WEBVTT - James Donald Discusses the Sensitivity of Emerging Markets 0:00:02.200 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:10.560 --> 0:00:13.039 This week on the podcast, I have an extra special 0:00:13.119 --> 0:00:16.119 guest and his name is James Donald and he is 0:00:16.200 --> 0:00:20.799 Managing Director and Head of Emerging Markets at Lazard Asset Management, 0:00:21.079 --> 0:00:24.440 where he runs a team of seventy people and analysts 0:00:24.800 --> 0:00:28.760 focused on the emerging markets across equities and fixed income. 0:00:29.200 --> 0:00:31.920 He has been investing in the emerging market space for 0:00:32.040 --> 0:00:36.120 over three decades. If you find the world of emerging 0:00:36.200 --> 0:00:41.440 markets remotely interesting, well then strap yourself in for a 0:00:41.640 --> 0:00:47.720 master class in emerging markets investing. We discussed everything from 0:00:47.920 --> 0:00:53.559 valuation issues to constructing a portfolio, to risk factors that 0:00:53.640 --> 0:00:56.440 exist in a M that may not exist in in 0:00:56.520 --> 0:01:01.120 developed countries. How countries go from runtier to EM and 0:01:01.160 --> 0:01:04.480 from e M two developed and some of those developed 0:01:04.520 --> 0:01:08.320 countries have gone back uh, falling back into e M uh. 0:01:08.360 --> 0:01:12.920 This is an area I am personally fascinated in because 0:01:13.040 --> 0:01:15.240 I'm aware of the fact that U S stocks are 0:01:15.840 --> 0:01:20.319 let's just say, richly valued, European and Japanese stocks a 0:01:20.360 --> 0:01:25.880 little less richly valued. But EM is where the valuation exists. 0:01:25.920 --> 0:01:28.800 And when we look at the track record of EM 0:01:28.800 --> 0:01:33.000 and US stocks over long periods of time. It seems 0:01:33.040 --> 0:01:37.199 like the leadership goes back and forth its cycles over 0:01:37.400 --> 0:01:40.560 longer periods of time, five seven, nine years at a time. 0:01:41.160 --> 0:01:44.320 We just finished a nearly decade long period of time 0:01:44.760 --> 0:01:49.680 where e M not just underperformed the US, but significantly 0:01:49.760 --> 0:01:52.840 underperformed the US. The gap was about as wide as 0:01:52.840 --> 0:01:56.840 it ever gets. Last year seemed to be the beginning 0:01:56.880 --> 0:01:59.640 of a change of leadership, and we could see e 0:01:59.840 --> 0:02:04.120 M stocks outperforming the United States and other developed nations 0:02:04.680 --> 0:02:08.200 UH for quite a number of years, perhaps even a 0:02:08.240 --> 0:02:12.000 full cycle. So if you are all interested in places 0:02:12.160 --> 0:02:17.919 like China, India, Russia, Brazil, Mexico, Turkey, Greece, I keep 0:02:17.960 --> 0:02:20.519 saying Vietnam even though it's a frontier country, but I'm 0:02:20.560 --> 0:02:24.320 I'm intrigued by that part of the world, South Korea 0:02:24.440 --> 0:02:29.399 and Taiwan as em countries when really they're almost developed countries. 0:02:29.960 --> 0:02:34.000 You will find this conversation absolutely fascinating. So, with no 0:02:34.120 --> 0:02:39.760 further ado, my conversation with Lazard Asset Managements James Donald. 0:02:44.000 --> 0:02:46.920 My special guest today is James Donald. He is the 0:02:46.960 --> 0:02:50.920 head of Emerging Markets at Lazard Asset Management, where he 0:02:51.040 --> 0:02:54.600 is also a portfolio manager and runs a variety of 0:02:54.639 --> 0:02:59.920 equity strategies in the emerging markets space. James Donald well 0:03:00.000 --> 0:03:04.240 into Bloomberg. Thank you, Barry. So you began your career 0:03:04.320 --> 0:03:07.480 back in Nree, which was a pretty good time to 0:03:07.560 --> 0:03:12.440 get into finance, the start of a long bullmarket. What 0:03:12.560 --> 0:03:16.840 was your first job on Wall Street? Well? Um, I 0:03:16.880 --> 0:03:22.600 was born in Toronto and I actually began my first 0:03:22.639 --> 0:03:26.800 career in Toronto at a brokerage firm called Wood Gundy, 0:03:26.880 --> 0:03:30.639 where I did a training course around the firm. So 0:03:30.760 --> 0:03:35.240 you participated or helped build the trading course? Um, I 0:03:35.320 --> 0:03:38.240 participated in the trading corps in the training course, and 0:03:38.320 --> 0:03:41.800 I was involved in a whole lot of different functions 0:03:41.840 --> 0:03:44.520 in the firm, anything from operations all the way to 0:03:44.560 --> 0:03:47.400 government finance. So what what drew you to the emerging 0:03:47.480 --> 0:03:54.600 market side? Well? I I then got a position at 0:03:54.720 --> 0:03:59.880 s G Warburg in London and UH. I went into 0:03:59.880 --> 0:04:03.960 the investment management area there and was involved in global investments. 