Speaker 1: Welcome on Trillions. I'm Joel Weber and I'm Eric Bells. Eric.
Speaker 1: Next week in Singapore, Bloomberg is hosting something called the
Speaker 1: New Economy Forum, and the idea with this form is
Speaker 1: that it's going to be dedicated to talking about emerging
Speaker 1: economies around the world, which largely come from Amia and
Speaker 1: South America, Latin America, Africa. And so I wanted to
Speaker 1: take this episode of Trillions to sort of talk about
Speaker 1: um an investing lens that's different than one that we
Speaker 1: usually talked about because we haven't done this on the
Speaker 1: show yet, talking about countries outside of the developed world, right, Yeah,
Speaker 1: So this would be emerging markets and then frontier countries,
Speaker 1: which is sort of like the there's actually like official classifications. Yes,
Speaker 1: that's right, and and some get promoted. Uh, you know,
Speaker 1: it does remind me of you know, freshman year, j
Speaker 1: V and varsity in terms of the way it took
Speaker 1: a three pronged system. But in the immerge, NG and
Speaker 1: frontier areas there's a lot of opportunity, there's a lot
Speaker 1: more volatility. Just to put some numbers on this. In
Speaker 1: the e t F world, emerging markets e t F
Speaker 1: s as a whole, like when you invest in the
Speaker 1: whole region at once, have a hundred and seventy four billion,
Speaker 1: that's a lot. That's six of all e t F assets.
Speaker 1: But the countries when you go into a specific country
Speaker 1: and emerging markets, those e t f s only have
Speaker 1: forty one billions, So that's just over one percent of
Speaker 1: the assets. And most people who do who use those
Speaker 1: are traders. But I mean, mom and pop, if you
Speaker 1: are very interested in a country, uh that's you know,
Speaker 1: way out there, way developing. E t F serve up
Speaker 1: almost all of them at this point that are investable,
Speaker 1: from Vietnam to Argentina to Egypt. Um, there's just one
Speaker 1: for Pakistan. Uh you can now and and back in
Speaker 1: the day, this was very difficult to get local shares
Speaker 1: of these countries. You needed to know people. Now you
Speaker 1: can just buy it, like buying shares of Microsoft. So
Speaker 1: when we sometimes talk about et F sort of democratizing investing,
Speaker 1: this is a great example. Now anybody can get these countries.
Speaker 1: They're literally delivered to your doorstep. Um, and that's one
Speaker 1: of the reasons they're fairly popular and growing. Speaking of
Speaker 1: growing the population of these countries that we're talking about,
Speaker 1: when you look at um I m F numbers for them.
Speaker 1: If you take emerging and developing and put them all together.
Speaker 1: We're talking about of the world's population. So this could
Speaker 1: be I mean, when you really step back and think
Speaker 1: about it's like the long term growth plate because there's
Speaker 1: so much potential in these economies. Yeah, and the US
Speaker 1: market is by a market cap is so dominant in
Speaker 1: disproportioned to the number of people we have. So you're
Speaker 1: right there, there's a bit of an imbalance in terms
Speaker 1: of the size of our star stock market and the
Speaker 1: number of people and the growth potential over there. Although
Speaker 1: I will say and I hope we bring this up
Speaker 1: in the discussion, um there. Look, there are many times
Speaker 1: when a country has a good story written about it,
Speaker 1: it looks like there's a lot of growth, the pe
Speaker 1: is low and it just doesn't go up. In fact,
Speaker 1: they could go down worse, and so there is a
Speaker 1: lot of risk. Can't wait to talk about that, and
Speaker 1: so for this discussion, because yours truly knows the t
Speaker 1: s very well, but I don't know every single country
Speaker 1: out there. In fact, sometimes I have to scramble. It's
Speaker 1: like doing a book report of talk about Vietnam today Okay,
Speaker 1: I gotta look at Wikipedia and do my homework. But
Speaker 1: rather than me doing that, we brought in a couple
Speaker 1: of experts from Van Eck who are specialists in these
Speaker 1: countries and do nothing but look at them all day.
Speaker 1: And if you want to learn more about the New
Speaker 1: Economy Forum, there's a great new podcast. You've heard it
Speaker 1: teased in our feed before. The host is Stephanie Flanders
Speaker 1: and the name of the show is The New Economy
Speaker 1: This week Countrilliance all around the World and e t s.
Speaker 1: We have a couple of guests, Ola, Patricia, Welcome to
Speaker 1: the show. Hi guys, y, Yes, thank you for having us.
Speaker 1: So you guys are at van Neck, Can you describe
Speaker 1: what you do there? Sure? Um, I'm all I'm at
Speaker 1: one of the senior analysts on the Emerging Markets Equity
Speaker 1: fund at Vanack, more on the active side than the ETF,
Speaker 1: but happy to be here and talk about the countries
Speaker 1: I look at. And Patricia, Yes, I'm Patricia Gonzales. I'm
Speaker 1: also a senior analyst Advanik and focusing more on Latin
Speaker 1: America and a couple of countries in Asia, and I'm
Speaker 1: very happy to be here. And you know, they are
Speaker 1: from the active side. You hear that, So a lot
Speaker 1: of these shops have both e T s and active
Speaker 1: mutual funds and so, uh, lunch lunch is really interesting.
