October 8, 2024 • 36 mins
Countries in Asia make up the top echelon of the BI Emerging Markets Scorecard, based on factors such as price performance, breadth and fundamentals. In this episode of Bloomberg Intelligence’s Inside Active podcast, host David Cohne, BI mutual fund and active management analyst, and co-host Marvin Chen, BI senior Asia equity strategist, speak with Sean Taylor, chief investment officer of Matthews Asia and portfolio manager for the Matthews Emerging Markets Equity Active ETF (MEM). They discuss the firm’s four-stage process of evaluating countries and Matthews’ portfolio-construction system that looks at marginal contribution of active risk. They also talk about the impact of AI in Asia and the implications of US Federal Reserve policies on emerging markets.
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Speaker 1 (00:11):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
i lead mutual fund and Active Research at Bloomberg Intelligence.
Today my co host is Marvin Chen, Senior Asia Equity
strategist at Bloomberg Intelligence. Marvin, thank you for joining me
(00:32):
today as my co host.
Speaker 2 (00:34):
Thank you, David.
Speaker 1 (00:35):
So, Marvin, can you tell our listeners about the BI
Emerging Markets Equity Scorecard and what countries are currently on top?
Speaker 2 (00:43):
Yeah. The Emerging Market Equity Scorecard is a scorecard where
you rank very emerging markets across various factors such as
prize performance, breadth, as well as fundamentals and currency and
commodity exposure.
Speaker 1 (00:58):
We do this review quarterly.
Speaker 2 (00:59):
And currently Vietnam, while technically still not an emerging market yet,
sits the top of our scorecard as it ranks well
versus many of the emerging markets. But the broader message
for the scorecard is that you know, investors should focus
stay focused on Asia, with Turkey being the only non
Asian country within the top echelon of our scorecard. Amongst
(01:23):
major markets, Korea sits pretty well and the first half
outperformers such as India and Taiwan have slipped a few
notches due to valuation concerns. China is still at the
bottomwear scorecard. It has moved up a few slots, but
challenges are There's still challenges for the outlook and more
(01:45):
policy support is needed there.
Speaker 1 (01:48):
Great well, speaking of emerging markets, I'd like to welcome
Sean Taylor, chief investment officer of Matthews Asia and portfolio
manager for the firm specific Tiger Fund specific your active
ETF for Emerging Markets Equity Fund and the ETF as
well in the Emerging markets ex China Active ETF. Thank
you so much for joining the podcast.
Speaker 3 (02:09):
John Pleasure, thank you for being invited.
Speaker 1 (02:11):
So I'd like to begin by asking you how you
got your start in the business.
Speaker 3 (02:14):
Actually, I originally was in the military, having been brought
up abroad, and when I went to the business world
after business school, I was very interested in working in
in what I knew about, which was, you know, anything
(02:34):
non developed Middle East, Asia, Eastern Europe, and got the
opportunity to go and work on an Asian desk at
James Capele, who were at the time one of the
the main sort of Asian brokers, and I sort of
got in that way, and you know, it was very
fortunate that a lot of places that I had lived
(02:55):
in suddenly became markets. A bit like you know, talking
about Vietnam Vy going from not being an emerging market
to being one in the future. I was sort of
you know, they're in the Middle East and in Eastern Europe,
which was which was very interesting.
Speaker 1 (03:11):
Nice. Well, you know, one of the things we wanted
to talk about, or at least you know, definitely hear more about,
is the Matthews Emerging Markets Equity Active ETF, which is
the ticker simill em. Can you tell us the investment
process for this fund.
Speaker 3 (03:25):
Yeah, we've really got four stages of it. The first
principle is we think that the value of an equity
or the value of an equity index is a simple
formula of earnings plus a dividend translated into US dollars,
and then we give it a p rerating or a
(03:45):
D rating. You know, we have the four stage process. One,
we think countries matter, so we have a country target
based on that formula for every market. We then rank
those countries. We take an account volatility, so we get
you know, earning what's the best earnings growth, you know,
(04:06):
what's what's in the price of that earnings growth, and
we come up with a series of over neutral and underweights.