0:04:04.240 --> 0:04:08.800 This is really pre emerging markets. Emerging markets only really developed, 0:04:08.840 --> 0:04:14.160 I would say in UM and UM So I was 0:04:14.240 --> 0:04:18.600 involved in managing global portfolios a lot of us UH 0:04:19.279 --> 0:04:24.360 holdings at that time and really learned about portfolio management 0:04:24.560 --> 0:04:28.760 at SG Warburg and the firm ultimately became Mercury Asset Management. 0:04:29.680 --> 0:04:33.800 And in the early nineteen nineties, when Mercury was establishing 0:04:34.360 --> 0:04:38.360 it's Emerging market team, I was very interested in joining 0:04:38.400 --> 0:04:40.119 that team, and so I was one of the first 0:04:40.160 --> 0:04:44.080 members that that joined that team and was involved in 0:04:44.120 --> 0:04:48.320 managing portfolios at Mercury. What was the motivation that led 0:04:48.360 --> 0:04:51.640 you to say, So, you're in London the center, especially 0:04:51.720 --> 0:04:56.080 in the nineties of a of a fairly booming developed nation, 0:04:56.720 --> 0:05:00.920 developed metropolis. Europe was really star to come into its 0:05:00.920 --> 0:05:04.159 own What made you say, Hey, all these developed market 0:05:04.200 --> 0:05:07.400 things are kind of interesting, but let's venture into something 0:05:07.400 --> 0:05:12.280 a little more adventuresome. Yeah. I had done a lot 0:05:12.360 --> 0:05:17.320 of work analyzing smaller stocks in the US and looking 0:05:17.360 --> 0:05:21.400 at stock markets in Asia and back then essentially the 0:05:21.440 --> 0:05:25.200 equivalent of emerging markets places like Hong Kong and Singapore 0:05:25.400 --> 0:05:31.400 and UM Malaysia and areas like that, and so uh, 0:05:31.560 --> 0:05:35.159 I thought these markets were ones that I had had 0:05:35.200 --> 0:05:40.760 experience or not two different experiences with. And I also 0:05:40.880 --> 0:05:45.080 was very attracted by the cultures um the variety of 0:05:45.120 --> 0:05:49.000 cultures in emerging markets. And at the end of the day, 0:05:49.040 --> 0:05:54.039 I felt that people around the world want to see 0:05:54.080 --> 0:05:57.480 their economies develop, and the capital markets are very very 0:05:57.520 --> 0:06:00.120 critical part of that. So this was long before for 0:06:00.320 --> 0:06:04.080 the era of index funds or country funds, where you 0:06:04.080 --> 0:06:07.159 could just push a button and one transaction gives you 0:06:07.200 --> 0:06:12.280 exposure to fill in the blank. Asia, Vietnam, emerging markets 0:06:13.200 --> 0:06:16.560 very different era. How was it like in those those 0:06:16.680 --> 0:06:21.760 days compared to today. It was before index funds, but 0:06:21.839 --> 0:06:25.080 it wasn't necessarily before country funds. A lot of country 0:06:25.080 --> 0:06:30.440 funds actually developed during this time because a lot of 0:06:30.440 --> 0:06:34.440 these markets were very, very small and they don't didn't 0:06:34.440 --> 0:06:38.320 want to be overwhelmed by foreign capital flowing in and 0:06:38.360 --> 0:06:42.440 flowing out. So actually country funds were very very big 0:06:42.480 --> 0:06:47.800 part of the development of those markets. In general, the 0:06:47.880 --> 0:06:51.520 markets were very small. A lot of the big big 0:06:51.640 --> 0:06:55.599 countries today, for instance, China, which is close to being 0:06:55.680 --> 0:07:00.719 thirty percent of the Emerging Market Index today was around 0:07:00.800 --> 0:07:04.560 one percent. And back then, places like I mean, Malaysia 0:07:04.680 --> 0:07:07.240 was a huge market. Mexico was a very big market, 0:07:07.800 --> 0:07:13.360 whereas say Brazil was relatively small or um you know, 0:07:13.400 --> 0:07:16.120 for instance, India was relatively small as well. Were