Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges and philosophies and security selection. I'm David Cohne,
Speaker 1: i lead mutual fund and Active Research at Bloomberg Intelligence.
Speaker 1: Today my co host is Marvin Chen, Senior Asia Equity
Speaker 1: strategist at Bloomberg Intelligence. Marvin, thank you for joining me
Speaker 1: today as my co host.
Speaker 2: Thank you, David.
Speaker 1: So, Marvin, can you tell our listeners about the BI
Speaker 1: Emerging Markets Equity Scorecard and what countries are currently on top?
Speaker 2: Yeah. The Emerging Market Equity Scorecard is a scorecard where
Speaker 2: you rank very emerging markets across various factors such as
Speaker 2: prize performance, breadth, as well as fundamentals and currency and
Speaker 2: commodity exposure.
Speaker 1: We do this review quarterly.
Speaker 2: And currently Vietnam, while technically still not an emerging market yet,
Speaker 2: sits the top of our scorecard as it ranks well
Speaker 2: versus many of the emerging markets. But the broader message
Speaker 2: for the scorecard is that you know, investors should focus
Speaker 2: stay focused on Asia, with Turkey being the only non
Speaker 2: Asian country within the top echelon of our scorecard. Amongst
Speaker 2: major markets, Korea sits pretty well and the first half
Speaker 2: outperformers such as India and Taiwan have slipped a few
Speaker 2: notches due to valuation concerns. China is still at the
Speaker 2: bottomwear scorecard. It has moved up a few slots, but
Speaker 2: challenges are There's still challenges for the outlook and more
Speaker 2: policy support is needed there.
Speaker 1: Great well, speaking of emerging markets, I'd like to welcome
Speaker 1: Sean Taylor, chief investment officer of Matthews Asia and portfolio
Speaker 1: manager for the firm specific Tiger Fund specific your active
Speaker 1: ETF for Emerging Markets Equity Fund and the ETF as
Speaker 1: well in the Emerging markets ex China Active ETF. Thank
Speaker 1: you so much for joining the podcast.
Speaker 3: John Pleasure, thank you for being invited.
Speaker 1: So I'd like to begin by asking you how you
Speaker 1: got your start in the business.
Speaker 3: Actually, I originally was in the military, having been brought
Speaker 3: up abroad, and when I went to the business world
Speaker 3: after business school, I was very interested in working in
Speaker 3: in what I knew about, which was, you know, anything
Speaker 3: non developed Middle East, Asia, Eastern Europe, and got the
Speaker 3: opportunity to go and work on an Asian desk at
Speaker 3: James Capele, who were at the time one of the
Speaker 3: the main sort of Asian brokers, and I sort of
Speaker 3: got in that way, and you know, it was very
Speaker 3: fortunate that a lot of places that I had lived
Speaker 3: in suddenly became markets. A bit like you know, talking
Speaker 3: about Vietnam Vy going from not being an emerging market
Speaker 3: to being one in the future. I was sort of
Speaker 3: you know, they're in the Middle East and in Eastern Europe,
Speaker 3: which was which was very interesting.
Speaker 1: Nice. Well, you know, one of the things we wanted
Speaker 1: to talk about, or at least you know, definitely hear more about,
Speaker 1: is the Matthews Emerging Markets Equity Active ETF, which is
Speaker 1: the ticker simill em. Can you tell us the investment
Speaker 1: process for this fund.
Speaker 3: Yeah, we've really got four stages of it. The first
Speaker 3: principle is we think that the value of an equity
Speaker 3: or the value of an equity index is a simple
Speaker 3: formula of earnings plus a dividend translated into US dollars,
Speaker 3: and then we give it a p rerating or a
Speaker 3: D rating. You know, we have the four stage process. One,
Speaker 3: we think countries matter, so we have a country target
Speaker 3: based on that formula for every market. We then rank
Speaker 3: those countries. We take an account volatility, so we get
Speaker 3: you know, earning what's the best earnings growth, you know,
Speaker 3: what's what's in the price of that earnings growth, and
Speaker 3: we come up with a series of over neutral and underweights.
Speaker 3: And then from the bottom up basis, we're very fortunate
Speaker 3: to Matthews to have a team of country managers, people
Speaker 3: that are focused were you know, we run a lot
Speaker 3: of single country funds and ETFs that feed up into that,
Speaker 3: and so our country teams give us the best ideas
Speaker 3: and then the fund managers based on the fund put
Speaker 3: the portfolio construction to work. We use a system called
Speaker 3: marginal contribution of active risk, so we really beat to
Speaker 3: adjust everything to make sure that we were taking you
Speaker 3: intended positioning and we don't have any unintended overweights and underweights,
Speaker 3: and that sets the sizes of the overweights and underweights,
Speaker 3: so the country level at the stock level, and that
Speaker 3: enables us to dial up the beta and dial down
Speaker 3: the beta. And then finally we have an ongoing monitoring
Speaker 3: process that happens and that that cycle that's that cycle continues.