And then from the bottom up basis, we're very fortunate
to Matthews to have a team of country managers, people
that are focused were you know, we run a lot
of single country funds and ETFs that feed up into that,
(04:27):
and so our country teams give us the best ideas
and then the fund managers based on the fund put
the portfolio construction to work. We use a system called
marginal contribution of active risk, so we really beat to
adjust everything to make sure that we were taking you
(04:47):
intended positioning and we don't have any unintended overweights and underweights,
and that sets the sizes of the overweights and underweights,
so the country level at the stock level, and that
enables us to dial up the beta and dial down
the beta. And then finally we have an ongoing monitoring
(05:09):
process that happens and that that cycle that's that cycle continues.
Now we're probably a slightly differentiated thinking that countries matter,
but you know, if you just look at the facts
in an example this year, that the outperformance of Asia
relative to to Latin America, the outperformance of India relative
(05:30):
to China, the outperformance even in Latin America of Brazil
relative to Mexico. So at the end of the day,
we're picking stocks, but we have this country framework that
enables us to hopefully damp and risk or take the
opportunity of whether it's a you know, a good a
good country story. For instance, you know, we do across
(05:51):
many strategies have a non index overweight to Vietnam because
you know, we like the growth story there. In the
valuations we think of a lot more upside.
Speaker 1 (06:00):
So you know, you mentioned looking at countries and so
it's kind of top down. But when you're looking at
individual stocks, you know, in terms of fundamental analysis, what
do you look for, for instance, in company balance sheets?
Speaker 3 (06:14):
Yeah, you know, obviously depends on the growth state of
the company, But what we look at is whether the
balance sheet has enough the ability to fund that country
that company going forward that it doesn't need to go
for external finance. So either if it's a sort of
newer growth yer company, then it has the sources in
(06:36):
place that it knows where it's next growth is going
to come from, so that we have going down the
road to sustainable cash flow. And then those companies that
are mature that you know that the balance sheet is
good and that we have good cash flow. We think
cashflow goes into earnings is the most important thing because
what we're really looking for is the sustainability of earnings
and the sustainability of dividend streams within that.
Speaker 1 (07:01):
What about more on the qualitative side, do you look
at management teams? You know kind of how do you
evaluate them?
Speaker 3 (07:09):
Yeah, So one thing that we we do, and we've
it's always been the DNA of Matthews over the last
thirty years, is being on the ground. So we have
part of the team in Hong Kong, part of the
team in San Francisco, and you know, the San Francisco
side is very driven by what's happening in global tech
and using that knowledge base to you know, look at Asia.
(07:31):
You know, where are those trends being seen in Asia?
You know, for instance, the whole AI build, how that's
seen in the supply chain in areas and then in
Hong Kong, you know where we also cover maybe couple
a lot of the Asian markets. From here, it's really
been on the ground visiting companies. We have a huge
amount of fund managers traveling you know constantly and seeing companies,
(07:56):
and we place a really big emphasis on meeting management,
you know, both in the offices or on the ground
seeing the competitors and also with our you know esg team,
we do a lot of engagement with companies. So we
write to them on factors and we go and see
them and we attend a GMS and we think that's
(08:17):
very very important because although we have this country framework
where we think we can add value at a country
level by selecting countries, at the end of the day
we are buying companies and so we have to get
that balance. You know, we're really looking for the right
stop for the environment. But it's very important what the
what the management is up to. I mean, we could
(08:38):
go to a management that we've seen as you know,
not up to standard that we think is changing. So
you know, one of the engagement parts of engagement is
is you know, where we're seeing companies that are turnaround
where they are pricing in you know, an old situation,
but we do believe that you know, things are changing
and that change will affect one of the valuation that
(08:59):
people will pay for that company. But you know, more
importantly the fundamentals, the cash flows. Maybe they're getting rid
of you know, non core activities, they're becoming more more transparent.
That dividend policy, which could have been weak, is getting
much stronger. They're more aware about capital management. You know,
if we see situations like that, then that's a perfect
(09:20):
story that we like to look for. That's sort of
you know, I suppose a turnaround story.