there 0:07:16.120 --> 0:07:20.120 any restrictions on we know, everybody wants capital coming into 0:07:20.120 --> 0:07:23.400 their countries. Were there any restrictions on how that money 0:07:23.440 --> 0:07:26.600 could be removed? That were they gated or any of 0:07:26.600 --> 0:07:29.400 these country funds? And I was thinking of country ETFs 0:07:29.880 --> 0:07:33.240 and indexes, but these specific country funds, if you needed 0:07:33.240 --> 0:07:35.600 to get your money out in a hurry, was that 0:07:35.800 --> 0:07:38.960 was that feasible? Well, if you go back more than 0:07:39.000 --> 0:07:42.440 twenty years, a great deal of these markets, we're not 0:07:42.600 --> 0:07:46.000 markets you could directly invest in. You had to go 0:07:46.080 --> 0:07:48.920 through those country funds. So they were fixed pools of capital. 0:07:49.800 --> 0:07:53.320 And as a result of that, you know, the country 0:07:53.320 --> 0:07:58.679 funds values could be very different from their net asset values, 0:07:59.200 --> 0:08:03.480 and so essentially that could distort the picture very heavily. 0:08:03.600 --> 0:08:08.280 And no, no computerized arbitrage opportunities, none, none of that. 0:08:08.480 --> 0:08:14.040 Slowly these markets have opened up and UH and investors 0:08:14.080 --> 0:08:16.720 like ourselves have been able to directly invest in them. 0:08:16.920 --> 0:08:20.360 Let's get into some of the details and specifics. How 0:08:20.400 --> 0:08:24.080 do you define what is or is not an emerging market? 0:08:24.560 --> 0:08:27.760 Is it an economic definition? Is it a political definition? 0:08:28.000 --> 0:08:30.960 Where where are the lines drawn? It's something that's changed 0:08:31.000 --> 0:08:34.880 over time. I think originally the index was based or 0:08:34.920 --> 0:08:41.680 the indices were based on economic development and and political development. 0:08:42.440 --> 0:08:47.760 They've moved over time more towards what's easily accessible and 0:08:48.040 --> 0:08:50.640 M s c I is the biggest index provider in 0:08:50.679 --> 0:08:54.560 this area, and they're very focused on accessibility, meaning define 0:08:54.600 --> 0:08:58.000 accessibility the ability to get capital in and the ability 0:08:58.040 --> 0:09:02.679 to get capital in capital the ability to to get 0:09:02.720 --> 0:09:09.480 information on these markets without any major restrictions. So now 0:09:09.520 --> 0:09:11.920 as good a time as any to ask what is 0:09:12.000 --> 0:09:18.000 the distinction between the so called frontier markets and emerging markets? Well, 0:09:18.040 --> 0:09:22.960 those have even less accessibility on the whole. They are 0:09:23.040 --> 0:09:28.400 much more rudimentary economies and rudimentary markets, um, and they 0:09:28.520 --> 0:09:33.319 have less liquidity in them. So uh, there are is 0:09:33.360 --> 0:09:38.640 an ongoing process by which countries have moved between frontier 0:09:38.679 --> 0:09:42.040 markets and emerging markets and even back into frontier market. 0:09:42.080 --> 0:09:45.760 It's a fuzzy line, it's not a very bright line there. 0:09:45.800 --> 0:09:49.880 There's certainly some gray in in that whole discussion. And 0:09:50.440 --> 0:09:55.720 you mentioned earlier China is about of emerging markets. It's 0:09:55.880 --> 0:09:59.440 arguable that they're not that far off from being a 0:09:59.520 --> 0:10:03.600 developed nation. When when might that occur where China is 0:10:03.679 --> 0:10:08.800 no longer considered an em country. Yes, I I understand 0:10:08.800 --> 0:10:10.720 that I get asked that question a great deal I 0:10:10.720 --> 0:10:13.520 would say there are there are other countries that would 0:10:13.600 --> 0:10:18.680 be probably contenders, at least based on economic development before China. 