Global Equities Mid-Year Review

Tariffs, AI, defence and more defence

Defence stocks drove markets to new highs.

Welcome to my first half-year global equities update, my diary sharing the events, stocks, and markets shaping global equities and how I'm approaching research for the second half. Twice a year, this update will consist of:

• A review of key themes, industries and regions influencing markets

• Assessing the top-performing large-cap companies

• Assessing the worst-performing large-cap companies

• My research priorities for the next six months

As a reminder, at Global Outperformers by Jenga Investment Partners, I take a long-term perspective and prefer to hold stocks for three to five years or more. These updates are not about short-term trading or investment calls, but rather about understanding the themes influencing global equities and a dose of my very biased investment thoughts and opinions. As always, take these with a pinch of salt, and it's essential to do your own due diligence.

The first half was a volatile period. The MSCI ACWI Index ended the first half of the year up 10.3%, but as at April 8th, it was down by 11.2%, driven primarily by sharp declines across the US large-cap space.

Source: MSCI and S&P Capital IQ. Emerging Markets and Europe outperformed the US Index in H1 2025. A contrast to previous years.

At the start of the Trump administration, the initial consensus was that the administration would focus its tariff policies on Mexico and China. However, as it turned out, this was far from the case, particularly with tariff increases directed to Europe, export-driven Southeast Asian countries like Vietnam, and, to a more surprising extent, Canada. Mexico, in particular, is a country I liked entering this year after the MSCI Mexico index experienced a 27% drop last year. More particularly, I like (and have invested in) their airports and have shortlisted other high-quality Mexican businesses for further research, such as Coca-Cola FEMSA, their staple retailers, and GMexico Transportes (which is to be delisted).

In USD terms, the MSCI Canadian Index ended the first half more than 10% higher than the US, once again demonstrating that Canada and the US remain two distinct equity markets exposed to different factors. I haven't examined Canada as deeply as I have Mexico, but it's important to note the depth available in Canadian equities: there are nearly 250 companies with a market capitalisation of over $1 billion, or 150 companies excluding materials and energy.

Looking more domestically in the US, initial market expectations was that AI would continue to drive its markets to new highs led by the typical Big Tech suspects. This was partly true but slightly different from what we experienced in previous years.

From FAANGs to BATONAMNAM (Ba-to-nam-nam) US Tech Titans

The American Big Tech companies are no longer just five companies. It's now ten - BATONAMNAM (I will be taking alternative acronyms in the comments)

B - Broadcom

A - Apple

T - Tesla

O - Oracle (yes, they are back!)

N - Nvidia

A - Amazon

M - Microsoft

N - Netflix

A - Alphabet

M - Meta Platforms

At its rate, we'll soon have to include Palantir (+80% YTD). Also, watch out for the revival of IBM and Cisco.

At least from a sentiment lens, the US Big Tech companies are much more diverse than they were a few years ago when the market was limited to only five companies. AI has reinvigorated the roles of semiconductors and cloud computing (Nvidia, Broadcom, and Oracle) in technology. In my view, it's an important insight that reflects just how difficult and patient investors will have to be in finding the true long-term winners from AI. As we'll see, AI likely resets the moats and the leaders of tomorrow will be those who execute best today.

Another key insight from the first half of the year on AI is the range of returns across the Big Tech companies. Years ago, Big Tech returns were quite similar; you just needed to invest in one of them. Today, that's quite different. For example, in the traditional FAANG companies, Apple (-18%) and Alphabet (-7%) experienced declines, Amazon remained flat (0%), while Meta Platforms (+26%), Netflix (+50%) and Microsoft (+18%) outperformed the S&P 500. I'm not sure if we have witnessed this broad range of returns in Big Tech in recent periods, but it does show that markets no longer bid up all companies thematically but rather selectively pick winners and losers.

At Jenga IP, we invested in one of the losers, Alphabet and transitioned another one (to be discussed in the August deep dive) into our stage 4 research list. You can expect more analysis on Alphabet from me after it reports its Q2 2025 results.

Defence

During periods of war and increased political tension, two things are likely to become more valued by investors - gold and defence companies. My painful admission is that I've never invested in a defence company. Even without war, the defence industry is one every global investor should consider. The industry has become more specialised, with pockets of oligopolistic and monopolistic sub-markets. Defence budgets are sticky for many economies, and the barriers to entry in these long-term contracts make the case for the large-cap US and European aerospace and defence companies more attractive and more recently, East Asian defence companies.