Speaker 3: Now we're probably a slightly differentiated thinking that countries matter,
Speaker 3: but you know, if you just look at the facts
Speaker 3: in an example this year, that the outperformance of Asia
Speaker 3: relative to to Latin America, the outperformance of India relative
Speaker 3: to China, the outperformance even in Latin America of Brazil
Speaker 3: relative to Mexico. So at the end of the day,
Speaker 3: we're picking stocks, but we have this country framework that
Speaker 3: enables us to hopefully damp and risk or take the
Speaker 3: opportunity of whether it's a you know, a good a
Speaker 3: good country story. For instance, you know, we do across
Speaker 3: many strategies have a non index overweight to Vietnam because
Speaker 3: you know, we like the growth story there. In the
Speaker 3: valuations we think of a lot more upside.
Speaker 1: So you know, you mentioned looking at countries and so
Speaker 1: it's kind of top down. But when you're looking at
Speaker 1: individual stocks, you know, in terms of fundamental analysis, what
Speaker 1: do you look for, for instance, in company balance sheets?
Speaker 3: Yeah, you know, obviously depends on the growth state of
Speaker 3: the company, But what we look at is whether the
Speaker 3: balance sheet has enough the ability to fund that country
Speaker 3: that company going forward that it doesn't need to go
Speaker 3: for external finance. So either if it's a sort of
Speaker 3: newer growth yer company, then it has the sources in
Speaker 3: place that it knows where it's next growth is going
Speaker 3: to come from, so that we have going down the
Speaker 3: road to sustainable cash flow. And then those companies that
Speaker 3: are mature that you know that the balance sheet is
Speaker 3: good and that we have good cash flow. We think
Speaker 3: cashflow goes into earnings is the most important thing because
Speaker 3: what we're really looking for is the sustainability of earnings
Speaker 3: and the sustainability of dividend streams within that.
Speaker 1: What about more on the qualitative side, do you look
Speaker 1: at management teams? You know kind of how do you
Speaker 1: evaluate them?
Speaker 3: Yeah, So one thing that we we do, and we've
Speaker 3: it's always been the DNA of Matthews over the last
Speaker 3: thirty years, is being on the ground. So we have
Speaker 3: part of the team in Hong Kong, part of the
Speaker 3: team in San Francisco, and you know, the San Francisco
Speaker 3: side is very driven by what's happening in global tech
Speaker 3: and using that knowledge base to you know, look at Asia.
Speaker 3: You know, where are those trends being seen in Asia?
Speaker 3: You know, for instance, the whole AI build, how that's
Speaker 3: seen in the supply chain in areas and then in
Speaker 3: Hong Kong, you know where we also cover maybe couple
Speaker 3: a lot of the Asian markets. From here, it's really
Speaker 3: been on the ground visiting companies. We have a huge
Speaker 3: amount of fund managers traveling you know constantly and seeing companies,
Speaker 3: and we place a really big emphasis on meeting management,
Speaker 3: you know, both in the offices or on the ground
Speaker 3: seeing the competitors and also with our you know esg team,
Speaker 3: we do a lot of engagement with companies. So we
Speaker 3: write to them on factors and we go and see
Speaker 3: them and we attend a GMS and we think that's
Speaker 3: very very important because although we have this country framework
Speaker 3: where we think we can add value at a country
Speaker 3: level by selecting countries, at the end of the day
Speaker 3: we are buying companies and so we have to get
Speaker 3: that balance. You know, we're really looking for the right
Speaker 3: stop for the environment. But it's very important what the
Speaker 3: what the management is up to. I mean, we could
Speaker 3: go to a management that we've seen as you know,
Speaker 3: not up to standard that we think is changing. So
Speaker 3: you know, one of the engagement parts of engagement is
Speaker 3: is you know, where we're seeing companies that are turnaround
Speaker 3: where they are pricing in you know, an old situation,
Speaker 3: but we do believe that you know, things are changing
Speaker 3: and that change will affect one of the valuation that
Speaker 3: people will pay for that company. But you know, more
Speaker 3: importantly the fundamentals, the cash flows. Maybe they're getting rid
Speaker 3: of you know, non core activities, they're becoming more more transparent.