0:10:19.080 --> 0:10:21.760 Give us some examples, well, the most obvious or South 0:10:21.840 --> 0:10:27.000 Korea and Taiwan, which are actually quite developed economies, relatively 0:10:27.040 --> 0:10:31.960 wealthy economies. There are some restrictions with changing money and 0:10:32.040 --> 0:10:34.960 with investor identification that has caused them to stay in 0:10:35.000 --> 0:10:40.079 emerging markets, but in terms of overall capital market development 0:10:40.120 --> 0:10:43.120 and economic development, they're probably the leading contenders. You would 0:10:43.120 --> 0:10:46.400 think South Korea is much closer to a Japan like 0:10:46.880 --> 0:10:51.240 economy than a China like economy. Well, China has come 0:10:51.280 --> 0:10:57.199 a long way. China has industrialized very successfully, and China 0:10:57.280 --> 0:11:00.599 is no longer a low wage country. It's actually a 0:11:01.080 --> 0:11:04.240 medium wage country. So it's not nearly as wealthy as 0:11:04.640 --> 0:11:07.880 South Korea or Taiwan on a per capita basis, but 0:11:07.960 --> 0:11:10.800 it's moved up quickly. One of the appeals of emerging 0:11:10.880 --> 0:11:15.679 markets are that within this equity half of your portfolio, 0:11:16.400 --> 0:11:21.719 they're not completely correlated with either developed markets or the 0:11:21.840 --> 0:11:25.400 US as a particular example. But that raises the question 0:11:25.520 --> 0:11:31.240 how correlated or uncorrelated are emerging markets with the U 0:11:31.320 --> 0:11:34.040 S stock market? Well, the correlations have increased. There's no 0:11:34.160 --> 0:11:39.320 question that when the US market has big movements, we 0:11:39.400 --> 0:11:42.720 have a lot of interlinked risks around the world that 0:11:42.920 --> 0:11:45.560 cause these markets to be much more correlated than they 0:11:45.640 --> 0:11:48.880 used to be. Over time, there are big differences between 0:11:48.880 --> 0:11:52.600 the performance of the emerging markets and the US market, 0:11:53.200 --> 0:11:56.440 But on a short term basis, the correlations are pretty high. 0:11:56.520 --> 0:12:00.960 So let's talk about those performance um metri. You look 0:12:00.960 --> 0:12:04.800 at the trailing ten years, uh, and now we're so 0:12:04.880 --> 0:12:08.680 it takes us back still through the financial crisis, US 0:12:08.760 --> 0:12:12.800 markets have done very well, emerging markets not so much. 0:12:13.120 --> 0:12:16.520 There seem to be signs that that's changing. Now, tell 0:12:16.600 --> 0:12:20.240 us your thoughts on on the performance issue and how 0:12:20.280 --> 0:12:23.679 long these cycles last. They seem to alternate a little bit, 0:12:23.720 --> 0:12:27.360 don't they. It's hard to tell how long they last. 0:12:27.520 --> 0:12:31.080 I mean, they seem to be often seven to ten 0:12:31.160 --> 0:12:35.400 year periods that we see this. Your absolutely right, emerging 0:12:35.440 --> 0:12:41.320 markets has underperformed the US over the last ten years. UM. 0:12:41.360 --> 0:12:44.960 I think the biggest reason for that is that we've 0:12:45.000 --> 0:12:51.120 been through a strong period where deflationary pressure has dominated markets, 0:12:51.480 --> 0:12:56.360 and the emerging markets are just more economically sensitive than 0:12:56.400 --> 0:12:59.240 the US. You know, if you think about the technology 0:12:59.280 --> 0:13:03.120 sector French, big big area. In the US, there is 0:13:03.120 --> 0:13:06.240 actually quite a big technology sector in emerging markets as well, 0:13:06.559 --> 0:13:09.600 But you have a lot of industries that are very 0:13:09.640 --> 0:13:14.600 economy sensitive. So in that in that last decade period, 0:13:14.920 --> 0:13:20.120 that economic sensitivity has worked against the returns in emerging markets. 0:13:20.440 --> 0:13:23.040 What about the dollar I I used to think, and 0:13:23.120 --> 0:13:25.840 I'm changing my view someone on this. I used to 0:13:25.880 --> 0:13:30.360 think of emerging markets as heavily commodity dependent and therefore 0:13:30.400 --> 0:13:34.839 heavily dollar dependent. Is that still the case? And how 0:13:34.880 --> 0:13:39.640 significant is the dollar to emerging markets performance? Well, the 0:13:39.720 --> 0:13:44.760 commodity areas like energy materials are today relatively small parts 0:13:44.800 --> 0:13:48.200 of emerging markets, around fifteen percent of our universe. How 0:13:48.200 --> 0:13:53.000 does that compare to say, years ago, well even ten 0:13:53.080 --> 0:13:56.280 years ago it was over Really that's a big change. 