With the ongoing tension in the Russia-Ukraine conflict and the Middle East, particularly between Israel and Iran, the rest of 2025 and possibly 2026 will likely continue to see optimism in this sector. NATO countries recently committed to spending 5% (3.5% on core defence and 1.5% on flanking infrastructure) of their GDP on defence. Unlike tech, defence is more broadly dispersed by country. Among the largest ten companies, five are European, led by French Airbus and Safran, which makes the upside more regionally balanced.

For investors in a similar position, it isn't easy to make new investments here, given how strongly the defence index has performed. The MSCI World IMI Aerospace and Defence Index is up +33.5% YTD through to May and trades at a forward P/E of 30x (48x trailing P/E). I've accepted that I missed this move and will likely sit it out.

Top winners of H1 2025

I highlight the ten biggest share price gainers among the large-cap companies ($10 billion market cap - 1910 companies):

Source: S&P Capital IQ

As I mentioned earlier, defence has been the most significant driver of returns in H1 2025, and among the top 10 performers, five companies came from the sector, with a notable concentration in South Korean companies (Hyundai Rotem, Doosan Enerbility, Hanwha Aerospace, Hensoldt, and Rheinmetall). While the Korean Index has generally rebounded strongly after a sharp drawdown in 2024, the Korean defence space has particularly benefitted from the increased allocation from foreign countries for their equipment as a bid to make up for capacity constraints within home markets.

Source: S&P Capital IQ. The five defence companies are among the top 10 performing large-cap companies globally.

Beyond the defence theme, the rest of the top leaders had a mix of drivers, ranging from booming toy and consumer accessory companies, such as China's Laopu Gold and Pop Mart (owner of Labubu), and companies like Victory Giant Technology, a key player in China's goal of semiconductor self-sufficiency. In China, finding profitable growth companies has become increasingly challenging, especially within the consumer sector. Therefore, I'm not surprised to see companies with actual profit growth, such as Pop Mart and Laopu Gold, advancing aggressively. That said, I’ll stick with the less trendy and more mature companies within Chinese consumer equities. You can call me old school.

Overall, among the top gainers, the Federal National Mortgage Association (Freddie Mac) is one I've recently taken an interest in after my deep dive into its younger sibling, Farmer Mac. I plan to cover their business models in future deep dives. Bill Ackman (The art of the deal and a 2002 short report on Farmer Mac), Peter Lynch (chapter 18 of Beating the street), and Charlie Munger (1998 WESCO letter) are three greats who have written extensively about these companies, and I believe it's worth paying attention to the potential privatisation of the US GSEs.

My Mac and Mae siblings analogy

1. Fannie Mae - the oldest sibling. Once a strong leader and responsible firstborn, but eventually buckled under the pressure of needing to behave perfectly all the time.

2. Freddie Mac - the second-born. Looked up to their older sibling and made many of the same mistakes, but appears to have learned and matured since.

3. Farmer Mac - the third-born. Had a rocky start, but has stayed consistent. Doesn’t surprise on the upside or downside. Quiet, steady, and low-drama.

4. Sallie Mae - the youngest. True to last-born fashion: mischievous and unpredictable. Was kicked out of the house (fully privatised), but lately has surprised many with signs of grown-up behaviour.

Top losers of H1 2025

I’m more interested in the losers and spotting potential areas of excessive pessimism and in the table below are the top 10 biggest losers for the first half:

Source: S&P Capital IQ

There's quite a range of themes among the losers. First, it's rare for utilities to drop by a third in a quarter, but 3 companies, in 3 countries, in 3 different sub-industries within utilities (a rare 3-3-3) fell by more than a third during the half-year, a period the MSCI ACWI Utilities index is up by nearly 15%, outpacing the market. Admittedly, these three aren't companies I'd invest in, given that both PT Barito Renewables and ACWA Power Company trade at more than 60 times their EBITDA.

The worst-performing five are companies I (and most readers) might be more familiar with. Airports of Thailand (AOT) was the joint worst performer during the first half of the year, and in our Airports deep dive, I shared a case study on the dangers of overpaying, even for top-quality airports like AOT. Today, it trades at 22 times earnings, a valuation multiple I believe is fair. The question for the future is whether the Chinese tourism revival, coupled with dividends and renegotiation in its duty-free agreement, can lift earnings growth and shareholder returns over the mid-to-long term.