Speaker 3: That dividend policy, which could have been weak, is getting
Speaker 3: much stronger. They're more aware about capital management. You know,
Speaker 3: if we see situations like that, then that's a perfect
Speaker 3: story that we like to look for. That's sort of
Speaker 3: you know, I suppose a turnaround story.
Speaker 2: Yeah, Sean, you mentioned AI and tech. I just kind
Speaker 2: of wanted to go into the themes you know, around
Speaker 2: markets this year. You know, AI has been a big
Speaker 2: theme for Asia. You know, Taiwan has outperformed on the
Speaker 2: back of this, but now we're seeing some volatility. What's
Speaker 2: review Is it, you know, time to rotate out of
Speaker 2: this theme or does this have more legs to go
Speaker 2: room to run? And you know is do you think
Speaker 2: Southeast Asia is a shelter for kind of this tech
Speaker 2: volatility that we've seen over the past month or so.
Speaker 3: Yeah, I think on the first question on AI, I
Speaker 3: mean AI, I think is going to be a really
Speaker 3: cool driver of Asia and emerging markets going forward, you know,
Speaker 3: because I think at the moment, you know, it's all
Speaker 3: about Ai going onto the computer and then it will
Speaker 3: be going on to the hand said the humanoid. The
Speaker 3: supply chain in particularly in Taiwan and even certain companies
Speaker 3: in Malaysia, certain companies in Vietnam. You know, it's growing,
Speaker 3: and the growth is you know, the capex is there
Speaker 3: and the growth is there. And then you've also got
Speaker 3: the semi side as well. So obviously career much more
Speaker 3: affected by the semiconductor side. Short term, there is a pause.
Speaker 3: I think, you know, we are seeing much more selectivity.
Speaker 3: So actually we've lightened positions in Taiwan. We've really lightened
Speaker 3: positions in career, much more on the domestic side of career.
Speaker 3: But in the longer run, you know, we are still
Speaker 3: invested in certain Taiwanese companies, but we've been a lot
Speaker 3: more STOP companies. Specific it's a very alpha orientated because
Speaker 3: we do think that you know, some stop's got overvalued
Speaker 3: in the hype, and probably the earnings will disappoint, but
Speaker 3: certainly the theme is there, and I think it's a
Speaker 3: really important I think it's a really important driver for
Speaker 3: Asia because you know, in the last five years. Probably
Speaker 3: the debate has always been India's expensive, but we like it,
Speaker 3: and the earnings are going China's cheap, but the earnings
Speaker 3: aren't coming through. But actually there's so much more to
Speaker 3: em and you know, the sort of the extra ai
Speaker 3: the tech supply chain in North Asia is very very important.
Speaker 3: I think it's gonna be a big driver of markets
Speaker 3: going forward. And also actually the domestic demand story and
Speaker 3: the sort of value up story and career has worked
Speaker 3: pretty well. But Asian is probably my favorite place to
Speaker 3: invest at the moment, and for a number of reasons.
Speaker 3: One is it's always relative. You know, even China looks
Speaker 3: relatively better when other markets don't look as good because
Speaker 3: they've worked and China's still been a laggard, but Asiyan
Speaker 3: has been a laggard. It's been a laggard because rates
Speaker 3: in some markets have had to go up during this
Speaker 3: this year, particularly Indonesia. The growth is coming through and
Speaker 3: it will be the main beneficiary of interest rate policy
Speaker 3: easing in the US. It's cheap, it's under owned, and
Speaker 3: so you know it deserves a place on its own merit.
Speaker 3: But it's even more interesting now where you know, we've
Speaker 3: been taking money, taking profits from the North Asian area
Speaker 3: and India, you know, is it's still a very solid market,
Speaker 3: but it's looking quite expensive. You know, it's stead it's
Speaker 3: still steadily going up, but you can't put all your
Speaker 3: money in India in an emerging market or an asient
Speaker 3: fund at the moment. So it's a great, great balance.
Speaker 3: And within Asian Indonesia our favorite index country, and that's
Speaker 3: probably the most sensitive to rates coming up. It's had
Speaker 3: a little bit of a sort of policy vacuum because
Speaker 3: of the handover from Jockovy to Provoa and that the
Speaker 3: new president will be he will take over in October,
Speaker 3: and so people are sort of wasting the cabinet and
Speaker 3: you know the direction there, so that might cause a
Speaker 3: bit of volatility, but you know, the growth is growth
Speaker 3: story is very good. Rates will help that growth story.
Speaker 3: Vietnam and as I mentioned earlier, remains our favorite Asian market,
Speaker 3: but isn't in the index yet, so it depends on
Speaker 3: the degree of how much we have invested in in ETFs.
