1 00:00:04,080 --> 00:00:07,500 Sean Aylmer: Welcome to the Fair and Greed Daily Business Interview. Emerging markets 2 00:00:07,500 --> 00:00:11,219 Sean Aylmer: can appear to hold attractive investment opportunities, but they're not 3 00:00:11,219 --> 00:00:14,250 Sean Aylmer: for the faint- hearted. Emerging markets might have a different 4 00:00:14,250 --> 00:00:16,829 Sean Aylmer: rule of law or different sovereign risk. There's cultural risk, 5 00:00:16,829 --> 00:00:20,640 Sean Aylmer: information, risks, a whole host of other factors compared to 6 00:00:20,640 --> 00:00:23,730 Sean Aylmer: nations like Australia, the US, or Europe. I thought I'd 7 00:00:23,730 --> 00:00:27,570 Sean Aylmer: ask an expert about emerging markets on ... And maybe he 8 00:00:27,570 --> 00:00:30,929 Sean Aylmer: can provide some insights into how to think about investing 9 00:00:30,929 --> 00:00:34,019 Sean Aylmer: in that category. John Moorhead, Head of Global Emerging Markets 10 00:00:34,019 --> 00:00:35,940 Sean Aylmer: at Maple- Brown Abbott, welcome to the show. 11 00:00:36,479 --> 00:00:37,620 John Moorhead: Hi, Sean. Thanks for having me. 12 00:00:38,040 --> 00:00:40,470 Sean Aylmer: So let's start with the very basics. What are we 13 00:00:40,470 --> 00:00:42,690 Sean Aylmer: talking about when we talk about emerging markets? 14 00:00:43,290 --> 00:00:48,540 John Moorhead: Yeah. So emerging markets are really a very broad and wide- 15 00:00:48,540 --> 00:00:52,199 John Moorhead: ranging group of countries. Broadly, you can think of it 16 00:00:52,260 --> 00:00:55,410 John Moorhead: as any country that's outside what we would think of 17 00:00:55,560 --> 00:00:59,910 John Moorhead: as developed. So that's outside North America, outside Europe, Japan, 18 00:00:59,940 --> 00:01:03,179 John Moorhead: and Australia, roughly. So on a world map, you're looking 19 00:01:03,179 --> 00:01:06,750 John Moorhead: at anything from the Philippines and Korea and go west 20 00:01:06,750 --> 00:01:09,929 John Moorhead: all the way through India, Middle East, Eastern Europe, and 21 00:01:09,929 --> 00:01:10,740 John Moorhead: Latin America. 22 00:01:11,969 --> 00:01:14,100 Sean Aylmer: Okay. So what are some of the bigger ones, so China's obviously a bigger one. 23 00:01:14,100 --> 00:01:16,800 Sean Aylmer: What about places like Mexico and Brazil? They're all included in that. 24 00:01:17,340 --> 00:01:21,330 John Moorhead: That's right, yeah. So China's clearly the largest. They're about 25 00:01:21,389 --> 00:01:24,959 John Moorhead: 30% by weight and 50% by name- 26 00:01:24,959 --> 00:01:24,961 Sean Aylmer: Wow. 27 00:01:24,961 --> 00:01:28,079 John Moorhead: ... In the universe, I should say. Yeah, the index 28 00:01:28,080 --> 00:01:32,790 John Moorhead: is about 1400 and the universe is about 3000 listed companies 29 00:01:32,790 --> 00:01:36,270 John Moorhead: that we would include as investible. And exactly the next up- and- 30 00:01:36,270 --> 00:01:41,340 John Moorhead: comers behind that are India, Taiwan, Mexico, Brazil, South Africa, 31 00:01:41,490 --> 00:01:43,410 John Moorhead: Saudi Arabia is coming up as well. 32 00:01:43,590 --> 00:01:47,520 Sean Aylmer: Okay. So how have they performed? I mean, are they 33 00:01:47,520 --> 00:01:52,020 Sean Aylmer: expensive markets? When I'm thinking about investing in emerging markets and 34 00:01:52,320 --> 00:01:54,480 Sean Aylmer: I might go to an organization, I mean a lot 35 00:01:54,480 --> 00:01:56,370 Sean Aylmer: of these markets are difficult to invest directly in, so maybe it goes through 36 00:01:57,059 --> 00:01:59,099 Sean Aylmer: a managed fund or however, but what is it that 37 00:01:59,099 --> 00:02:02,009 Sean Aylmer: I should be thinking about it? Aah, I mean, I'm 38 00:02:02,009 --> 00:02:03,929 Sean Aylmer: interested in the risks I suppose to start off with 39 00:02:03,929 --> 00:02:04,799 Sean Aylmer: and then price. 