Speaker 2 (09:24):
Yeah, Sean, you mentioned AI and tech. I just kind
of wanted to go into the themes you know, around
markets this year. You know, AI has been a big
theme for Asia. You know, Taiwan has outperformed on the
back of this, but now we're seeing some volatility. What's
review Is it, you know, time to rotate out of
this theme or does this have more legs to go
(09:48):
room to run? And you know is do you think
Southeast Asia is a shelter for kind of this tech
volatility that we've seen over the past month or so.
Speaker 3 (09:58):
Yeah, I think on the first question on AI, I
mean AI, I think is going to be a really
cool driver of Asia and emerging markets going forward, you know,
because I think at the moment, you know, it's all
about Ai going onto the computer and then it will
be going on to the hand said the humanoid. The
supply chain in particularly in Taiwan and even certain companies
(10:20):
in Malaysia, certain companies in Vietnam. You know, it's growing,
and the growth is you know, the capex is there
and the growth is there. And then you've also got
the semi side as well. So obviously career much more
affected by the semiconductor side. Short term, there is a pause.
I think, you know, we are seeing much more selectivity.
(10:41):
So actually we've lightened positions in Taiwan. We've really lightened
positions in career, much more on the domestic side of career.
But in the longer run, you know, we are still
invested in certain Taiwanese companies, but we've been a lot
more STOP companies. Specific it's a very alpha orientated because
we do think that you know, some stop's got overvalued
(11:03):
in the hype, and probably the earnings will disappoint, but
certainly the theme is there, and I think it's a
really important I think it's a really important driver for
Asia because you know, in the last five years. Probably
the debate has always been India's expensive, but we like it,
and the earnings are going China's cheap, but the earnings
aren't coming through. But actually there's so much more to
(11:26):
em and you know, the sort of the extra ai
the tech supply chain in North Asia is very very important.
I think it's gonna be a big driver of markets
going forward. And also actually the domestic demand story and
the sort of value up story and career has worked
pretty well. But Asian is probably my favorite place to
(11:49):
invest at the moment, and for a number of reasons.
One is it's always relative. You know, even China looks
relatively better when other markets don't look as good because
they've worked and China's still been a laggard, but Asiyan
has been a laggard. It's been a laggard because rates
in some markets have had to go up during this
(12:11):
this year, particularly Indonesia. The growth is coming through and
it will be the main beneficiary of interest rate policy
easing in the US. It's cheap, it's under owned, and
so you know it deserves a place on its own merit.
But it's even more interesting now where you know, we've
(12:34):
been taking money, taking profits from the North Asian area
and India, you know, is it's still a very solid market,
but it's looking quite expensive. You know, it's stead it's
still steadily going up, but you can't put all your
money in India in an emerging market or an asient
fund at the moment. So it's a great, great balance.
And within Asian Indonesia our favorite index country, and that's
(12:59):
probably the most sensitive to rates coming up. It's had
a little bit of a sort of policy vacuum because
of the handover from Jockovy to Provoa and that the
new president will be he will take over in October,
and so people are sort of wasting the cabinet and
you know the direction there, so that might cause a
(13:23):
bit of volatility, but you know, the growth is growth
story is very good. Rates will help that growth story.
Vietnam and as I mentioned earlier, remains our favorite Asian market,
but isn't in the index yet, so it depends on
the degree of how much we have invested in in ETFs.
And then Philippines I think is one behind it is
(13:45):
it's a bit less liquid, but it's becoming more interesting growth,
very cheap valuations, growth picking up Malayser has been a
very good story. It's already done pretty well this year,
so we're a little bit more selective there, but we
still like the market. And then Thailand, and actually Thailand's
had a pretty good run but having underperformed for a while,
(14:05):
but it was a very sudden movement when we had
a change in politics. So we we're a bit worried
about the growth in Thailand. Still it's not really coming through,
but we're just you know, really seeing how this political
change will affect that growth there. So that's probably the
market we're less convinced about.
Speaker 1 (14:27):
I know, Marvin's got more questions relating to countries and
things happening, but I just wanted to have one more
follow up. You mentioned valuations, you know, as part of
the process, and in you know, the last question, I
guess if you could dig deeper a little bit into
valuations as you know, what do you look at specifically
and you know, does it help when you're determined to
(14:49):
you know, decide to sell the position.