0:13:56.440 --> 0:14:00.400 So it's a big change. It tends to fluctuate over 0:14:00.480 --> 0:14:03.800 periods of time. Um, But I what what I would 0:14:03.800 --> 0:14:07.560 say is that emerging markets as a whole are just 0:14:07.640 --> 0:14:12.680 more dependent on economic growth than the developed world, and 0:14:12.800 --> 0:14:16.920 so when when the world has difficulties with economic growth, 0:14:17.160 --> 0:14:21.040 emerging markets tend to be negatively affected by it. So 0:14:21.200 --> 0:14:24.760 that's an interesting contrast because I usually think of everybody 0:14:24.760 --> 0:14:28.040 dependent on economic growth. When we have a recession, people 0:14:28.080 --> 0:14:32.120 tend to spend less, less employments, profits are affected, It 0:14:32.120 --> 0:14:35.800 affects markets. But what you're really saying is more nuanced 0:14:36.080 --> 0:14:39.320 emerging markets are much more sensitive to the state of 0:14:39.360 --> 0:14:42.920 the economy than Europe, of the US, or even Japan 0:14:43.000 --> 0:14:45.040 for that matter. Is that is that a fair assessment? 0:14:45.160 --> 0:14:48.160 I think that's fair. I think the the clear enemies 0:14:48.200 --> 0:14:52.520 of emerging market equities are negative real economic growth and 0:14:52.720 --> 0:14:55.960 or crises. So we've seen over the past year or 0:14:56.000 --> 0:14:59.240 two the US dollar we can fairly dramatically after a 0:14:59.360 --> 0:15:03.200 huge seven or nine you run and when we look 0:15:03.240 --> 0:15:07.480 at performance of emerging markets versus Europe versus US, they 0:15:07.520 --> 0:15:12.000 seem to have just edged out uh those areas on 0:15:12.040 --> 0:15:16.000 a nominal basis. But for a US investor in dollars, 0:15:16.440 --> 0:15:19.680 they had a booming year last year because of the 0:15:19.680 --> 0:15:23.760 weakness of the dollar. How significant is the currency not 0:15:23.920 --> 0:15:27.520 to the exports of commodities, but to the net performance 0:15:27.960 --> 0:15:31.720 of e M two investors in the US well, emerging 0:15:31.760 --> 0:15:35.640 market equities tend to have a natural negative correlation to 0:15:35.720 --> 0:15:40.160 the dollar and week dollar strong EM week dollars strong 0:15:40.240 --> 0:15:44.120 EM strong dollar week E MUH. That is, that is 0:15:44.120 --> 0:15:48.160 a strong correlation, and indeed emerging markets tend to have 0:15:48.240 --> 0:15:51.880 quite a strong correlation with commodity prices. Let's talk a 0:15:51.920 --> 0:15:56.560 little bit about some of these varied UH differences between 0:15:57.520 --> 0:16:01.160 emerging market countries in different parts of the world. When 0:16:01.200 --> 0:16:04.120 I think about e M, I tend to think about 0:16:04.720 --> 0:16:09.960 Asia and South America, and to a lesser degree UH 0:16:10.040 --> 0:16:14.640 Southern Europe places like Turkey. Um, how different are all 0:16:14.680 --> 0:16:17.920 these regions. One would imagine those three places are very, 0:16:18.040 --> 0:16:22.200 very different economically and in terms of their markets. There 0:16:22.320 --> 0:16:26.640 is tremendous variety across emerging markets. In Asia you have 0:16:26.880 --> 0:16:30.760 large technology sectors, for instance, whereas you have a lot 0:16:30.840 --> 0:16:34.800 more of a focus on commodities in parts of Latin 0:16:34.880 --> 0:16:40.000 America and in parts of Eastern Europe like Russia or 0:16:40.240 --> 0:16:45.080 South Africa. So very different countries, very different political systems, 0:16:45.160 --> 0:16:48.720 tremendous variety. So when I think about different parts of 0:16:48.720 --> 0:16:52.520 the world, I think of the US as fully or 0:16:52.560 --> 0:16:56.800 even richly valued, Europe a little less richly valued. Emerging 0:16:56.880 --> 0:17:01.720 markets relatively cheap compared to the other two. How do 0:17:01.800 --> 0:17:04.879 you come up with valuation metrics for different parts of 0:17:04.880 --> 0:17:07.520 the world when there's such different economies. If you're if 0:17:07.520 --> 0:17:09.639 you're looking at China or Russia, or you're looking at 0:17:10.119 --> 0:17:13.760 Brazil or Argentina. Can you apply the same sort of metrics. 