40 00:02:05,399 --> 00:02:10,169 John Moorhead: Yeah. So a lot of investors would luckily know emerging markets when they 41 00:02:10,169 --> 00:02:13,050 John Moorhead: really came on the scene was in the 2000s as 42 00:02:13,050 --> 00:02:15,840 John Moorhead: China entered the WTO when you had the commodity supercycle 43 00:02:15,840 --> 00:02:18,689 John Moorhead: and emerging markets, absolutely boomed then. So when you say 44 00:02:18,690 --> 00:02:21,809 John Moorhead: today, are they expensive, or how have they performed? What's 45 00:02:21,809 --> 00:02:24,720 John Moorhead: their price? Over the last 10 years, it's been a 46 00:02:24,720 --> 00:02:27,930 John Moorhead: pretty much flat market, and I would point out to 47 00:02:27,930 --> 00:02:31,410 John Moorhead: that, that over the last 10 years globally, it's been the U. 48 00:02:31,410 --> 00:02:35,220 John Moorhead: S. and then everyone else behind that. So Europe, the EM, 49 00:02:35,250 --> 00:02:40,230 John Moorhead: even Australia to some extent. So valuation- wise, today where 50 00:02:40,288 --> 00:02:44,130 John Moorhead: it's about average, but again, it's such a broad group 51 00:02:44,130 --> 00:02:46,140 John Moorhead: of markets that you really need to break that down 52 00:02:46,290 --> 00:02:51,149 John Moorhead: into, there's 27 countries in there and some are highly- 53 00:02:51,150 --> 00:02:54,630 John Moorhead: priced, we would view India as a market that everyone 54 00:02:54,630 --> 00:02:57,089 John Moorhead: knows, or at least a lot of people would know 55 00:02:57,089 --> 00:03:00,029 John Moorhead: that India today is booming. Their government's making a lot 56 00:03:00,029 --> 00:03:03,720 John Moorhead: of reforms and infrastructure spending to unlock the potential spend 57 00:03:03,720 --> 00:03:07,169 John Moorhead: in India, but it's well- known and quite expensive. On 58 00:03:07,169 --> 00:03:11,038 John Moorhead: the other hand, we've got markets like Brazil where on 59 00:03:11,040 --> 00:03:14,280 John Moorhead: a forward price to earnings multiple, the entire market's on 60 00:03:14,280 --> 00:03:17,549 John Moorhead: seven and a half times earnings. So it is a 61 00:03:17,730 --> 00:03:19,860 John Moorhead: big spread in valuations, but also a big spread in 62 00:03:19,860 --> 00:03:20,550 John Moorhead: risk as well. 63 00:03:20,910 --> 00:03:23,160 Sean Aylmer: Okay. What are the key risks when you're going into 64 00:03:23,160 --> 00:03:24,238 Sean Aylmer: these sorts of markets? 65 00:03:24,630 --> 00:03:28,440 John Moorhead: Yeah. It's a good question. So one is they do 66 00:03:28,440 --> 00:03:34,469 John Moorhead: have different political structures and different cultures. That's positives and 67 00:03:34,469 --> 00:03:38,220 John Moorhead: negatives, so you need to have some knowledge around what's happening 68 00:03:38,220 --> 00:03:42,809 John Moorhead: there. A lot of the smaller markets, they're quite tightly 69 00:03:42,810 --> 00:03:46,620 John Moorhead: held and family- controlled. So like Philippines, or Thailand, have 70 00:03:46,620 --> 00:03:48,690 John Moorhead: a lot of families behind them. India, even