While the first few months of the year showed evidence of the benefits of diversification, the past few months have been different. Stock markets are again driven by a narrow range of US mega cap tech companies, and it has become more difficult to find short to medium term opportunities that don’t depend on the mood swings of President Trump or the market’s enthusiasm for AI. In August, we focused on some of our more niche tactical positions.

First our position in Latin American equities, which we established in May 2025. Made up of circa 60% Brazilian and 28% Mexican stocks, this is a volatile region which had under-performed for several years. Coming into 2025, valuations were comfortably cheaper than Europe, the UK or China. Macro fundamentals in Brazil were improving, with inflation calming and the labour market remaining strong. A particular attraction for us was that Brazil runs a trade deficit with the US, meaning it was not a target of Trump’s trade war. So we were as surprised as the markets were when Trump slapped a 50% tariff on imports from the country in July. His motive was purely political – he took exception to Brazil prosecuting ex-President Bolsonaro for his attempted coup last year. While we did consider selling out of the position, on researching further, we found enough good reasons to hold on. First, we noted that the US makes up only a small portion (circa 12%) of Brazilian exports, and second, many major goods were excluded, like crude oil and iron ore. Adding in the potential for rate cuts this year, the outlook for Brazilian equities is still positive, and the market has recovered well (see figure 1 below). The tariffs have raised another risk though – they have increased the popularity of Brazilian President Lula, reducing the chances of a more market-friendly president being elected next year. For now, we will hold and keep watching as the situation evolves. (Please note this Tactical Call is not held in our Social Focus Range.)

Figure 1: Latin American equities before and after Trump’s tariff increase

Source: Bloomberg, MSCI. All indices are expressed in Euro. Our tactical position was initiated on May 21st.

Another tactical position, that we have held since August 2023, is a small bet on the Japanese yen. At the time, the currency had declined to its lowest level in decades, as the Bank of Japan (BOJ) kept rates below zero while the rest of the world hiked rates to battle the post covid inflation shock. We believed that Japanese growth and inflation would eventually recover, lifting Japanese interest rates and bond yields, which would lift the currency. We also liked the defensive nature of the yen, which tends to rally when risky assets sell off, making it a handy portfolio hedge in a crisis1. As it happens, all these expectations – higher inflation, rates and yields – played out over the past 2 years. Yet the yen exchange rate is still roughly where it was versus the dollar back then and has weakened versus the euro and pound (as they gained versus the dollar). There were fears for the Japanese economy from the Trump tariffs, which have since eased with the trade deal, and the BOJ have been very slow raising rates, although we expect them to continue.

As Japanese bond yields continue to rise, closing the gap to global yields, we believe that the currency should appreciate from here, as illustrated in figure 2. Therefore, we decided to re-establish the position. But learning from last time, the gains may be slower and weaker than expected, so our implementation has changed slightly. See the next section for details.

Finally, as we discussed last month, we have been re-assessing our two largest tactical deviations – to be underweight the US tech sector and to be underweight US dollars – and due to the overlap, we have been considering reducing one or both.

The rebound in the tech sector since April has brought it back to uncomfortable levels, while the negative momentum in the dollar has weakened since its double-digit decline. Therefore, we are more inclined to reduce our dollar underweight than our US tech underweight, and may look to move on this in the coming months.

Figure 2: Japanese yen exchange rate versus the gap in Japanese and US bond yields

Source: Bloomberg. Japanese bond yield is in Japanese yen, and US bond yield is in US dollars.

1 We note that the yen rallied in the stock market sell-off in August 2024 and again in tariff shock in April this year.

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