0:17:14.040 --> 0:17:18.920 What do you have to develop different tools for different economies? Well, 0:17:18.960 --> 0:17:21.440 I would, I would agree with you. I actually come 0:17:21.480 --> 0:17:24.800 at this from the perspective of thinking there are no 0:17:24.920 --> 0:17:28.600 cheap asset classes today relative to their own history, but 0:17:28.680 --> 0:17:32.600 emerging markets are relatively cheap to develop markets and to 0:17:32.680 --> 0:17:37.199 the US market. From where I stand and uh, we 0:17:38.240 --> 0:17:45.840 approach our analysis by focusing on stocks stocks that look 0:17:45.960 --> 0:17:51.600 inexpensively valued and relatively profitable. We do a lot of 0:17:51.960 --> 0:17:58.760 accounting analysis because we have around seventy analysts at Lazard 0:17:59.200 --> 0:18:03.520 who are involved at looking at all types of different strategies, 0:18:04.280 --> 0:18:10.199 and we make adjustments for accounting distortions where relevant, and 0:18:10.240 --> 0:18:13.800 then we look forward towards the fundamentals for their businesses 0:18:14.680 --> 0:18:19.199 and we then see according to the valuations if we 0:18:19.280 --> 0:18:24.680 think the stocks are inexpensively priced or not. And then 0:18:24.760 --> 0:18:28.920 at the end of our process will discount for certain 0:18:29.040 --> 0:18:35.040 risks that include things like political risk and macroeconomic risk 0:18:35.600 --> 0:18:39.480 and even governance risk. So so last year in the 0:18:39.560 --> 0:18:43.639 United States, I think we could fairly safely say we 0:18:43.680 --> 0:18:48.640 had one of the most politically unstable or certainly politically 0:18:48.720 --> 0:18:52.000 volatile years we've seen, and yet the stock market was 0:18:52.080 --> 0:18:55.879 utterly placid. It was very confounding to a lot of people. 0:18:56.080 --> 0:19:00.359 Although history tells us politics and investing don't don't matter 0:19:00.440 --> 0:19:03.119 that much in the United States. Can you apply that 0:19:03.200 --> 0:19:07.240 same rule abroad or do you have genuine risk that 0:19:07.320 --> 0:19:10.960 a government gets destabilized there are capital controls that come 0:19:11.000 --> 0:19:14.680 in and suddenly the investment thesis for that country is 0:19:14.760 --> 0:19:17.640 much more challenging than it was earlier. It's a very 0:19:17.640 --> 0:19:21.280 good question, because I also was surprised last year in 0:19:21.320 --> 0:19:24.760 the US that the market did not seem to be 0:19:24.840 --> 0:19:30.119 affected by the noise, the political noise and the economic 0:19:30.200 --> 0:19:33.240 noise out there in the world as a whole and 0:19:33.440 --> 0:19:38.200 in the US. UM. I think it varies on situations, 0:19:38.200 --> 0:19:41.200 but certainly there are political effects that we see in 0:19:41.280 --> 0:19:45.520 emerging markets. A very good example right now is in 0:19:45.600 --> 0:19:52.760 South Africa, where um a new leader of the African 0:19:52.840 --> 0:19:57.760 National Congress, so Ramiphos, has come into power and where 0:19:57.760 --> 0:20:01.960 there seemed to be sizeable changes of what politically that 0:20:02.000 --> 0:20:05.280 are causing some quite big changes with the currency and 0:20:05.440 --> 0:20:08.639 with the market in that country. What about um some 0:20:08.800 --> 0:20:12.840 of the other countries where we've seen some either diplomatic 0:20:12.920 --> 0:20:18.960 or geopolitical issues. You mentioned Russia is Russia and investible country. 0:20:19.160 --> 0:20:22.840 We believe it is. It certainly is a place where 0:20:22.880 --> 0:20:27.119 you have to take into account political risk because it 0:20:27.200 --> 0:20:31.640 can have big, big effects on certain corporations, and there's 0:20:31.680 --> 0:20:35.760 some degree of judgment in how we look at that. UM. 0:20:35.800 --> 0:20:39.960 It's also a place where we tend to see risks 0:20:39.960 --> 0:20:43.920 associated with governance in some companies. So those are big, 0:20:43.960 --> 0:20:47.560 big factors in Russia, but we do think that there's 0:20:48.040 --> 0:20:52.800 reasonable protection in most companies in Russia. What about India? 