a lot 71 00:03:48,690 --> 00:03:51,540 John Moorhead: of the countries, there's a lot more of private ownership 72 00:03:51,540 --> 00:03:55,080 John Moorhead: or they're called promoters. So I think it's something like 73 00:03:55,110 --> 00:03:59,400 John Moorhead: 80% of companies in emerging markets are either tightly held 74 00:03:59,400 --> 00:04:03,270 John Moorhead: by promoters or by the government. And the big risk 75 00:04:03,270 --> 00:04:05,909 John Moorhead: that you would take on is currency risk as well. 76 00:04:05,910 --> 00:04:09,839 John Moorhead: So even though we think the situation today is much 77 00:04:09,839 --> 00:04:12,960 John Moorhead: improved than what it was over especially 20 to 25 78 00:04:12,960 --> 00:04:15,720 John Moorhead: years ago, in the last 10 years, you've had lost 79 00:04:15,720 --> 00:04:17,310 John Moorhead: a lot on the currencies as well. And we think 80 00:04:17,310 --> 00:04:18,960 John Moorhead: we could be at a turning point there with what 81 00:04:18,960 --> 00:04:22,469 John Moorhead: interest rates and inflation are doing in emerging markets where 82 00:04:22,469 --> 00:04:25,078 John Moorhead: people might be surprised that EM is well ahead of 83 00:04:25,080 --> 00:04:27,420 John Moorhead: developed markets in bringing inflation under control. 84 00:04:27,809 --> 00:04:30,059 Sean Aylmer: Okay. What about things, like I mean, if I go 85 00:04:30,059 --> 00:04:32,609 Sean Aylmer: and read a set of accounts from a company in 86 00:04:32,610 --> 00:04:35,250 Sean Aylmer: one of those emerging markets, can I have the confidence 87 00:04:35,550 --> 00:04:39,599 Sean Aylmer: in that as me reading Commonwealth Bank's set of accounts? 88 00:04:40,230 --> 00:04:43,409 John Moorhead: For the large part, yes. So out of the times, it's the 89 00:04:43,410 --> 00:04:48,209 John Moorhead: same big four auditors, they are professionally run and regulated 90 00:04:48,209 --> 00:04:51,150 John Moorhead: as well. There are a few issues. A lot of 91 00:04:51,150 --> 00:04:54,988 John Moorhead: the times the disclosure levels aren't anywhere near what you 92 00:04:54,990 --> 00:04:57,270 John Moorhead: would get in developed markets, so you don't get all 93 00:04:57,270 --> 00:05:02,580 John Moorhead: those details. Second is sometimes, and it's becoming less often, 94 00:05:03,000 --> 00:05:06,060 John Moorhead: the companies may not report in English, so you'll need 95 00:05:06,240 --> 00:05:09,839 John Moorhead: some local interpretation. So in my team here we have 96 00:05:09,870 --> 00:05:14,279 John Moorhead: Mandarin speakers, or Portuguese, in Spanish that can read into 97 00:05:14,279 --> 00:05:16,830 John Moorhead: those local accounts to understand what's going on. But in 98 00:05:16,830 --> 00:05:20,279 John Moorhead: general, the corporate numbers are believable. 99 00:05:20,610 --> 00:05:22,499 Sean Aylmer: Stay with me, John, we'll be back in a minute. 100 00:05:29,249 --> 00:05:32,070 Sean Aylmer: I'm talking to John Moorhead, Head of Global Emerging Markets 101 00:05:32,070 --> 00:05:34,950 Sean Aylmer: at Maple- Brown Abbott. We'll put the risks out there, 102 00:05:34,950 --> 00:05:38,070 Sean Aylmer: and we're not an investment podcast, so certainly anyone listening 103 00:05:38,070 --> 00:05:41,219 Sean Aylmer: that's interested, get your own professional advice to suit your 104 00:05:41,219 --> 00:05:45,210 Sean Aylmer: circumstances. So they're the risks. What about what you like, 105 00:05:45,810 --> 00:05:47,910 Sean Aylmer: I