Speaker 1: I'm sure there's some tension you can cut with a
Speaker 1: knife now, I'm just kidding. Um. The reason that we
Speaker 1: would get somebody from active side is the E T
Speaker 1: F product specialists are just not going to know as
Speaker 1: much because they're out there looking for individual stocks in
Speaker 1: these areas. So they're the perfect people for this. Even
Speaker 1: though we tend to normally have et F people on
Speaker 1: um they work need work and et F company though,
Speaker 1: so you're kind of into it a little bit. But yeah, okay, UM,
Speaker 1: so how do you guys look at the difference between
Speaker 1: frontier and emerging markets? Because that's sort of frontier is
Speaker 1: more j V and then you get promoted to or
Speaker 1: I guess frontiers frontiers spread shman emerging markets. So how
Speaker 1: do you guys look at it through your investing went? Yeah,
Speaker 1: I mean I would say that the classification that most
Speaker 1: people follow tends to be from the index classification by
Speaker 1: ms c I. But as far as we're concerned, we
Speaker 1: really are looking for countries that offer longer term development
Speaker 1: and growth opportunities. Whether it's on the the you know,
Speaker 1: emerging side, whether it's on the frontier side, we kind
Speaker 1: of don't really care as much. UM. Frontier markets tend
Speaker 1: to have less experience with foreign institutional investors. UH, some
Speaker 1: of the liquid you know, liquidity, and some of those
Speaker 1: markets can be more challenging. UH. Some of the capital
Speaker 1: market laws are still being developed, so they tend to
Speaker 1: be a bit earlier stage, let's say, in their cycle
Speaker 1: of development. So we're always mindful of that when we
Speaker 1: do our analysis and due diligence on companies and UM
Speaker 1: and countries. But I think we're looking for opportunity and
Speaker 1: we can find that. I mean, there are shared characteristics
Speaker 1: between both in terms of UM typically having larger populations,
Speaker 1: younger populations, so a lot of runway for growth going forward. Yes,
Speaker 1: I agree with with all that. Mean in a particular case,
Speaker 1: we look at either emerging or frontier UH, and the
Speaker 1: main characteristic, like she says, a lot of the frontier
Speaker 1: market UM like the liquidity steel and they have a
Speaker 1: capital market that is not very developed. But certainly, like
Speaker 1: you said, there are still very good opportunities to demographic
Speaker 1: is there so UM there's a lot of opportunities in both.
Speaker 1: So with that said, obviously you're just looking for countries
Speaker 1: a lot of growth. Let's just jump in and talk
Speaker 1: about Brazil. An interesting one, an interesting one. This is
Speaker 1: sort of the like I said, the soccer ball is
Speaker 1: always landing on one of these countries at some point,
Speaker 1: and right now it's on Brazil because there's an election
Speaker 1: and as I tell people, Single Country Emerging Market TTFS
Speaker 1: like nothing better than a pro business conservative leader elected.
Speaker 1: Is that right? So walk us through what happened. Because
Speaker 1: e w Z, which tracks Brazil is up twenty in October.
Speaker 1: You know how bloody and brutal October was for everybody else,
Speaker 1: So that's how much that they really liked this election.
Speaker 1: And this election was was a little controversial. Civilly had
Speaker 1: a lot of attention, that's correct. Well, yeah, like you
Speaker 1: said last Sunday, they had the presidential elections and Jabel Sonado,
Speaker 1: who was a former army captain and a congressman one
Speaker 1: at the election. The other candidate was Fernando had that
Speaker 1: with was part of the Workers Party more on the left,
Speaker 1: that was the party of former president Silva. So definitely
Speaker 1: also NATO the more market friendly of the two uh
Speaker 1: and and his victory was already anticipated by the market
Speaker 1: and that's one of the main reasons what we had saw,
Speaker 1: you know, a very good rally on the equity side
Speaker 1: over the last month and the expectation that he's going
Speaker 1: to be very you know, market friendly. I mean, um,
Speaker 1: the most important thing for him to do is really
Speaker 1: attack on the fiscal side as some main issue for Brazil.
Speaker 1: The fiscal deficity is really one of the largest in
Speaker 1: emerging market. But he said the right things and I
Speaker 1: think that's one of the main focus of his new government.