Speaker 3: And then Philippines I think is one behind it is
Speaker 3: it's a bit less liquid, but it's becoming more interesting growth,
Speaker 3: very cheap valuations, growth picking up Malayser has been a
Speaker 3: very good story. It's already done pretty well this year,
Speaker 3: so we're a little bit more selective there, but we
Speaker 3: still like the market. And then Thailand, and actually Thailand's
Speaker 3: had a pretty good run but having underperformed for a while,
Speaker 3: but it was a very sudden movement when we had
Speaker 3: a change in politics. So we we're a bit worried
Speaker 3: about the growth in Thailand. Still it's not really coming through,
Speaker 3: but we're just you know, really seeing how this political
Speaker 3: change will affect that growth there. So that's probably the
Speaker 3: market we're less convinced about.
Speaker 1: I know, Marvin's got more questions relating to countries and
Speaker 1: things happening, but I just wanted to have one more
Speaker 1: follow up. You mentioned valuations, you know, as part of
Speaker 1: the process, and in you know, the last question, I
Speaker 1: guess if you could dig deeper a little bit into
Speaker 1: valuations as you know, what do you look at specifically
Speaker 1: and you know, does it help when you're determined to
Speaker 1: you know, decide to sell the position.
Speaker 3: Yeah, Well, we target price everything. We target price and index,
Speaker 3: so we're not really top down investors in a way
Speaker 3: that we just set t targets for country indexes. So
Speaker 3: we will take MSCI India, which is essentially a collection
Speaker 3: of all the earnings for those companies that are in
Speaker 3: MSCI India and then all the valuations, and we set
Speaker 3: targets at a country level, and we set every stock
Speaker 3: we put in the portfolio, we set a target for
Speaker 3: on a valuation and an earning spaces, and we track
Speaker 3: those earnings all the time. It's very easy to track
Speaker 3: earning's upgrades and earnings down grades, and that can obviously
Speaker 3: sort of adjust. So you know, when we start to
Speaker 3: reach our target prices, then that is a warning point.
Speaker 3: So when we would change and now then it depends
Speaker 3: obviously on the relative illness of how that target price
Speaker 3: is relative to everything else in your portfolio and other
Speaker 3: ideas coming in. But we have a very disciplined approach
Speaker 3: on that. I mean, I'll give you an example. At
Speaker 3: the beginning of the year, we increased our having been
Speaker 3: very underway China. We increase positions in the end of
Speaker 3: January to China because the market had really underperformed and
Speaker 3: it was eight point five times earnings, and we thought
Speaker 3: that there was sort of better news coming out from
Speaker 3: the government property and actually the larger stocks in the
Speaker 3: in the index when talking to the companies were you know,
Speaker 3: we're going to have less subsidies. They were promising more
Speaker 3: capital management in terms of higher paybacks, buybacks, and that
Speaker 3: happened actually, and some of the larger stocks have have
Speaker 3: done pretty well. We increased our positions there. But then
Speaker 3: by the middle of May, the market had gone to
Speaker 3: eleven and a half time's earnings, and we thought, given
Speaker 3: that we hadn't seen that much of an economic recovery,
Speaker 3: a lot of good news was priced in, so we
Speaker 3: lightened up those positions, and you know, so that it
Speaker 3: made it May, It does make a big difference. And
Speaker 3: then when you have you know, on a on a
Speaker 3: change of government for instance. I mean we went into
Speaker 3: the beginning of the year a bit more cautious on
Speaker 3: Mexico on valuations. Market was pricing in a very good
Speaker 3: situation and we knew there was some election coming up.
Speaker 3: But when the election came up, and you know, it
Speaker 3: was obviously unfriendly to that, we thought to investors we
Speaker 3: had to assign a lower pe for Mexico, you know,
Speaker 3: depending on because of that political risk. On the other hand,
Speaker 3: Brazil went down almost to six and a half seven
Speaker 3: times earnings, with the sort of news on Mexico where
Speaker 3: actually the situation wasn't as bad, and we took that
Speaker 3: as an opportunity to increase our Brazilian exposure. And the
Speaker 3: companies know that we had met on in Brazil. We're
Speaker 3: not giving the same negativeness as the market, and so
Speaker 3: we just sort there's a good upside there in our
Speaker 3: target price that we weren't expecting Brazil to go back
Speaker 3: to ten eleven times earnings, but certainly could go back
Speaker 3: to sort of eight eight and a half times earnings.