mean, firstly, do you think about a country like 106 00:05:48,000 --> 00:05:50,550 Sean Aylmer: Korea, as Korea, or do you think about it as 107 00:05:50,550 --> 00:05:54,270 Sean Aylmer: a technology play, which happens to be Korea, maybe chips 108 00:05:54,270 --> 00:05:55,649 Sean Aylmer: or something like that? How do you think about it? 109 00:05:56,009 --> 00:05:59,669 John Moorhead: Yeah. Great question. And it depends on the makeup of 110 00:05:59,670 --> 00:06:03,419 John Moorhead: the market, right? So Samsung, if you're looking inside Korea, 111 00:06:03,420 --> 00:06:07,260 John Moorhead: Samsung totally dominates. If you go and buy a Korean 112 00:06:07,260 --> 00:06:10,889 John Moorhead: ETF for instance, it will be dominated by Samsung. It's 113 00:06:10,889 --> 00:06:14,730 John Moorhead: about I think 40% of Korean weight would be something like Samsung. 114 00:06:14,820 --> 00:06:20,339 John Moorhead: TSMC, Taiwan semiconductor in Taiwan is similar. So if you're 115 00:06:20,339 --> 00:06:22,920 John Moorhead: taking that top- level view, I buy a Korean ETF, 116 00:06:22,920 --> 00:06:25,349 John Moorhead: then you're going to basically be buying Samsung and tech. 117 00:06:25,710 --> 00:06:29,910 John Moorhead: But as a stock picker, so I said earlier that the 118 00:06:29,910 --> 00:06:33,839 John Moorhead: universe is about 3000 companies, we have a portfolio of 119 00:06:33,900 --> 00:06:37,529 John Moorhead: 30 to 40, so we're buying 1% of those companies. So 120 00:06:37,529 --> 00:06:40,919 John Moorhead: for us as stock pickers, it's much more about going 121 00:06:40,920 --> 00:06:43,678 John Moorhead: down to that individual company level and what's driving it 122 00:06:43,680 --> 00:06:46,799 John Moorhead: rather than we go into Korea and is Korea going 123 00:06:46,800 --> 00:06:50,340 John Moorhead: to outperform. No, let's pick the better companies within that. 124 00:06:50,849 --> 00:06:53,790 John Moorhead: That said, you can look at some of those big 125 00:06:54,000 --> 00:06:57,270 John Moorhead: global trends. So what you said, what's interesting, or where 126 00:06:57,270 --> 00:07:01,170 John Moorhead: we're finding opportunities, you can see for instance that Mexico 127 00:07:01,470 --> 00:07:06,479 John Moorhead: is benefiting massively from foreign direct investment as companies that 128 00:07:06,480 --> 00:07:08,428 John Moorhead: are maybe not pulling out of China, but making their 129 00:07:08,428 --> 00:07:13,380 John Moorhead: next investments in Mexico, or India, or Vietnam. This is 130 00:07:13,380 --> 00:07:16,679 John Moorhead: the near- shoring concept, and you can see that over 131 00:07:16,680 --> 00:07:19,440 John Moorhead: the last five or six years, basically since Trump came 132 00:07:19,440 --> 00:07:23,160 John Moorhead: in and put the tariffs on Chinese imports, Chinese direct 133 00:07:23,160 --> 00:07:26,459 John Moorhead: investment into Mexico has gone from 200 million to $ 800 134 00:07:26,460 --> 00:07:30,059 John Moorhead: million per annum. And so that's those corporates setting up 135 00:07:30,059 --> 00:07:33,240 John Moorhead: those bases in Mexico to service the U. S. consumer 136 00:07:33,240 --> 00:07:36,870 John Moorhead: base. And that creates opportunities, a lot of opportunities within 137 00:07:36,870 --> 00:07:40,049 John Moorhead: Mexico, and it's our largest active position today. 