Speaker 1: So if that's the case, I mean, we can really
Speaker 1: see Brasilia accelerating GDP growth and in a positive environment
Speaker 1: going forward. And in the case of something like a leader,
Speaker 1: is that worth I mean, since the election, it's kind
Speaker 1: of gone flat. So people were buying the rumors so
Speaker 1: to speak. Um, but is is that over bought? In
Speaker 1: other words, when you're looking to play a single country
Speaker 1: like this, should you, um, you know, buy in after
Speaker 1: a rally like that or do you think the fundamental
Speaker 1: value of the stocks that you analyze are not really
Speaker 1: tied up to the pricing. Now that there was this
Speaker 1: sort of like top down buying because of an election. Well,
Speaker 1: I think the fundamentals of the companies are there, and
Speaker 1: I do believe there's still more opportunity. A lot of
Speaker 1: people are comparing Brazil would happened to Indian two thousand
Speaker 1: fourteen when Moody was elected president and the equity market
Speaker 1: had a really you know, big rally and the expectations
Speaker 1: of UH of economic growth and reforms. So I I
Speaker 1: do think that if the president do the right things,
Speaker 1: in particular on the fiscal side, UH, there's a lot
Speaker 1: of opportunities for Brazil going forward in terms of growth
Speaker 1: UM the conditions are already good there. I mean you
Speaker 1: see that in terms rates are low, you see low inflation,
Speaker 1: and you have seen some pickup in economic um UH
Speaker 1: numbers and also on labor market. So I do believe
Speaker 1: that under the right circumstances, with the right economic cabinet
Speaker 1: and with the right reforms, I really see Brazil I
Speaker 1: can really continue rerating and influence continue to come to
Speaker 1: the country. So with something like Brazil and at the neck,
Speaker 1: how do you guys try and get exposure if you
Speaker 1: if you like what you see, if you like those conditions. Yeah,
Speaker 1: on our particular case, we are we are very bottom up.
Speaker 1: Like we alla mentioned, we're on the active side. Uh
Speaker 1: So for us, it's very important to find companies when
Speaker 1: we we will see visible and structural and growth in profitability.
Speaker 1: And we continue to see that in many sectors within
Speaker 1: Brazil and education sector, healthcare sector, um and and like
Speaker 1: and like a beilieve evaluations are are still very reasonable.
Speaker 1: Uh So we we continue to find very good opportunities there.
Speaker 1: And if you look at Verdeck, I know you guys
Speaker 1: are on the active side, but Vanneck has a Brazil
Speaker 1: e t F. It's a small cap one the tickers
Speaker 1: b RF and I do find after when these elections
Speaker 1: are happening and they're sort of positive for the market,
Speaker 1: the small cap will zip up a little faster. Do
Speaker 1: you go and look at small caps too, because the big,
Speaker 1: the big single country e m ets tend to be
Speaker 1: dominated by the bank's financials and you've got to go
Speaker 1: down to the small caps to get a more broader
Speaker 1: swath of the economy. Is that right? Is that correct?
Speaker 1: Because usually, um, you know, the small cap are the
Speaker 1: ones that represent a lot of the smallest sector. I mean,
Speaker 1: like you said, the majority of the or the companies
Speaker 1: that have the largest way on the index, normally the banks,
Speaker 1: but also like Petro Brass or the ballast and and
Speaker 1: we've really find the opportunities are in in some of
Speaker 1: these small caps and like a small healthcare companies that
Speaker 1: are taking opportunity of of of the market, and or
Speaker 1: education companies like like I mentioned in the past. So
Speaker 1: I I do believe that a lot of the opportunities,
Speaker 1: specifically domestic opportunities are within the small caps. Although you
Speaker 1: definitely have to take something before you buy this because
Speaker 1: these things are volatile. Both the b Z and b
Speaker 1: RF are three or four times of altility of the
Speaker 1: smp FISMA. Is that what you take before you Yeah,
Speaker 1: you can get something over the counter. You don't have
Speaker 1: to go that you don't have to go you don't
Speaker 1: have to go on the streets for this. I mean
Speaker 1: it's not like bitcoin or vex, tivix or anything. Okay,
Speaker 1: but yeah, there's definitely a lot of about the stomach
Speaker 1: this vulatility. That's the downside, that's the that's the the
Speaker 1: cost to potentially get in the benefit from this, right,
Speaker 1: that's correct. Yeah, Well, the issues sometimes with some of
Speaker 1: these smaller caps of liquidity so that's why if you
Speaker 1: want to build a position or exit a position um
Speaker 1: with the lower liquidity, that trands to create more volatility.
Speaker 1: But like Petree you mentioned, if you are investing in
Speaker 1: emerging markets and you know, as we talked about, with
Speaker 1: favorable demographics, you want to get exposure to some of
Speaker 1: these more domestic themes because even though they're smaller companies,
Speaker 1: they tend to probably offer better valuations and higher growth
Speaker 1: over time UM and they tend to be less correlated
Speaker 1: with global events. So if you take Petrow Brass, that's
Speaker 1: really moving much more with the you know, global commodity
Speaker 1: cycle rather than with the fundamentals of Brazil domestically. So
Speaker 1: I mean that's why we we tend to find more
Speaker 1: interesting ideas and also less um covered some more unique,
Speaker 1: adducing cractic ideas in the smaller and medium cap space.
Speaker 1: How long will you hold a position in someplace like
Speaker 1: this where there is this much volatility, you see that
Speaker 1: there's opportunity, How long will you bury in the hold
Speaker 1: on the something that you believe in? Oh, I mean
Speaker 1: we're long term investors, and when their structure growth and
Speaker 1: and especially like the small cap that are in in
Speaker 1: in sectors that are more domestic. Um. You know, usually
Speaker 1: they're UM. Irrespective of what is happening in the country,
Speaker 1: we continue to see a very good growth. So you know,
Speaker 1: if the fundamentals of the companies are there and we
Speaker 1: continue to see that, definitely we were long term investor,
Speaker 1: unless unless the story change and you know, then that's
Speaker 1: a different situation. But and when you see long term,
Speaker 1: what's that horizon look like for you? It can be
Speaker 1: up to a one three years or definitely well, you
Speaker 1: know Gunlock said by India and don't look at your
Speaker 1: statement for thirty years, So there's there's a long long
Speaker 1: term Definitely, that's definitely a way to deal with the
Speaker 1: votility because you just don't look at it. Um. But
Speaker 1: you have to really commit to the country. In your case,
Speaker 1: you're you're one to three years long term for you. UM.
