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Speaker 1: Welcome to Fear and Greed Q and A where we

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Speaker 1: ask and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Sean Aylmer. Today it's all about emerging markets. Matt

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Speaker 1: Williams is the senior investment director at Aberdeen Investments based

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Speaker 1: out of the UK. He oversees emerging market equity funds

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Speaker 1: and believes emerging markets are back on the table for investors.

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Speaker 1: Remember this is general information only and you should seek

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Speaker 1: advice Taylor to your circumstances before making investment decisions. Matt,

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Speaker 1: Welcome to Fear and Greed Q.

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Speaker 2: And a great to be here. Thank you.

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Speaker 1: We've heard emerging markets are back for a few years

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Speaker 1: now now, having said that, the last few months have

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Speaker 1: definitely been better for emerging markets, but why are you

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Speaker 1: confident that they are back? Yeah?

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Speaker 2: So well, structurally so who knows what happens in the

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Speaker 2: very short term, But thinking about the medium and longer term,

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Speaker 2: I think there are changes in the global economy that

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Speaker 2: will live earnings growth in emerging markets and you can

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Speaker 2: buy into those attractive valuations. You'll have to compete against

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Speaker 2: domestic households in emerging markets because they're also seeing the opportunity.

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Speaker 2: So you put those things together along with what I

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Speaker 2: think are pretty sound financial circumstance for emerging market companies,

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Speaker 2: and you've got what makes for an appealing outlook.

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Speaker 1: So what are some of these changing dynamics broadly We

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Speaker 1: will come to specific markets later, but broadly, and I

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Speaker 1: know you've talked about the three seas, carry capex and

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Speaker 1: cheap what are these dynamics?

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Speaker 2: Yeah, so maybe to set the scene, so a number

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Speaker 2: of learned strategists have made the point that the last

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Speaker 2: forty years up until COVID were run for a policy

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Speaker 2: of debt economics, so cutting interest rates and they went

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Speaker 2: all the way down to five thousand year lows and

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Speaker 2: then using central bank balance sheets to incentivize investing into

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Speaker 2: risk assets, and both of those things resulted in more

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Speaker 2: and more debt accumulation for developed market countries. And then

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Speaker 2: we started to change policy after COVID to invest more

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Speaker 2: into directly into our economies, and that previous period had

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Speaker 2: the effect, through a rising strengthening dollar, of constraining emerging

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Speaker 2: market companies' ability to take on debts. So ironically, we're

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Speaker 2: in a situation today where developed market countries have leathered

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Speaker 2: financial positions, and emerging market countries have much sounder financial positions,

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Speaker 2: and I think the response, the policy response to deal

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Speaker 2: with those levered balance sheets is to engineer a major

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Speaker 2: investment cycle. And what that means is that emerging market companies,

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Speaker 2: we believe will benefit without having to make the expenditure.

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Speaker 2: But the carry is really about the outcome of that

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Speaker 2: spending in developed markets and inflating away real returns, and

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Speaker 2: you won't have that effect in emerging market countries. So

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Speaker 2: capital should flow towards safe havens, and strangely today that's

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Speaker 2: emerging markets.

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Speaker 1: That is, not all emerging markets are the same broadly.

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Speaker 1: Obviously in Australia we think a lot about China, which

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Speaker 1: is an emerging market. For my presumious I think for

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Speaker 1: merging China is an emerging market. But in South America now,

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Speaker 1: the Grade Area, Central America, Mexico, those sorts of countries

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Speaker 1: the rest of Asia are the time you prefer, are

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Speaker 1: the you know, sort of attributes of some of them

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Speaker 1: that you should be looking for.

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Speaker 2: Yes, and you're quite right, my comments were inclusive of China,

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Speaker 2: but certainly China has the kind of dirtiest linen within

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Speaker 2: the emerging market sphere. But even China are now reasonably

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Speaker 2: well progressed through their workout of their property market adjustment

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Speaker 2: in terms of changing behaviors, so that hasn't yet fed

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Speaker 2: through into balance sheet improvement, but when you get the

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Speaker 2: mechanisms right, that should put you on a path to

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Speaker 2: correcting the debt situation within China. Despite the debt situation,

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Speaker 2: we see an opportunity for investment away from some of

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Speaker 2: the older industries where we think growth is saturated and

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Speaker 2: returns dwindled to unappealing levels. But in a number of

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Speaker 2: service areas and perhaps increasingly consumption, you can buy into

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Speaker 2: businesses that offer attractive returns and growth. So that's that

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Speaker 2: results in cash flow generation on appealing valuations. So even

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Speaker 2: within the worst of emerging markets we see areas of opportunity.