Speaker 3: And so that valuation is used really as a as
Speaker 3: a reward risk tool, and it just it just sort
Speaker 3: of tries to keep you safe. You look at it
Speaker 3: every day, say what, what's what's priced? In Valuations alone
Speaker 3: aren't aren't aren't a catalyst, but they are definitely a level.
Speaker 3: You know, for instance, in China at the moment, you know,
Speaker 3: the valuation of China is at eight point seven times
Speaker 3: I think in the MSCI China, but that is you know,
Speaker 3: looking at an earnings growth of about fourteen percent. Now,
Speaker 3: given the macro data that's come through, you've seen a
Speaker 3: couple of seal side houses in the last twenty four
Speaker 3: hours take the China GDP number down. You know, you
Speaker 3: could say that, you know, if that if the fourteen
Speaker 3: percent growth of the consensus expecting was taken down to
Speaker 3: six or seven, then obviously China's trading on eleven times
Speaker 3: and so isn't so cheap. So you really have to
Speaker 3: you have to balance the valuations with what's happening on
Speaker 3: the earning side.
Speaker 2: Yeah, for China, you know, you after that rally we
Speaker 2: saw earlier in this year, we're really back at square one,
Speaker 2: you know, back at the eight nine times earnings level.
Speaker 2: And you're right, I agree, it all comes down to catalysts.
Speaker 2: Do do you guys see any catalysts on the horizon
Speaker 2: for China.
Speaker 3: Look at the moment, we're focusing really on what are
Speaker 3: the winners and losers from the situation in China, And
Speaker 3: there are clear winners at a stock level, and there
Speaker 3: are clear losers. They were pretty cautious on consumption. But
Speaker 3: some of the some of the sort of e commerce
Speaker 3: companies of the capital management are producing better earnings and
Speaker 3: so actually within the earnings changes in China, there is
Speaker 3: huge differentiation and that gives us a good opportunity being
Speaker 3: on the ground. I think, you know, at the moment,
Speaker 3: the government is probably a little bit more prepared to
Speaker 3: see the situation declining because the word of deflation has
Speaker 3: been sort of put up to the party and that
Speaker 3: that's always a scary word. But I do think the
Speaker 3: catalysts will take time. So I do think there will
Speaker 3: be more support on the property side for China. I
Speaker 3: do think we'll get more support on the demand side,
Speaker 3: but I do think it will take time, so I
Speaker 3: do not see an immediate catalyst. We also have the
Speaker 3: presidential election happening in the US, which you depending on
Speaker 3: which party wins, could affect you know, the economic situation
Speaker 3: in China to particularly around around tariffs. Interest rates coming
Speaker 3: down in the US actually will be a little bit
Speaker 3: of a benefit for China because that eases China has
Speaker 3: been had quite tight monetary policy. Actually, if you look
Speaker 3: at where real interest rates are nowhere near the level
Speaker 3: of Latin American real interest rates like Brazil or Indonesia,
Speaker 3: but they are relatively high, and obviously when you've got
Speaker 3: quite a weak economy that need they need to come down.
Speaker 3: But I think the government has always been worried about
Speaker 3: the level of the currency. So once you start to
Speaker 3: see the dollar stabilize a little bit or maybe even
Speaker 3: weakend again certain countries on rates coming down. That just
Speaker 3: gives the Chinese monetary system and ability to cut rates.
Speaker 3: But I think the real, real catalyst of China needs
Speaker 3: is on the fiscal side, and we wouldn't really see
Speaker 3: it happening in one big, you know, in one big
Speaker 3: sort of trigger point. It will be incremental and probably
Speaker 3: incrementally driven in the net between after the election and
Speaker 3: going into next summer, after the Workers Council in Economic
Speaker 3: Workers Council in December and then the two sessions in March.
Speaker 2: Yes, speaking of the you know, the FED interest rate
Speaker 2: cut being a benefit for China, you know, how how
Speaker 2: should we be positioning for the Fed the expected rate cuts,
Speaker 2: you know, in terms of small caps versus large caps?
Speaker 2: You know, you know we've seen the India small caps
Speaker 2: really outperformed this year. Is that going to be boosted
Speaker 2: by this you know, this cutting?
Speaker 3: Yeah? I think it's it's different things to all markets,
Speaker 3: I think, I mean, I think the first thing is
Speaker 3: is that you know, the FED cutting isn't automatically positive
Speaker 3: for em It isn't automatically positive for EM currencies with
Speaker 3: a weaker dollar. It depends on the growth outlook. So
Speaker 3: the most benign environment for emerging markets in Asia is
Speaker 3: when the FED is cutting, the dollar is weak, and
Speaker 3: global growth is outpacing US growth. And so it really
Speaker 3: comes down to why is the FED cutting? And so
Speaker 3: you know, if the FED is cutting and we you
Speaker 3: knowed the US economy is not going to a recession,
Speaker 3: and even if it does, it's a shallow recession, then
Speaker 3: that is pretty positive for markets because it's cutting and
Speaker 3: it's going to help growth. If it's cutting because the
Speaker 3: US economy is going into recession, then it's actually risk off.