Speaker 1: And in the case of Brazil, did the election confirm
Speaker 1: what you already knew or did it actually like make
Speaker 1: you buy a little more of the country. Oh well,
Speaker 1: definitely were more positive um than now. We gotta oppress
Speaker 1: then and it's more market friendly. There are still uncertainties
Speaker 1: because I mean his his brand new he's somebody that
Speaker 1: is rather a way to the right, so we don't
Speaker 1: that's right. This is like the farthest right has done
Speaker 1: is a former military So we don't know what really
Speaker 1: can happen. We have good expectations and we're waiting to
Speaker 1: see what kind of cabinets he will have and you know,
Speaker 1: what are the kind of policies that he would put
Speaker 1: in place. But definitely so Brazil is not the only
Speaker 1: country in South America. We talk about the rest of
Speaker 1: the gun. Yeah, another interesting country. I think we can
Speaker 1: we can talk about it. They also have a very
Speaker 1: interesting but it's a small country. A lot of people
Speaker 1: don't look at it. Uh, it's a small part of
Speaker 1: the m c I and this part is a very
Speaker 1: interesting country. Is the fastest growing, one of the fastest
Speaker 1: growing in the region. It's actually a really interesting one
Speaker 1: in relation to the ms c I index because it
Speaker 1: didn't get down, like the percentage dedicated to the index
Speaker 1: in Peru shrunk traumatical well, because they didn't have enough.
Speaker 1: The liquidity that the market cap is is not that big.
Speaker 1: It's not that big, that's correct. I mean the largest
Speaker 1: constituent is a credit card, which is the largest bank there.
Speaker 1: And the you have another couple of company, who is
Speaker 1: this Southern copper and when I went to but yeah,
Speaker 1: definitely there's not a lot of name within the you know,
Speaker 1: the whole basketball metaphor with freshman to JV to varsity.
Speaker 1: Sometimes a country can be a big deal on the
Speaker 1: freshman team and then when it gets promoted, it's like
Speaker 1: ninth man on JV. And that is Peru. It's only
Speaker 1: point four four percent in the MSc Emerging Markets. Israel
Speaker 1: is a good example that dominated the emerging markets, not dominated,
Speaker 1: but it had a good waiting and it's basically lost
Speaker 1: now in the developed world. Um, but what's interesting is EPU,
Speaker 1: which is the I shares Peru ETF listen to returns
Speaker 1: on this it's up six in three years. The SMP
Speaker 1: is up thirty six, and the Emerging Markets Index as
Speaker 1: a hole's up six. So Peru s and yeah and
Speaker 1: tripled its own index. So in these cases you kind
Speaker 1: of have to use a single country, right if you
Speaker 1: want to get exposure. And why is it up that much?
Speaker 1: What's going on? When we look at Peru, it's a
Speaker 1: country that depends a lot of metal prices for their growth,
Speaker 1: and I mean you can see that their second largest
Speaker 1: producer of copper, silver, the third largest producer of sink.
Speaker 1: They also produced gold. So, I mean metal prices has
Speaker 1: been in a very good recovery and that have really
Speaker 1: helped their GDP on the growth. And when we look
Speaker 1: at at the index, a lot of the companies are
Speaker 1: commodity companies UM, so definitely they have had a good performance.
Speaker 1: So if PREW has been a bright spot, and especially
Speaker 1: bright spot, what's been not so bright Well that's the
Speaker 1: case of Argentina. Argentina is a completely different case. Actually,
Speaker 1: back in June, the m S A I in this
Speaker 1: UM included Argentina, which was a big deal. It was
Speaker 1: a big deal. It was a big deal, but unfortunately
Speaker 1: it came during a time of a lot of volatility
Speaker 1: for for for Argentina. You know, the changes that they
Speaker 1: were happening global and domestically really made Argentina in a
Speaker 1: very vulnumber of state. I mean it's a country with
Speaker 1: a high twin deficits and you know, like tier global liquidity,
Speaker 1: they had a drought, all the things, you know, created
Speaker 1: the perfect storm for them at the same time that
Speaker 1: they were being upgraded or graduating for you know, to
Speaker 1: to the emerging market. This thing is down thirty this year,
Speaker 1: which is the year it got promoted, right, Yeah, that's correct. Well,
Speaker 1: they they announced that they will be promoted, so yeah,
Speaker 1: usually it takes like six six months when with the
Speaker 1: announcement back in June May June this year, Yeah, it
Speaker 1: didn't really do much. This this is and that's you know,
Speaker 1: this is why some people do try to play that
Speaker 1: promotion because they're anticipating all this foreign capital coming in.