138 00:07:40,530 --> 00:07:42,929 Sean Aylmer: Okay. So what sort of companies are you involved in? I 139 00:07:42,929 --> 00:07:45,539 Sean Aylmer: mean, what do they do those companies in Mexico that 140 00:07:45,540 --> 00:07:46,409 Sean Aylmer: you invest in? 141 00:07:46,590 --> 00:07:48,900 John Moorhead: So for instance, a direct player, it's been a long- 142 00:07:48,900 --> 00:07:51,840 John Moorhead: term holding of mine, it's a company called Vesta. They 143 00:07:51,840 --> 00:07:56,280 John Moorhead: make industrial warehouses, so quite a simple business. A multinational 144 00:07:56,460 --> 00:08:00,359 John Moorhead: such as Ford, or Nestle will come to Vesta and say, " 145 00:08:00,360 --> 00:08:03,899 John Moorhead: We want to set up operations in Mexico." And Vesta 146 00:08:03,900 --> 00:08:06,929 John Moorhead: will build them a custom warehouse. Generally, it's a five 147 00:08:06,930 --> 00:08:10,620 John Moorhead: to seven- year lease with rents in U. S. dollars 148 00:08:10,620 --> 00:08:14,429 John Moorhead: linked to U.S. CPI. And so for us, that's a really 149 00:08:14,429 --> 00:08:17,580 John Moorhead: neat stable business, that they've been doing it for 25 150 00:08:17,580 --> 00:08:19,349 John Moorhead: years and they've got a long- term track record of 151 00:08:19,349 --> 00:08:23,129 John Moorhead: consistently growing. It's another family- owned corporate, so that's one 152 00:08:23,129 --> 00:08:25,320 John Moorhead: that we like. But also the big long- term trend 153 00:08:25,320 --> 00:08:28,560 John Moorhead: in emerging markets has been the rising consumer and that 154 00:08:28,560 --> 00:08:32,370 John Moorhead: increase in consumption. So Walmex, which is Walmart in Mexico, 155 00:08:32,580 --> 00:08:35,880 John Moorhead: we think that's a fantastic business that continually grows year- over- 156 00:08:35,880 --> 00:08:40,620 John Moorhead: year as they roll out formal consumption. So a lot 157 00:08:40,620 --> 00:08:45,150 John Moorhead: of the emerging worlds still has informal marketplaces, so Walmex 158 00:08:45,150 --> 00:08:48,660 John Moorhead: can come in and roll out supermarkets and continue to 159 00:08:48,660 --> 00:08:51,689 John Moorhead: grow there. Banks are another way of servicing that growing 160 00:08:51,690 --> 00:08:53,730 John Moorhead: consumption as well. And you've got each of those in 161 00:08:53,730 --> 00:08:55,140 John Moorhead: Mexico as an example. 162 00:08:55,380 --> 00:08:59,429 Sean Aylmer: Okay. So Brazil's relatively cheap, Mexico there certainly are opportunities. 163 00:09:00,120 --> 00:09:03,208 Sean Aylmer: Korea and Taiwan, they're kind of dominated by big players. 164 00:09:03,540 --> 00:09:06,480 Sean Aylmer: We better mention China though, because as you said, 30% and then 165 00:09:06,990 --> 00:09:09,870 Sean Aylmer: 50% in terms of number, how do you invest in China? 166 00:09:10,980 --> 00:09:14,759 John Moorhead: Yeah. So that's the elephant in the room, and a 167 00:09:14,759 --> 00:09:18,300 John Moorhead: tricky question for emerging markets at the moment. When we're 168 00:09:18,300 --> 00:09:22,410 John Moorhead: looking for stocks, we're looking for good quality companies trading 169 00:09:22,410 --> 00:09:25,980 John Moorhead: good valuations, and importantly, we want to see positive change. 