Speaker 3: It's positive for the dollar, it's not positive for global markets.
Speaker 3: Our scenario is the FED is cutting, the US economy
Speaker 3: is strong. US economy, even with rate cutting and the
Speaker 3: slowdown in the US economy, is going to grow more
Speaker 3: than Europe and Japan, but there are certain other so
Speaker 3: countries in emerging markets that can grow more. So overall,
Speaker 3: the international growth is not going to surpass US growth,
Speaker 3: but emerging market growth will. And then it depends then
Speaker 3: in that scenario, what's going to do well. So anything
Speaker 3: that benefits from interest rate cuts. The normal domestic story,
Speaker 3: you know, Latin America, particularly Brazil, as I am, a
Speaker 3: great benefit, but in the past it's also been the
Speaker 3: cyclical side of North Asia, the sort of semi side,
Speaker 3: the hardware side in Taiwan and Korea, And as we
Speaker 3: discussed you know a few minutes ago, that area is
Speaker 3: relatively expensive having performed, so I think we'll get a
Speaker 3: different rally this time. So I don't think it's a
Speaker 3: great catalyst for Taiwan and career. It might even be
Speaker 3: a reason for money to come moreover to some of
Speaker 3: the more domestically driven, consumption driven markets. I think in India,
Speaker 3: you know, it's pretty much neutral. I think India benefits
Speaker 3: much more in my opinion, from the oil price coming down,
Speaker 3: because that's one of the inflationary issues, but also inflation
Speaker 3: in India very much depends on them monsoon, and that
Speaker 3: seems to be okay. The small cap effect is not
Speaker 3: a rate issue. It's the fact that you know, the
Speaker 3: MSCI India about four or five years ago had roughly
Speaker 3: seventy stocks in it. It now has roughly one hundred
Speaker 3: and fifty stocks. And those newer stocks are more reflective
Speaker 3: of the new India, you know, they're more reflective of
Speaker 3: the cap expends, the infrastructure you know, they're moving into
Speaker 3: two other air is the competition financials have got more competition,
Speaker 3: the housing policy that's changing, and so I do think
Speaker 3: that there will be more of a still continuing to
Speaker 3: be a structural change in India. You know, the larger
Speaker 3: sectors in India that did incredibly well, the financials, the
Speaker 3: IT companies, they were more a reflection they were doing
Speaker 3: well when India wasn't doing well. They were more a
Speaker 3: reflection of those great good conglomerates that managed to keep
Speaker 3: costs down and grow market share in a difficult environment,
Speaker 3: take share from other companies. That's changing now you're getting
Speaker 3: more competition coming in, You're getting a wider nests of
Speaker 3: the economic growth, and so it's more of a balanced view,
Speaker 3: and I think the larger sectors probably don't do as
Speaker 3: well going forward, although in the short term there's a
Speaker 3: huge valuation gap between you know, mid cap and small
Speaker 3: cap and large cap at the moment, and the area
Speaker 3: that's the that offers the most value in India is
Speaker 3: actually the financials, the larger banks, because they've been they've
Speaker 3: suffered from everyone taking money out of them and putting
Speaker 3: them into the faster growing errors. We are seeing now
Speaker 3: with Moody three point zero, and I think this is
Speaker 3: a really important question to look at for the next
Speaker 3: few years. Is I think international money will really embrace
Speaker 3: India in the next year, but they're looking at the
Speaker 3: valuations going Actually, you know, the area I want to
Speaker 3: buy is really expensive, so they might buy these bigger
Speaker 3: sectors just to get exposure there. And why I'd say, well,
Speaker 3: we should see more international exposure to India is I
Speaker 3: think what Mody three point zero did with the volatility
Speaker 3: around the election was it showed that India was a democracy,
Speaker 3: that there are checks and balances, and I think from
Speaker 3: international investors given the situation over the last few years
Speaker 3: in Russia and you know in China and other markets,
Speaker 3: people prefer to buy democracies. And you know, you can't
Speaker 3: really ignore the growth story of India all the fact
Speaker 3: that it's going to be you know that it really
Speaker 3: is the leading democracy and emerging markets, and the growth
Speaker 3: rates probably a bit more balanced. I mean probably Underno.