0:20:52.840 --> 0:20:56.600 We talked about China earlier, and you mentioned Indian passing 0:20:57.040 --> 0:21:01.280 a giant country by population, a big technology center. What 0:21:01.320 --> 0:21:06.240 are we to make of India's perennial sense of being 0:21:06.280 --> 0:21:09.360 on the verge of of great things happening and then 0:21:10.119 --> 0:21:14.280 nothing seems to really gain any traction. Well, I think 0:21:14.440 --> 0:21:17.360 India is very exciting right now. You've got a prime 0:21:17.400 --> 0:21:21.560 minister in Mr Modi who doesn't really have to answer 0:21:21.600 --> 0:21:24.840 to anyone. Even the leaders of his own party were 0:21:24.880 --> 0:21:29.080 not in favor of him being prime minister. He appears 0:21:29.119 --> 0:21:33.159 to be very, very courageous. Ah, he's willing to do 0:21:33.240 --> 0:21:41.000 things like um, removing the largest denominations of currencies and 0:21:41.040 --> 0:21:46.320 making big, big changes in the civil service. So um, 0:21:46.440 --> 0:21:51.080 what what is exciting is he's he's tackling the bureaucracy 0:21:51.119 --> 0:21:55.880 of that country, knowing that there's a huge young population 0:21:56.720 --> 0:21:58.840 with I think about a million people going into the 0:21:58.840 --> 0:22:05.320 workforce every month, and he needs to prepare that country 0:22:05.359 --> 0:22:11.760 for UM a much more developed type of economic system. 0:22:11.880 --> 0:22:14.840 What are the country is sort of underappreciated or overlooked 0:22:15.200 --> 0:22:18.040 in the world of m Well, of course, I mean 0:22:18.160 --> 0:22:21.000 every country has its own issues. I mean India, for instance, 0:22:21.080 --> 0:22:25.320 is actually I wouldn't say a terribly inexpensive market. We 0:22:25.359 --> 0:22:28.719 do find opportunities there, but it in general is not 0:22:28.800 --> 0:22:33.200 an inexpensive market. Um. The areas that that we think 0:22:33.240 --> 0:22:40.800 are are relatively underappreciated include Russia, include some stocks in Brazil, Turkey, 0:22:40.880 --> 0:22:45.160 Indonesia for instance, UM and and to some degree South 0:22:45.200 --> 0:22:49.879 Africa right now, but again we find opportunities in many 0:22:50.000 --> 0:22:53.560 many markets across the emerging markets. Let's let's talk a 0:22:53.600 --> 0:22:56.520 little bit about putting those seventy analysts to work in 0:22:56.560 --> 0:23:00.720 the emerging market space. How important is to have the 0:23:01.000 --> 0:23:04.200 I know it's a cliche, but how important is it 0:23:04.240 --> 0:23:08.160 to physically be located in some of these countries and 0:23:08.280 --> 0:23:13.000 see firsthand what's going on. I think it's vital two 0:23:13.440 --> 0:23:17.960 go and see activities in all of these countries. I 0:23:18.000 --> 0:23:22.720 don't think it's necessary to actually be there all the time, 0:23:23.520 --> 0:23:27.199 but I think it's very very critical to travel to 0:23:27.280 --> 0:23:30.760 get updates, to see what's changing in these markets on 0:23:30.800 --> 0:23:36.399 a very very regular basis, because if you're not seeing 0:23:36.400 --> 0:23:42.280 it fairly regularly, you're perhaps not understanding opportunities or risks 0:23:42.320 --> 0:23:44.760 that are coming up in these markets. So you're racking 0:23:44.840 --> 0:23:47.679 up a million frequent flyer miles a year or you 0:23:48.000 --> 0:23:52.520 more New York based, Uh, not a million, but a 0:23:52.560 --> 0:23:55.840 good portion of that. And pretty much all of our 0:23:55.840 --> 0:24:00.879 analysts are traveling heavily around the emerging market world to 0:24:00.920 --> 0:24:04.479 see opportunities on an ongoing basis. So let's talk a 0:24:04.480 --> 0:24:08.720 little bit about market efficiency. You know, there's only so 0:24:08.800 --> 0:24:12.280 much any of us can do to beat large cap 0:24:12.480 --> 0:24:15.880 US stocks. It seems a ton of information is known, 0:24:16.400 --> 0:24:19.479 there are no real advantages to picking this company over that, 0:24:19.720 --> 0:24:22.520 or so it seems in the US. Do you have 0:24:22.640 --> 0:24:28.120 that same level of market efficiency in emerging markets specifically, 0:24:29.560 --> 0:24:33.520 is information is freely available? Are there advantages that can 0:24:33.560 --> 0:24:37.000 be had from your own analysis, in your own data gathering. 