170 00:09:25,980 --> 00:09:27,960 John Moorhead: So we want to see them going in the right 171 00:09:27,960 --> 00:09:31,710 John Moorhead: direction. And when we look at China today through that 172 00:09:31,710 --> 00:09:35,400 John Moorhead: lens, the stock market's down 50%, right? And I just 173 00:09:35,400 --> 00:09:38,700 John Moorhead: say to people, imagine if the S& P 500 was down 50%, or the 174 00:09:38,730 --> 00:09:43,410 John Moorhead: ASEX had fallen 50%. That's a real crisis, right? And 175 00:09:43,410 --> 00:09:47,429 John Moorhead: China, the economy's still going, just the stock market just 176 00:09:47,429 --> 00:09:52,319 John Moorhead: halved. So valuations look okay, the valuations are okay. It's 177 00:09:52,320 --> 00:09:55,710 John Moorhead: not extremely cheap from when we compare it across emerging 178 00:09:55,710 --> 00:10:00,780 John Moorhead: markets. The quality, again, it's okay. The issue with China 179 00:10:01,230 --> 00:10:04,409 John Moorhead: is it's a very big market. So if you're a 180 00:10:04,410 --> 00:10:07,169 John Moorhead: multinational and you want to grow your consumption like a 181 00:10:07,170 --> 00:10:10,979 John Moorhead: Tesla, or BMW, you go into China, fantastic big market, 182 00:10:10,980 --> 00:10:15,420 John Moorhead: lots of opportunities. The issue is it's ultra- competitive, and 183 00:10:15,420 --> 00:10:18,240 John Moorhead: so they're really cut for it on prices and margins, 184 00:10:18,240 --> 00:10:21,328 John Moorhead: so it makes it hard to have these stable growing 185 00:10:21,330 --> 00:10:23,280 John Moorhead: businesses. There's a few that come out, and as we 186 00:10:23,280 --> 00:10:26,580 John Moorhead: say, we only buy 1% of the market. And so 187 00:10:26,580 --> 00:10:29,369 John Moorhead: the last one is change. So what's the direction of 188 00:10:29,369 --> 00:10:33,240 John Moorhead: change? And today in China, it's still disappointing, in that 189 00:10:33,240 --> 00:10:36,118 John Moorhead: yes, it's negative, the stock market's down, but expectations are 190 00:10:36,120 --> 00:10:40,140 John Moorhead: still, in my opinion too high, as the company's reporting 191 00:10:40,349 --> 00:10:42,990 John Moorhead: that people are having to continue to downgrade their estimates. 192 00:10:42,990 --> 00:10:45,238 John Moorhead: And it won't be until we see a bottom in 193 00:10:45,240 --> 00:10:48,088 John Moorhead: those estimates that the stock market has a chance of 194 00:10:48,090 --> 00:10:51,718 John Moorhead: recovery. Now, what could set that? If you want to 195 00:10:51,720 --> 00:10:54,360 John Moorhead: go into the details, it's really, it's a confidence crisis 196 00:10:54,360 --> 00:10:56,490 John Moorhead: that's going on in China at the moment, and we need 197 00:10:56,490 --> 00:10:59,340 John Moorhead: to see the government set a floor under the property 198 00:10:59,340 --> 00:11:02,759 John Moorhead: market and get that consumer confidence back up. 199 00:11:03,210 --> 00:11:05,069 Sean Aylmer: John, thank you for talking to Fear and Greed. 200 00:11:05,520 --> 00:11:06,659 John Moorhead: No problem. Thank you, Sean. 201 00:11:06,960 --> 00:11:09,840 Sean Aylmer: That was John Moorhead, Head of Global Emerging Markets at Maple- 202 00:11:09,840 --> 00:11:11,939 Sean Aylmer: Brown Abbott. You've been listening to the Fear and Greed 203 00:11:11,940 --> 00:11:15,360 Sean Aylmer: Daily Business Interview. Remember, we're not an investment advice podcast, 204 00:11:15,360 --> 00:11:18,779 Sean Aylmer: so always seek out professional advice to suit your circumstances. 205 00:11:19,049 --> 00:11:20,728 Sean Aylmer: Don't forget to join us every morning for the full 206 00:11:20,730 --> 00:11:23,458 Sean Aylmer: episode of Fear and Greed, Australia's best business podcast. I'm 207 00:11:23,458 --> 00:11:25,078 Sean Aylmer: Sean Aylmer. Enjoy your day.