were no new sector-specific tariffs on semiconductors or pharmaceuticals.

• The calculation method for the reciprocal tariffs appears to preclude negotiation based on foreign countries cutting their import tariffs.

• The implementation timeline was extremely rapid, with tariffs coming into effect on 9 April.

 

Had the full reciprocal tariff regime been implemented, economists estimate the blended tariff rate on all U.S. imports would have jumped from 2.5% to over 24%, versus a market consensus expectation of 10–15%. Even accounting for the delay in implementing reciprocal tariffs on countries other than China (and using the 145% rate for China), the theoretical blended tariff rate on U.S. imports would still be over 24%. However, this headline figure likely overstates the long-term impact, because China can re-route its exports through countries like Vietnam or Mexico. At current tariff rates, U.S.-China bilateral trade appears set to shrink dramatically, aside from specifically carved-out areas.

 

Thinking through the economic ramifications of the tariffs

 

The trade war raises the possibility of a U.S. recession, and possibly a global recession, even after the pause and various carve outs. From past EM experience, the lesson for the U.S. is that major imbalances tend to be corrected via major recessions. In a recession, demand is destroyed and import volumes fall. While we hesitate to make macro forecasts, it is possible that Trump’s policies, or even just the extreme policy uncertainty and higher bond yields, will depress the U.S. economy and that the resulting demand destruction will reduce the current account deficit. Such a recession-driven rebalancing could occur much faster than production can relocate back to the U.S.

 

For China — the primary target of these tariffs — there may be significant pressure on GDP growth and manufacturing employment as exports decline. China’s annual exports of around USD 450 billion to the U.S. represent roughly 2.7% of Chinese GDP. However, looking only at China’s direct exports to the U.S. may understate the exposure: a significant portion of Chinese exports is now routed through third countries such as Vietnam. Taking a global view is more illustrative: China’s quarterly goods trade surplus is nearly USD 400 billion, roughly matched by the U.S. deficit. The underlying share of GDP at risk for China is thus closer to a high-single-digit percentage of GDP.

 

China may have 100 million workers employed in the broad export value chain, including supporting industries, and about 25 million workers (approximately 2% of the workforce) employed specifically in areas related to exports to the U.S. That said, China has considerable scope to offset the downward pressure via domestic consumption stimulus. The Xi government has been reluctant to pull this lever in any significant way until now, but it may soon have little choice. We expect significant consumption stimulus to begin in 2025.

 

Impact on Variis’ strategy

 

At Variis, we (a) focus on high-quality, stakeholder-aligned businesses; (b) aim to invest when valuations are attractive; and (c) remain mindful of macroeconomic factors to keep those risks contained. Prior to 2 April — and indeed since our launch — we have eschewed Chinese businesses with material U.S. export exposure. We felt that the imbalance in the global trade structure posed a risk. Indeed, among our seven Chinese investments, only one (Mindray) exports anything at all. Mindray’s focus, aside from its larger domestic business, is on selling medical equipment to other Emerging Markets.

 

Our domestically focused Chinese investments have declined in price since 2 April despite having no direct trade exposure. This decline has largely been the result of indiscriminate selling. For example, Didi — often called the “Chinese Uber” — stated on 9 April that while its gross bookings growth has some macro sensitivity, it still expects 8–13% gross bookings growth in 2025 regardless, along with higher margins. Yet Didi’s stock is down 20%. Of course, how the future plays out for these domestically focused consumer companies will depend in part on how China navigates the economic pressure from the trade war. A rebalancing toward domestic consumption, ideally front-loaded through stimulus, will be important. We have no concerns that the long-term intrinsic value of our Chinese investments will be impaired.

 

We were most surprised by the (now-delayed) announcement of 32% tariffs on Taiwan, where we have three investments. We had anticipated that 10–15% was possible. Two of these holdings, E Ink and Delta Electronics, would likely be directly impacted by tariffs, depending on where levels settle after negotiations. As of this writing, both E Ink and Delta Electronics traded down the 10% daily limit for three consecutive sessions (along with most of the Taiwan market), and then up the 10% limit in the most recent session.