0:24:37.280 --> 0:24:41.560 How does EM differ from you know, the SMP five 0:24:41.640 --> 0:24:49.040 hundred in terms of potentially producing market beating results. Well, 0:24:49.080 --> 0:24:54.840 I think indexing is a perfectly viable, tactical, and often 0:24:54.880 --> 0:24:58.960 short term solution. UM. But one of the interesting things 0:24:59.040 --> 0:25:04.040 is that in emerging markets, over longer periods of time, 0:25:04.560 --> 0:25:08.680 the median manager tends to beat the index. And so 0:25:08.720 --> 0:25:13.520 I think informational efficiency is less good in the emerging markets, 0:25:14.400 --> 0:25:18.280 and there aren't necessarily a huge amount of analysts in 0:25:18.359 --> 0:25:22.679 emerging markets. Overall, it's nothing like the US, and so 0:25:22.760 --> 0:25:30.320 actually going and understanding these companies and utilizing certain strategies 0:25:30.320 --> 0:25:35.359 for investing UM, I think can produce good results in 0:25:35.440 --> 0:25:40.520 comparison with the index over longer term periods of time. So, um, 0:25:40.560 --> 0:25:43.080 it's a bit more work. I think one has to 0:25:43.119 --> 0:25:47.240 be creative, but I think one can construct portfolios using 0:25:47.880 --> 0:25:55.280 perhaps different investing methodologies and emerging markets that can provide 0:25:55.280 --> 0:25:59.359 a very strong performance in the long term. So, so 0:25:59.480 --> 0:26:03.680 let's talk about constructing those portfolios and discuss a little 0:26:03.720 --> 0:26:08.840 bit of of process. Um, you manage a team that's 0:26:08.960 --> 0:26:11.440 a lot of analysts, I assume a bunch of traders, 0:26:12.200 --> 0:26:15.560 a number of other support process and I'm guessing this 0:26:15.680 --> 0:26:20.399 investment committee on the top of that whole pyramid. What 0:26:20.600 --> 0:26:25.080 is the process like thinking about creating a new portfolio 0:26:25.240 --> 0:26:29.119 making changes to existing portfolios? Tell us how you you 0:26:29.160 --> 0:26:35.240 think about these things? Well, the way we're uh organized 0:26:35.280 --> 0:26:39.960 at Lazard is that we actually have twelve different emerging 0:26:40.000 --> 0:26:44.560 market teams, anywhere from fixed income to currencies, to fund 0:26:44.560 --> 0:26:48.400 of funds to equities. We're almost like a collection of boutiques, 0:26:49.040 --> 0:26:52.960 and all the strategies are different. So in equities, for example, 0:26:54.400 --> 0:26:59.520 we have four different equity strategies. We have a quantitative one, 0:27:00.040 --> 0:27:01.919 we have a relative value one, which is where I 0:27:01.960 --> 0:27:04.800 spend most of my time. We have a growth at 0:27:04.840 --> 0:27:07.200 a reasonable price one, and we have a core one. 0:27:07.840 --> 0:27:09.679 So a whole lot of different things. It's almost like 0:27:10.359 --> 0:27:18.560 a menu with four different um food plates, and people 0:27:18.600 --> 0:27:22.640 can decide, based upon their objectives, what they what type 0:27:22.640 --> 0:27:26.240 of journey they would like to go on. So that's GARP, quants, 0:27:26.400 --> 0:27:29.320 relative value, and core and core. Is there a much 0:27:29.400 --> 0:27:33.520 overlap between them or by design, they're all very by design, 0:27:33.560 --> 0:27:38.920 they're quite different portfolios. The overlap is relatively limited, and 0:27:39.119 --> 0:27:44.320 they will produce different types of results for investors over time. 0:27:44.480 --> 0:27:47.600 And you mentioned fixed income. I'm under the impression that 0:27:48.240 --> 0:27:51.360 fixed income overseas is a little bit of a challenge, 0:27:51.440 --> 0:27:54.840 and fixed income in emerging markets is a very very 0:27:54.840 --> 0:27:56.960 different animal than what we used to here in the 0:27:57.040 --> 0:28:01.479 United States. It is very different from the US um 0:28:01.520 --> 0:28:06.600 you really have a number of different fixed income areas 0:28:06.600 --> 0:28:10.960 in emerging markets. You have hard currency debt, which which 0:28:11.000 --> 0:28:14.480 has been a very very strong area. You have local 0:28:14.560 --> 0:28:19.720 currency that until recently has been relatively weak. Uh. And 0:28:19.760 --> 0:28:22.840 then you tend to get strategies that mix the two. 0:28:23.880 --> 0:28:28.160 And you also have quite a significant corporate debt universe 0:28:28.359 --> 0:28:31.960