Speaker 1: But it doesn't always work. There are macro issues that
Speaker 1: which can trump that game. And if there's one place
Speaker 1: that foreign capital has reservations about, it tends to be
Speaker 1: a Yeah, there has been a rollercoaster Argentina over the years.
Speaker 1: So as an investor, who can you know, look at
Speaker 1: a continent like this and see that Brazil has this
Speaker 1: long term opportunity, Peru's having out performance, Argentina's um not
Speaker 1: not doing as well as as you might want. How
Speaker 1: do you put put your thesis together based on those factors? Well,
Speaker 1: definitely there there's more postive macro news in like in
Speaker 1: Peru and Brazil. But in the case of Argentina, I
Speaker 1: mean we saw that under this situation that were able
Speaker 1: to um uh have find a loan from the i
Speaker 1: m F for over fifty billion, which we really cover
Speaker 1: a lot out of the financing needs or a few
Speaker 1: over the next few years. And they're doing the reforms
Speaker 1: I mean around right now. We've started to see some
Speaker 1: stability on the currency and and expectations are that hopefully
Speaker 1: things will get better. But there's another issue that all
Speaker 1: this is happening at the time when presidential elections will
Speaker 1: occur next year, so definitely we don't know what could
Speaker 1: happen in that sense. There can be a lot of volatility,
Speaker 1: in particular that thinking that they all uh political party,
Speaker 1: the curisioners of the Petal News that you know, will
Speaker 1: come back to power. But there are opportunities and and Argentina,
Speaker 1: I mean it's it's a country in particular when you look,
Speaker 1: uh demographic is very good, there's a high middle class
Speaker 1: and and very low pennetuation of banking. So opportunities are
Speaker 1: there just on the on the you know, better environment,
Speaker 1: or at least see that things starting to move in
Speaker 1: the right direction. Okay, I want to turn the globe slightly,
Speaker 1: and we're gonna turn from South America to Asia. There's
Speaker 1: one country in particular, I want to talk about in Asia,
Speaker 1: which is South Korea, and South Korea is classified as
Speaker 1: an emerging market and it's been stuck there. Eric, it's
Speaker 1: like perpetual JV. It's like the guy who can't get
Speaker 1: onto the varsity squad. What's going on there? Yes, so
Speaker 1: South Korea is considered developed in the foot see line
Speaker 1: of indexes, but in the M S c I it's
Speaker 1: still emerging. It's the rare country that has different views there,
Speaker 1: but most people use MS, so they considered emerging. And
Speaker 1: the reason it's still there. Remember we talked about this
Speaker 1: a couple of weeks ago and we weren't sure. Um
Speaker 1: I got a tweet and I'll give this guy credit
Speaker 1: quant of Asia. He's actually a good follow Um. He says.
Speaker 1: South Korea is still considered an emerging market because of
Speaker 1: capital controls and investor I D requirements can't buy REA
Speaker 1: stocks um in certain ways. So I think that's it's
Speaker 1: not the country itself, it's these regulations and controls which
Speaker 1: is holding it back. So what are the other Asia
Speaker 1: E t F that you keep an eye on, Well,
Speaker 1: Taiwan that's that's one of the bigger ones. That's an
Speaker 1: eleven percent waiting in the emerging market. So for most investors,
Speaker 1: they're getting plenty of Taiwan in their broad one UM.
Speaker 1: But then you know, you've got countries that have less waiting,
Speaker 1: like a Vietnam that is very underrepresented in UM a
Speaker 1: lot of these indexes, and there is a market Vectors
Speaker 1: has the Vietnam ETF which is million actually, but there's
Speaker 1: UM it's such a hard country to get to get
Speaker 1: local shares in that. I believe you guys limit creations
Speaker 1: now and then because like if there's a rush of creations,
Speaker 1: you have to limit them to to a day or something.
Speaker 1: But regardless, if you try doing that on your own,
Speaker 1: you'd have a lot of difficulties. So, uh, you do
Speaker 1: you have Vietnam. Here is an e t F that's available,
Speaker 1: and let's look at what it's doing year to date. Um,
Speaker 1: it's down fourteen point seven. I mean, everything we've brought
Speaker 1: up today, with the exception of Brazil, is having a
Speaker 1: rough year. I mean it's just been a rough year.
Speaker 1: Remember the US was beating everybody. Now the US has
Speaker 1: gotten its big haircut. It's down to zero this year. UM.
Speaker 1: But all the other stuff was already in the red
Speaker 1: Brazil's the really the only outline. Well, no Peru that
Speaker 1: that it had a rough year too, that return was
Speaker 1: over the long term. Okay, I'm gonna twist the globe
Speaker 1: slightly to Mia and this is all his wheelhouse. So
Speaker 1: what are the countries that most interest to you? Yeah,
Speaker 1: I think one of the countries that we like at
Speaker 1: the moment and that that's a bit of its own
Speaker 1: story is Egypt. Um. If you recall, you know, in
Speaker 1: twenty eleven, with the airb spring, the country went went
Speaker 1: into a phase of political instability and a lot of change,
Speaker 1: which also had economic implications, so the growth slowed down. Um.