Speaker 3: D one point zero and two point zero you had
Speaker 3: a real boost on infrastructure and you know milk Od's
Speaker 3: viewers build it make in India and it will trickle
Speaker 3: down to consumption. But one of the problems has been
Speaker 3: is that only a certain part of society's got wealthier
Speaker 3: at the top of the property market, the stock market,
Speaker 3: but it hasn't really filtered down into the overall economy.
Speaker 3: So it hasn't impacted GDP per capita as much. I say,
Speaker 3: even China has over the last ten years, where you know,
Speaker 3: the wealthy have got less wealthy, but the gdpeper capita
Speaker 3: of the average person and has got wealthia. And so
Speaker 3: I think now with Modi three point zero, there's going
Speaker 3: to be a transition and a balance, and so I
Speaker 3: think you'll see more focus on domestic demand, on consumption,
Speaker 3: on help for the population. I don't think we'll go
Speaker 3: back to the sort of handouts that this area is
Speaker 3: not doing well, so we're going to hand out more support,
Speaker 3: you know, because I think the Modi government really believed
Speaker 3: that the best way of getting long term growth in
Speaker 3: India is infrastructure, urbanization, a more efficiency, more service, more
Speaker 3: manufacturing jobs, and so I do think that's a transition
Speaker 3: going point. So I do think, you know that that
Speaker 3: mid cap small cap bias in India might remain for
Speaker 3: a while, and it's also supported by local funds. You know,
Speaker 3: you see the amount of local money going into the
Speaker 3: market every month that it's incredible, it's structural, and so
Speaker 3: that's obviously been a very very big support, and they
Speaker 3: prefer to buy these faster.
Speaker 2: Growing Yeah, speaking of democracies, just one last question for me.
Speaker 2: You know, with the US elections and the potential for
Speaker 2: more tariffs, you know, it's not really just a China issue.
Speaker 2: Obviously China could be more exposed to further terrifikes, but
Speaker 2: you know, it's really are we going to see a
Speaker 2: more trend of deglobalization and how is that going to
Speaker 2: impact Asia?
Speaker 3: Yeah? I think I think in one way, we we
Speaker 3: we've been seeing that start. I mean, I don't I
Speaker 3: don't believe in the longer run that there'll be a huge,
Speaker 3: you know, true deglobalization because I just think, you know,
Speaker 3: I think COVID showed us and the transport links across
Speaker 3: the world that the world is pretty globalized already and
Speaker 3: you can't really undo that, and so it's really difficult
Speaker 3: to unwind these global global trade But I think the
Speaker 3: emphasis will change. I think the emphasis has already changed.
Speaker 3: I mean, I think when you look at the exports
Speaker 3: of China, they haven't particularly gone down as a percentage
Speaker 3: of global exports, but they've just gone different places, you know,
Speaker 3: and you know, US imports have come from different places.
Speaker 3: So I do think there'll be a rebalancing like that.
Speaker 3: I mean, obviously, you know, trade tariffs. You know, if
Speaker 3: Trump's talking about sixty percent tarifs to China, you know,
Speaker 3: I think that you know, probably China is is more
Speaker 3: immune to that than it was the first time around,
Speaker 3: because it's obviously had this threat, it's preparing for it.
Speaker 3: It's probably less of an impact on the market, but
Speaker 3: it's obviously not good news. It's inflationary. You know, it's
Speaker 3: not good news if tariffs and other areas come up
Speaker 3: as well, and that's something that will what we know
Speaker 3: we'll obviously have to impact, will impact into emerging market growth.
Speaker 3: It will also impact probably rates coming down quicker. You know,
Speaker 3: maybe that you know, if you've got that inflationary impact,
Speaker 3: I mean, my my, my inkling would be that you know,
Speaker 3: even if Trump got in, it wouldn't be as severe
Speaker 3: as the talk as it has been in the past,
Speaker 3: but it was obviously something that is that we're that
Speaker 3: we're aware of. And I think that in that way,
Speaker 3: you know, it makes it, you know. That's why we
Speaker 3: really do prefer in this environment, particularly after the run
Speaker 3: in South Korea and Taiwan, we really prefer those markets
Speaker 3: that have really domestic demand and are very old economy
Speaker 3: stories that you know already these economies are picking up
Speaker 3: two years later after COVID. The banking system wasn't like
Speaker 3: the US or the UK or Europe, where you know,
Speaker 3: aggregate demand was kept in check by the government. You know,
Speaker 3: aggregate demand fell in these countries. There weren't subsidies, there
Speaker 3: wasn't much fiscal spending, so it's a slower recovery and
Speaker 3: interest rates being cut in the US just helps that recovery.