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Speaker 2: But elsewhere we're finding attractive ideas from the bottom up

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Speaker 2: as stockpickers in countries like Mexico and Indonesia.

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Speaker 1: Well, Mexico and Mexico was kind of five of the

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Speaker 1: month and then the tariffs seem to have hit that economy.

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Speaker 1: In terms of evaluations, Mexico probably isn't the cheapest emerging

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Speaker 1: market out there. What is it about Mexico that people

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Speaker 1: that investors like you still really like. Yeah.

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Speaker 2: So we had the fortune of being able to spend

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Speaker 2: a day with important commercial banks in Mexico speaking to

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Speaker 2: their economists and speaking to representatives on the bank to

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Speaker 2: hear what their customers are telling them, and the picture

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Speaker 2: was that despite having had tariffs imposed upon them practically

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Speaker 2: speaking about ninety to ninety five percent of traded goods

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Speaker 2: with America, should be able to fall within a let's

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Speaker 2: call it a customs union. So, in other words, no

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Speaker 2: tariffs and for companies that's really good news because what

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Speaker 2: that means is the flick of a switch, they get

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Speaker 2: a major advantage over their competitors.

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Speaker 1: Okay, Indonesia, that was the other one, very cligh to

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Speaker 1: home a huge amount of people. Bureaucracy still is an

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Speaker 1: issue with Indonesia seemingly investing in their country. Why do

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Speaker 1: you like Indo?

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Speaker 2: Yeah, Well, firstly, sound country financials is always a good

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Speaker 2: starting point and a tremendous base and opportunity for growth.

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Speaker 2: The authorities they've come under quite a lot of stick recently,

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Speaker 2: but I think they have a sound program to try

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Speaker 2: and raise the value add through some of their basic industries.

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Speaker 2: So an illustration of that being that they want to

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Speaker 2: refine and process and develop basic materials into ends battery

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Speaker 2: manufacturing for example, and that should drive more career paths,

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Speaker 2: jobs and economic development. And you know, we're finding when

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Speaker 2: we speak to companies that there are opportunities to invest

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Speaker 2: in businesses that really have the bit between their teeth

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Speaker 2: and see opportunity to grow in a profitable way.

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Speaker 1: So let's stick with Indonesia. If I've decided that Indonesia

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Speaker 1: is a place for me to think about, is it

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Speaker 1: a sector bisector thing? Is it an asset by asset thing?

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Speaker 1: I mean, if I think Australia UK market minus a

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Speaker 1: big on both markets, do I invest in rear? Do

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Speaker 1: I invest in BHP kind of you know arising tide

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Speaker 1: floats or boats type thing? But is that the case

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Speaker 1: in emerging markets using Indonesia as an example, or is

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Speaker 1: it much more You need to know the asset fundamentally

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Speaker 1: or perps the sector.

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Speaker 2: Yeah, we have our routs in bottom up fundamental analysis,

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Speaker 2: So we think it's important to have boots on the ground,

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Speaker 2: be specialists at a sector level and really understands the

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Speaker 2: businesses well. So we're trying to pick winners in an industry,

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Speaker 2: and we think that requires a deep dive into companies.

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Speaker 2: One of the aspects that we're focused on is cash

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Speaker 2: flow generation and sound balance sheets so that our clients

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Speaker 2: have protections in difficult weathers. But also we like to

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Speaker 2: encourage companies to show a commitment to shareholders in the

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Speaker 2: form of paying surplus cash, so that's cash after they've

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Speaker 2: met their investment needs out in the form of dividends,

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Speaker 2: and that way we get a nice alignment between business owners.

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Speaker 1: Okay, bottom line here, emerging markets certainly worth a look.

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Speaker 2: Matt, Yeah, that's right, Please take a look.

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Speaker 1: Fantastic Matt, thanks for talking to you here in great

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Speaker 1: Q and a welcome. That was Matt Williams and your

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Speaker 1: investment director at Evideene Investments. Remember this is on information

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Speaker 1: only and if you're going to invest, get professional advice

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Speaker 1: tailored to your circumstances before making decisions. If you've got

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Speaker 1: something you'd like to know, then send through your questions

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Speaker 1: on LinkedIn, Instagram, Facebook or at Fearangreed dot com dot au.

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Speaker 1: I'm sure I am, and this is Fear and Greed

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Speaker 1: Q and a