Speaker 1: You also had a lot of your foreign currency sources disappear,
Speaker 1: basically foreign investment, even tourism because of the turbulence and
Speaker 1: all of that. So what ended up happening is the
Speaker 1: country's foreign reserves were depleted and that created further uncertainty
Speaker 1: because you also had some issues with capital repatriation. So
Speaker 1: if you had invested at the time, you got stuck
Speaker 1: on your way out. So that created a lot of
Speaker 1: risk aversion against the country and it was a very
Speaker 1: difficult time obviously. Um. That changed in the last few
Speaker 1: years after we had um, you know, we entered a
Speaker 1: more politically stable environment with the election of presiden c
Speaker 1: C and after that some more market trendy policies were adopted,
Speaker 1: uh and namely, the main thing that happened was a
Speaker 1: significant adjustment of the currency value end of twenty sixteen,
Speaker 1: so the currency ended up losing half its value and
Speaker 1: you know, effectively being freely floated, which was a problem before.
Speaker 1: And that was kind of a trigger point for foreign
Speaker 1: investments to start coming back, especially because at the time
Speaker 1: when the country did that, we also I'm saying we
Speaker 1: because I'm Egyptian, so forgive me sometimes I'm like from
Speaker 1: a t F, We're with you. Egypt basically managed to
Speaker 1: secure also an i'm F package, and that tends to
Speaker 1: be something that provides comfort and confidence to to foreign
Speaker 1: investors in particular because what comes with that is a
Speaker 1: package of reforms. So we started seeing a floating currency
Speaker 1: regime and I'M a program that basically man dated fiscal consolidation,
Speaker 1: which was a significant problem that the country was was facing.
Speaker 1: So naturally that put the country on track, um for
Speaker 1: a recovery process. It doesn't mean it came without pain.
Speaker 1: So twenties seventeen right after. It was a very difficult
Speaker 1: year because with the currency devaluation comes a lot of
Speaker 1: inflation because the country is quite dependent on inputs. Also,
Speaker 1: that means that the consumer came under pressure, so you
Speaker 1: had a lot of you know, difficulties was on the
Speaker 1: companies with cost inflation, higher interest rates, higher inflation overall,
Speaker 1: and a weaker consumer. But the good news is um
Speaker 1: but yeah, the good news is interact. Yeah you saw.
Speaker 1: You know, Egypt as a case in general has always
Speaker 1: been interesting for investors because, you know, similar to what
Speaker 1: we mentioned before about a lot of em and frontier countries,
Speaker 1: hundred million people, very young population so roughly fifty percent
Speaker 1: of the population is younger than twenty five years old
Speaker 1: and also very underserved, and you have consumption per capita
Speaker 1: being quite low on very basic goods like milk, like
Speaker 1: you know, the most basic of consumer products. So there's
Speaker 1: a lot of growth opportunity there. So with this reform
Speaker 1: package that started UM, foreign investor started looking back at
Speaker 1: the market and we started seeing influence first on the
Speaker 1: fixed income side, but also in the equity market as well.
Speaker 1: The valuations remain quite reasonable, so now you're starting to
Speaker 1: see GDP growth recover again getting closer to a five
Speaker 1: percent level. Um inflation after twenty seventeen is starting to
Speaker 1: be on a declining trend, which is obviously positive. Interest
Speaker 1: rates are still high, so we haven't really seen a
Speaker 1: lot of capital expenditure by companies yet. But what the
Speaker 1: companies have been doing is paying back their dead managing
Speaker 1: their costs, and so trying to get like very efficient
Speaker 1: with how they use capital and how they manage their
Speaker 1: cash flows. So we are actually setting up for a
Speaker 1: period where you start seeing um consumption recovery in a
Speaker 1: more significant fashion, companies that are more efficient and ready
Speaker 1: to invest, and valuations that are very reasonable. So Egypt
Speaker 1: is trading at a discount to the broader e M,
Speaker 1: even though if you look at the growth rates there
Speaker 1: are significantly higher than what the broader e M offers
Speaker 1: in the next three year period. So we like to
Speaker 1: usually look at tag Grady show, which is how much
Speaker 1: you're paying for every unit of growth, and in Egypt's case,
Speaker 1: I think it's around point five. Now you said you
Speaker 1: just made this strong case, let me push back little bit.
Speaker 1: So there's an a t F e g PT. It
Speaker 1: is down big this year, and it looks like It's
Speaker 1: been a struggle for the past couple of years, a
Speaker 1: couple of nice spikes, but I mean, when when will
Speaker 1: this pay off? Are there bigger macro issues that sort
Speaker 1: of suppress everything you just said, I mean, I think
Speaker 1: I wouldn't say there. So I've mentioned that we're coming
Speaker 1: from a very difficult period, right, so I'm always looking forward.