Speaker 3: And so that's really where we focused on the moment.
Speaker 3: There much of that area is much more immune, much
Speaker 3: more protected from overall trade. India is much more protected
Speaker 3: from overall trade. So that's where our biases at the moment.
Speaker 3: And just really you know, wait, wait, wait, wait, wait
Speaker 3: and see.
Speaker 1: Well, I've got one last question before we wrap up.
Speaker 1: In your opinion, how is investing in emerging markets changed
Speaker 1: over the last twenty or so years.
Speaker 3: Yeah, I think the most significant change, and the indexes
Speaker 3: seem to change every couple of years is the role
Speaker 3: of the domestic investor. So you know, you're take in
Speaker 3: a market like India or Indonesia, you know, they are
Speaker 3: the main investors there are domestic you know, China, actually
Speaker 3: the main investor is domestic. It's just not in a
Speaker 3: very good confident mood at the moment. And that that
Speaker 3: that is, you know, a very very important point. And
Speaker 3: you know also from the debt markets as well. Ninety
Speaker 3: percent of Asian debt issuance is taken up by Asian investors,
Speaker 3: and it makes emerging markets much you know, more protected
Speaker 3: from international capital coming in and out. And I think
Speaker 3: that's a very very important point. So we tend to
Speaker 3: prefer to invest in those markets overall as an entity.
Speaker 3: And obviously it's a very differentiated market. The balance sheets
Speaker 3: are much better, I mean, even compared to the Taper
Speaker 3: tantrum years twenty thirteen, twenty fourteen, the current account balances
Speaker 3: of a are much better. The debt levels are lower,
Speaker 3: the inflation structural inflation is much lower. So they're in
Speaker 3: a much much better state than they were before. And
Speaker 3: that's been reflected in credit ratings and sovereign ratings. And
Speaker 3: then I think the opportunities are much more broader. It's
Speaker 3: not just a China story. But obviously China has a
Speaker 3: huge element. You know, if you've got in these domestic
Speaker 3: stories like India, like Indonesia, like the Philippines. We still
Speaker 3: have the cyclical commodity stories like Brazil, but now you've
Speaker 3: also got the the AI and tech stories like South
Speaker 3: Korea and Taiwan. And I think Japan coming back into
Speaker 3: the fold is very important as well, because there's a
Speaker 3: lot of links between career and Taiwan and Japan in
Speaker 3: that sort of supply chain. So yeah, I don't think
Speaker 3: you know much much more more positive in a medium
Speaker 3: term story. But I think at the end of the day,
Speaker 3: you've got to ask the question is em is underperformed.
Speaker 3: For the last ten years, the US has outperformed, you know,
Speaker 3: ten years before that, emerging markets performed. And it always
Speaker 3: goes down to our formula. The earnings came through. So
Speaker 3: you used to have eight to ten percent earnings twenty
Speaker 3: years ago for ten years and that led to good returns.
Speaker 3: If you look at the US since the nineteen forty five,
Speaker 3: you've had on average, you know, seven seven and a
Speaker 3: half percent earnings growth, seven to seven and a half
Speaker 3: nearly eight percent performance in the the US stock market.
Speaker 3: I mean, obviously in the last ten years with tech
Speaker 3: with AI recovering from k best than the rest of
Speaker 3: the world, those earnings and returns have been much better.
Speaker 3: But you know, we foresee it the next five to
Speaker 3: ten years in Asia, particularly where we're getting back to
Speaker 3: that eight to ten earnings growth without any real valuation
Speaker 3: lift supported by domestic demand, which is which is a
Speaker 3: positive story because you know, local investors put more money
Speaker 3: in their own markets, they take money out of their
Speaker 3: own bond markets. You know, they buy their growth stories.
Speaker 3: So yeah, the outlook, we have to get through obviously
Speaker 3: the race cycle, the election, but they're going forward there.
Speaker 3: We do see some tremendously good opportunities across emerging markets
Speaker 3: in Asia.
Speaker 1: Well, it'll be interesting to see what happens over the
Speaker 1: next five or ten years. Sean. I really want to
Speaker 1: thank you for joining us today.
Speaker 3: Look, it's been a pleasure. Thank you very much for
Speaker 3: giving me the opportunity to present.
Speaker 1: To you in Marvid. Thank you for being my cost
Speaker 1: Thank you.
Speaker 2: Those are great insights, Sean.
Speaker 1: Until our next episode, this is David Cole with Inside
Speaker 1: after h