 

To illustrate how the now paused tariffs might have impacted intrinsic value, consider E Ink as an example. E Ink is a Taiwan-based provider of ePaper solutions. The company has a strong intellectual property moat protecting its electronic paper display technology (think Kindle screens). It holds market shares in the high-90% range across e-readers, electronic shelf labels, and digital signage applications—so dominant that the brand name “E Ink” is synonymous with the product itself. While E Ink has some production in the U.S., the majority is in Taiwan. Given its near-monopoly status, the company is in a position—should it choose—to force end customers and the intermediary supply chain (which integrates the e-paper into modules) to absorb the tariff.

 

E Ink’s management has commented that even a 32% tariff increase will not change the logic for retailers to invest in electronic shelf labels, even at slightly higher prices. As U.S. labour costs rise (due to inflation or more local manufacturing jobs), the savings from automatically updating labels—instead of having workers manually change paper labels—increase. Management also noted that if E Ink passes on tariff-driven cost increases to OEMs of consumer products (like the Kindle), those OEMs may raise prices, which could result in some impact on sales volumes. E Ink has said that over time it would consider adding additional production lines in the U.S.

 

From an intrinsic value perspective, roughly half of E Ink’s revenue comes from the U.S., and about half from consumer products. The tariff impact would be transmitted via a volume response to price increases on roughly one-quarter of E Ink’s business (the U.S. consumer products segment). Because E Ink has ~50% gross margins and tariffs apply only to costs, the price increase required to offset the tariffs is perhaps only half of the headline tariff rate. For instance, if prices for products like the Kindle were to rise by around 15%, and assuming a price elasticity of 1, we would expect roughly a 15% growth headwind on that one-quarter of the business.

 

Another surprise has been the market’s reaction to sell off ASEAN businesses like Grab. The now-paused reciprocal tariffs on ASEAN countries were much higher than anticipated. Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam were saddled with tariffs of 32%, 24%, 18%, 10%, 37%, and 46%, respectively. Grab, however, exports nothing. It is ASEAN’s leading “super-app,” offering a range of services — mainly ride-hailing and food delivery — to consumers across eight countries. Grab’s key markets are Indonesia, Thailand, and Singapore. Exports to the U.S. account for only ~2% of Indonesia’s GDP, compared to ~9% for Thailand (Singapore’s reciprocal tariff rate was relatively low, at 10%). Even if the full reciprocal tariffs were imposed — which now seems far-fetched — we do not doubt that ASEAN GDP growth would slow somewhat. Even in that scenario, we believe the impact on Grab would be limited. User growth should continue unabated at roughly 20%, and the market opportunity remains massive. Grab’s stock is currently 15–20% below its recent highs, which were already at what we viewed as a discounted valuation.

 

Selective on actions since 2 April

 

In the context of unpredictable swings in U.S. policy rhetoric (oscillating between negotiation and retaliation), the bar for investment action is high. Accordingly, we have been cautious about making any precipitous moves.

 

We have focused on adding to investments that have been overly discounted yet are clearly outside the direct line of fire. For example, last week we added to two strategy holdings, “AAA” and “BBB”, which are domestically focused ride-hailing and delivery businesses operating primarily in China, Latin America, and Southeast Asia. We funded these additions by trimming our position in “CCC”— a Mexican consumer business — which had performed defensively and was trading at a relatively smaller discount to its intrinsic value.

 

We are also continuously reviewing our Focus List for additional opportunities. Since we remain fully invested, any new investments must be funded by exiting or trimming existing holdings that have less upside or that are more at risk from trade policy or macroeconomic changes.

 

Additional relevant observations

 

Mexico has fared relatively well and remains something of a “loophole” in the global trading system. Mexico was not subject to the 2 April reciprocal tariffs. While non-USMCA imports (i.e. goods from outside the agreement) have faced a 25% tariff since 4 March, USMCA-compliant exports remain exempt. The rules around USMCA compliance are complex, but according to industry expert Dylan Patel at SemiAnalysis, Nvidia GPUs assembled in Mexico face zero tariffs. Mexico is the largest import hub for finished servers, with a historically 60–80% share of that market. While this compliance outcome may be surprising given that key components are manufactured in Taiwan and China, the result is good news for the U.S. AI datacentre value chain. Patel estimates that because server costs (which appear not to be subject to tariffs) drive so much of datacentre costs, the total cost of ownership of a GPU datacenter will not change materially for U.S. hyperscalers.