Speaker 1: Twenty seventeen was difficult because for the country to stabilize
Speaker 1: the currency after the devaluation, the central bank had to
Speaker 1: go ahead and hike interest rates quite significantly, and that
Speaker 1: put pressure on companies as well. Um Even though broadly
Speaker 1: speaking the Egyptian companies are under leveraged, but you still
Speaker 1: suffer from like higher interest rates or higher cost of that,
Speaker 1: a weaker consumer um and just cost inflation. That was
Speaker 1: very significant. Now, I think we're coming closer to the
Speaker 1: end of that period and you're bound to see the
Speaker 1: recovery we were hoping, and I think that that holds
Speaker 1: true for the broader investment community. We were hoping that
Speaker 1: interest rates would start coming down faster than what we
Speaker 1: are actually seeing. Unfortunately, because the country was subsidizing fuel
Speaker 1: prices and has been gradually eliminating these subsidies. When oil
Speaker 1: prices increased again this year, that put again some pressure
Speaker 1: on the on the physical side of things, and forced
Speaker 1: the country to go through further subsidy removal, which again
Speaker 1: you know, affected inflation and made it harder to bring
Speaker 1: down the interest rates as fast as we were hoping.
Speaker 1: So I think once we passed through the spirit and
Speaker 1: you start seeing interest rates coming down and companies going
Speaker 1: back to an investment cycle, then you should start seeing
Speaker 1: the market also react more positively. This is why people
Speaker 1: outsource this to mutual funds and ETFs. That is very complicated.
Speaker 1: It almost from is your pilot going over all the
Speaker 1: things in the cockpit, like what did you say? Um, no,
Speaker 1: it look this is very important. Egypt, by the way,
Speaker 1: is even more lost than Peru. It's only a point
Speaker 1: one four percent waiting in emerging markets, so you're just
Speaker 1: not getting Egypt if you're out there pretty much unless
Speaker 1: you use e g PT, which, by the way, during
Speaker 1: the Arab Spring, this e t F was famous because
Speaker 1: it um the stock market closed for two months, right,
Speaker 1: and the e t F traded and that that's Sometimes
Speaker 1: the e t F becomes like a futures contract on
Speaker 1: a market and then when the market opens, the prices
Speaker 1: usually come back up to where the et F was trading,
Speaker 1: even though it looks like the e t S trading
Speaker 1: at a premium. Now this does lead us to Africa
Speaker 1: as in general. Sometimes it's called us like the lion
Speaker 1: uh in, you know, the Asia tiger, the African lion.
Speaker 1: I've looked at Africa many times again. Vanneck has another
Speaker 1: e t F called a FK. It's the only pure
Speaker 1: Africa e t F. Egypt is a huge waiting Let
Speaker 1: me give you numbers on Africa, Okay, a f K.
Speaker 1: This is over the last six years since it came out,
Speaker 1: Africa's down. The Emerging Markets Index is up four percent,
Speaker 1: so flat Frontier Market Index is up thirty um. So
Speaker 1: Africa has underperformed, and of course the US is crushing
Speaker 1: all that. It's really like the bottom dwelling area of
Speaker 1: the whole world in terms of returns, and it's p
Speaker 1: is down to what like ten or eleven? I mean,
Speaker 1: if there's ever if somebody likes bargains, this seems to
Speaker 1: be like a bargain by what would help the whole
Speaker 1: continent beyond Egypt actually reach this potential that so many
Speaker 1: people say yeah, I mean Africa, like you mentioned, it's
Speaker 1: it's kind of um, it's kind of a continent that's
Speaker 1: quite interesting, and people always have this hope that Africa
Speaker 1: will provide a lot of growth opportunity, which I think
Speaker 1: long term it would just by virtue again of demographics
Speaker 1: and how underserved a lot of these countries are. For example,
Speaker 1: in Nigeria and Nigeria, South Africa can like like there
Speaker 1: are like even within Africa, like there are some some
Speaker 1: some places that we think will will rise to sort
Speaker 1: of like this frontier emerging market level and really be resiliant, right,
Speaker 1: And I think, I mean that there is a lot
Speaker 1: of merit to that argument over the long term. So
Speaker 1: so I'm definitely a believer in the content over the
Speaker 1: long term. The issue and and it treaty varies by country,
Speaker 1: but a lot of these countries have faced their share
Speaker 1: their fair share of political events and you know, changes
Speaker 1: in leadership, different things that have in the short term
Speaker 1: created a lot of difficulties and and and volatility. So
Speaker 1: if you think about South Africa, when you got Serilier
Speaker 1: Opposa in office earlier this year, there was a lot
Speaker 1: of hope and a lot of euphoria around the Ramaposa win.
Speaker 1: And you know, I think the issue there is you
Speaker 1: haven't Given that they have general elections coming up next year,
Speaker 1: the window this year was difficult for for him to
Speaker 1: really come through with some of the structural reforms that
Speaker 1: the country would need to recreate growth and to to
Speaker 1: become more exciting as an investment destination, and in particular
Speaker 1: in South Africa this case. The issue there is also
Speaker 1: you have a significant domestic investor based so a lot
Speaker 1: of domestic institutional money that has to invest in South Africa.