Deckers Outdoor and Lululemon Athletica are two American consumer discretionary companies that are among the higher-quality names in the industry. My initial decision against buying both was purely based on valuation in comparison to the Chinese apparel peers, but after doing more reflection, I've come to realise that the fashion trends, low barriers to entry and the competition intensity makes the whole category within apparel and footwear not as high quality as I initially thought. I was wrong - trends come and go. As a result, I've aggressively reduced the entry multiples I'd be willing to pay for any apparel or footwear company, including luxury brands. With that in mind, Lululemon Athletica, at 16x earnings, looks interesting and is currently on my watchlist. I'll be studying closer at how Nike's turnaround could affect them and the impact of upstarts like Alo and Vuori.

Finally, UnitedHealth Group and Dow Inc. are both companies outside my focus area or circle of competence. However, if I had to choose between the two, I'd consider UnitedHealth Group, given its better track record of cash flow generation.

Examining the losers beyond the top 10 companies (84 companies declined by 20% or more during the half-year), I noticed the presence of the following industries and themes;

• Premium international consumer products exposed China: Apple, LVMH, Christian Dior, Kering, Prada

• Healthcare (diversified): Moderna, Merck Novo Nordisk, Moderna, ICON Public Limited, Illumina, Thermo Fisher, IQVIA, United Therapeutics, Sonova Holding, West Pharmaceutical Services

• Alcohol: Diageo, Brown Forman, Constellation Brands, Jiangsu Yanghe Distillery, Pernod Ricard

• Automotive (mainly European): Stellantis, Dr. Ing Porsche AG, Tesla, Toyota, SAIC

Among these four segments, the first two — premium international consumer products exposed to China and healthcare — are the two I'm particularly interested in. Alcohol, of course, isn't going anywhere anytime soon, but there's some structural decline over the near term, and many of these large-cap companies may have limited growth potential. I'm also biased towards the Chinese alcohol brands, which I believe have more all-round growth potential than their foreign peers.

Finally, the automotive space is one I've avoided in my investment career and one I expect to continue avoiding in the near term, especially with the rise of BYD and other Chinese electric car manufacturers. There's unlikely to be enough space for all players, and I see traditional players like Stellantis among the long-term structural decliners with limited support from domestic, Chinese and American governments to support their manufacturing capacity.

Thailand - The country laggard

Among all major countries, Thailand has been the worst-performing index, with the local SET Index declining by nearly 25% YTD. Among its 10 large-cap companies, three were among the 84 that fell by more than 20%. Beyond its most recent political crisis, the Thai economy has underperformed expectations, and tourism, a sector on which its economy is highly dependent, accounting for nearly 20% of its GDP, has been particularly weak. Several listed companies are exposed to the tourism economy, so it's no surprise that the decline has been reflected in the stock market. Thailand hasn't been a country I've given much focus to, but I expect to take a closer look at its listed companies, including its small caps. Beyond Thailand, Turkey (more on this after my management trip later this month), Saudi Arabia, Indonesia, and Malaysia are other countries with sharp equity declines that are worth looking at.

Book of H1 2025

Admittedly, I didn't read as many books as I'd love to, something I hope to rectify in the second half; however, one I particularly enjoyed was Kings on the Catwalk: Moet-Hennessy Louis Vuitton Affair by Hugh Montefiore. You can read a summary of what I learned here.

Research Priorities for H2 2025

• Semiconductors - I will publish a deep dive on TSMC later this month, along with an overview of the global semiconductor industry.

• Big Tech BATO-NAM-NAM - I expect to publish a deep dive on another Big Tech company in the second half of the year (I await suggestions in comments for a better acronym)

• Industrial conglomerates and distributors - Metlen Energy's re-listing in the UK, expected in August, could be a near-term catalyst. Rental equipment and selective Swedish serial acquirers remain other areas of interest.

• Consumer staples food and staples retailing - With Dino Polska now close to our mid-term valuation, I am prioritising searching for alternative companies within the industry I consider high quality. Grupo Mateus in Brazil and La Comer in Mexico are among the candidates here.

• US GSEs - If time permits, I will be reviewing the weeds and intricacies of Fannie, Sallie, Freddie and Farmer Mac and Mae siblings.

• Management meetings - I will be visiting listed companies in Sweden, Poland and Turkey over the next 6 months.

H1 2025 served as a reality check and reset on conviction, valuations, and market perception. Predicting what will happen in the second half is a fool's errand, and I remain focused on searching globally for high-quality businesses at attractive prices.