 

Apple is in a sticky spot with the iPhone. In 2024, 90% of iPhones were made in China and about 10% in India — after five years of trying to reorient production. With U.S.-China tariffs around 145%, the cost of an iPhone in the U.S. (where 40% of iPhones are sold) is likely to rise substantially. The bill of materials (BOM) for an iPhone is about USD 550, and Apple earns roughly a 40% gross margin on each sale (the average selling price, or ASP, is about USD 900). If the post-tariff BOM rises to around USD 1,000, then even if Apple absorbs a 10% hit to its margin, the new ASP would need to be over USD 1,400. It is possible such prices increases will give American consumers pause. For us as EM investors, this raises serious questions about Apple’s supply chain companies, including TSMC. Apple represents about one-quarter of TSMC’s revenue. (Late breaking note: on 11 April, Trump exempted smartphones and other electronics from the reciprocal tariffs for all exporting countries, but it’s unclear whether the pre-existing 20% fentanyl tariffs will still apply. For China, the new exemption covers about 20% of total exports.)

 

Very high U.S. corporate profit margins (currently above 12%, versus a historic average of ~8%) are related to the U.S. trade deficit, and these tariffs appear to threaten those margins. Since the 1980s (especially from the 1990s onward), deepening globalisation and increasing trade deficits coincided with corporate profits rising as a share of GDP. This was partly due to lower costs through globalisation, as outsourcing and offshoring left only the highest value-added segments of the value chain inside U.S. businesses. Additionally, cheaper foreign-produced goods suppressed U.S. inflation, giving domestic businesses room to raise prices. Finally, because trade deficits bring persistent capital inflows, borrowing costs have been low, which has kept interest expenses down. The high profitability of U.S. businesses is now at risk with the prospect of partial de-globalisation. Moreover, it is not hard to imagine other countries taxing U.S. digital services at higher rates. In fact, half of the European OECD countries already levy a small digital services tax on large multinational technology companies.

 

There are several bright spots in the outlook for EM markets (at least relative to the U.S.) under this new Trump paradigm. We observe the following positives:

• In many Emerging Markets, macroeconomic policy looks stable and predictable compared to the U.S.; EM businesses will continue to invest and grow, whereas U.S. businesses (for example, Apple) may experience significant disruptions.

• Non-China EM exporters appear potentially well positioned given the reciprocal tariff pause. Mexico (with USMCA preserved) looks like a potential beneficiary.

• With the USD weakening, EM currencies may reverse the trend of the last 10–15 years, making foreign exchange a tailwind for many of our markets.

• Despite being a primary target of U.S. tariffs, China may emerge healthier and less imbalanced over time. China’s ongoing drive to develop indigenous technological and industrial capabilities is likely to continue bearing fruit.

• Valuations in EM are very compelling, both relative to the U.S. and in an absolute sense, providing enhanced downside protection.

• With the U.S. now accounting for ~72% of the MSCI World Index (as of March 2025), there is ample scope for equity investors to seek opportunities elsewhere — including in EM.

 

 

Conclusion

 

Our investment philosophy at Variis combines rigorous analysis of moats and management quality with a Variis Stakeholder Investing (VSI) approach to navigate emerging markets. Through this comprehensive framework, we sift through the vast expanse of opportunities and distill our Focus List to around 100 of the highest-quality companies. At any given time, our strategy is invested in the 20–30 most compelling Focus List companies. By adhering to this approach — which marries quality assessment with valuation discipline — we strive to identify winners and deliver exceptional long-term returns for our investors.

 

Thank you for your continued interest and support!

 

Leila, Eko, Rufus and Jamie

 

Disclaimer

 

FOR PROFESSIONAL INVESTORS AND ADVISORS ONLY

The contents of this document are communicated by, and the property of, Variis Partners LLP. The information and opinions contained in this document are subject to updating and verification and may be subject to amendment. No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by Variis Partners LLP or its directors. No liability is accepted by such persons for the accuracy or completeness of any information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this document. The information contained in this document is strictly confidential and is not intended to be advice or an offer or solicitation to invest. The value of investments and any income generated may go down as well as up and is not guaranteed.