Speaker 1: So for the level of growth that's being offered, South
Speaker 1: Africa is really not that cheap. So the hope is
Speaker 1: next year, after we passed through the election cycle, we
Speaker 1: started seeing some promising structural reform and then we go
Speaker 1: into a more interesting, hopefully recovery cycle. But we haven't
Speaker 1: seen that come through yet. So that's unfortunate. In the
Speaker 1: case of Nigeria, which is kind of, um, you know,
Speaker 1: the most in some ways one of the most interesting
Speaker 1: countries given the just the size of the population and
Speaker 1: and theoretically this should be a black horse in many
Speaker 1: ways given that it's also an energy rich country. It
Speaker 1: has been very unfortunate. I remember I was in Nigeria
Speaker 1: in twenty fifteen right after Bohari one and again at
Speaker 1: the time, there was a lot of hope that you know,
Speaker 1: he would come through combating corruption, which is one of
Speaker 1: the most significant issues in Nigeria, given that it's very
Speaker 1: hard the corruption scale. And you went through a significant
Speaker 1: period of high oil prices, but at the same time,
Speaker 1: the reserves weren't nearly where they were supposed to be
Speaker 1: from from the perspective of the country really benefiting, and
Speaker 1: a lot of that is because of corruption unfortunately, UM
Speaker 1: and he was also supposed to bring back security, introduce
Speaker 1: economic reform. There has been a sense that there was
Speaker 1: under delivering on the part of the Boharia administration. Now
Speaker 1: again we're going into an election cycle next next year
Speaker 1: UM in February, with Boharia and another candidate opposition Candida,
Speaker 1: contesting this election. So I think we're going through a
Speaker 1: period of uncertainty in Nigeria again. No doubt, oil prices
Speaker 1: are a bit more supportive this year in terms of
Speaker 1: improving growth and improving the availability of foreign currency. But
Speaker 1: for you to really see you know, an improvement and
Speaker 1: income per capita, which then is going to be supportive
Speaker 1: for consumption, you need to see structural reform. So I
Speaker 1: have one more if we if we started with a
Speaker 1: political hot potato with Brazil, there's one other country, um,
Speaker 1: Saudi Arabia that's also been in the headlines recently, So
Speaker 1: we can book in this with with Brazil and then
Speaker 1: Saudi Arabia. So how do you look at Saudi Arabia
Speaker 1: now through an investing lens, considering all the turmoil of
Speaker 1: recent weeks in the headlines, Yeah, I mean it's um.
Speaker 1: It's obviously quite freshened. I mean, I'm not sure I
Speaker 1: have I know a lot more about anything specifically related
Speaker 1: to the recent headlines than what you see on the news.
Speaker 1: But generally speaking, I mean Saudi again is um in
Speaker 1: the context of the Mina region, one of the more
Speaker 1: interesting countries because you know, it's also a very young
Speaker 1: population and overall wealth leveled and infrastructure development and so
Speaker 1: on is a bit better than your average emerging market.
Speaker 1: And you have a market that's actually quite liquid, which
Speaker 1: is unusual for some of for at least the mean region,
Speaker 1: it's it's the most liquid one. The country went through
Speaker 1: its own share of problems with the decline and oil
Speaker 1: prices and twenty fifteen, so they were forced to start looking,
Speaker 1: you know, reflecting at how they run the economy and
Speaker 1: trying to diversify away from oil over time with the
Speaker 1: vision twenty thirty, I mean, I think the delivery on
Speaker 1: that has been maybe a little less than what we
Speaker 1: were hoping, but I would say high level, probably the
Speaker 1: worst from an economic standpoint is behind us, because you
Speaker 1: did go through a significant fiscal adjustment, at least in
Speaker 1: the context of Saudi. So overall, going forward, I think
Speaker 1: we are probably more cautiously optimistic for a recovery. The
Speaker 1: other thing with Saudi, to your point about, you know,
Speaker 1: the index inclusion and these sort of graduate graduation events,
Speaker 1: Saudi is actually now not part of any index, but
Speaker 1: because of the size of the market and the liquidity there,
Speaker 1: it's actually being included right away in the Emerging Markets index.
Speaker 1: And the announcement came by both um UM MSCI and
Speaker 1: FOOTSIE over the course of the last few months. So
Speaker 1: we are looking at an event as well where you're
Speaker 1: seeing you're you're bound to see index inclusion, and given
Speaker 1: its size, it's actually going to be a relatively significant
Speaker 1: weight of the MSc I E M Index. And probably
Speaker 1: one of the higher weights in the emia region. So
Speaker 1: you should start seeing a lot more um investors looking
Speaker 1: at that. Certainly passive money would have to, you know,
Speaker 1: revisit the country which it has afforded to ignore for
Speaker 1: such a long period. So I think some uncertainties for sure.
Speaker 1: Headlines definitely not great interesting. Well, let me give you
Speaker 1: the numbers. I personally think in the case of this
Speaker 1: recent where the journalist was killed, horrible situation. Okay, it
Speaker 1: was bad, However, it didn't do that much to the
Speaker 1: e t F it's up. In the last two years,
Speaker 1: it did hurt it like a couple of percentage points,
Speaker 1: but this year to date this thing is still up
Speaker 1: six te Ola Patricia from Vaneck, thank you so much
Speaker 1: for joining us. Entrell you can say thank you so much.
Speaker 1: Thank you guys, No, thanks for listening to trillion until
Speaker 1: next time. You can find us on the Bloomberg terminal,
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Speaker 1: on Twitter, I'm at Joel Weber Show, He's at Eric Faltunist,
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