Speaker 3 (14:52):
Yeah, Well, we target price everything. We target price and index,
so we're not really top down investors in a way
that we just set t targets for country indexes. So
we will take MSCI India, which is essentially a collection
of all the earnings for those companies that are in
MSCI India and then all the valuations, and we set
targets at a country level, and we set every stock
(15:13):
we put in the portfolio, we set a target for
on a valuation and an earning spaces, and we track
those earnings all the time. It's very easy to track
earning's upgrades and earnings down grades, and that can obviously
sort of adjust. So you know, when we start to
reach our target prices, then that is a warning point.
(15:34):
So when we would change and now then it depends
obviously on the relative illness of how that target price
is relative to everything else in your portfolio and other
ideas coming in. But we have a very disciplined approach
on that. I mean, I'll give you an example. At
the beginning of the year, we increased our having been
very underway China. We increase positions in the end of
(15:55):
January to China because the market had really underperformed and
it was eight point five times earnings, and we thought
that there was sort of better news coming out from
the government property and actually the larger stocks in the
in the index when talking to the companies were you know,
we're going to have less subsidies. They were promising more
(16:16):
capital management in terms of higher paybacks, buybacks, and that
happened actually, and some of the larger stocks have have
done pretty well. We increased our positions there. But then
by the middle of May, the market had gone to
eleven and a half time's earnings, and we thought, given
that we hadn't seen that much of an economic recovery,
(16:37):
a lot of good news was priced in, so we
lightened up those positions, and you know, so that it
made it May, It does make a big difference. And
then when you have you know, on a on a
change of government for instance. I mean we went into
the beginning of the year a bit more cautious on
Mexico on valuations. Market was pricing in a very good
situation and we knew there was some election coming up.
(17:00):
But when the election came up, and you know, it
was obviously unfriendly to that, we thought to investors we
had to assign a lower pe for Mexico, you know,
depending on because of that political risk. On the other hand,
Brazil went down almost to six and a half seven
times earnings, with the sort of news on Mexico where
actually the situation wasn't as bad, and we took that
(17:22):
as an opportunity to increase our Brazilian exposure. And the
companies know that we had met on in Brazil. We're
not giving the same negativeness as the market, and so
we just sort there's a good upside there in our
target price that we weren't expecting Brazil to go back
to ten eleven times earnings, but certainly could go back
to sort of eight eight and a half times earnings.
(17:43):
And so that valuation is used really as a as
a reward risk tool, and it just it just sort
of tries to keep you safe. You look at it
every day, say what, what's what's priced? In Valuations alone
aren't aren't aren't a catalyst, but they are definitely a level.
(18:04):
You know, for instance, in China at the moment, you know,
the valuation of China is at eight point seven times
I think in the MSCI China, but that is you know,
looking at an earnings growth of about fourteen percent. Now,
given the macro data that's come through, you've seen a
couple of seal side houses in the last twenty four
(18:25):
hours take the China GDP number down. You know, you
could say that, you know, if that if the fourteen
percent growth of the consensus expecting was taken down to
six or seven, then obviously China's trading on eleven times
and so isn't so cheap. So you really have to
you have to balance the valuations with what's happening on
(18:46):
the earning side.
Speaker 2 (18:49):
Yeah, for China, you know, you after that rally we
saw earlier in this year, we're really back at square one,
you know, back at the eight nine times earnings level.
And you're right, I agree, it all comes down to catalysts.
Do do you guys see any catalysts on the horizon
for China.
Speaker 3 (19:07):
Look at the moment, we're focusing really on what are
the winners and losers from the situation in China, And
there are clear winners at a stock level, and there
are clear losers. They were pretty cautious on consumption. But
some of the some of the sort of e commerce
companies of the capital management are producing better earnings and
(19:28):
so actually within the earnings changes in China, there is
huge differentiation and that gives us a good opportunity being
on the ground. I think, you know, at the moment,
the government is probably a little bit more prepared to
see the situation declining because the word of deflation has
(19:51):
been sort of put up to the party and that
that's always a scary word. But I do think the
catalysts will take time. So I do think there will
be more support on the property side for China. I
do think we'll get more support on the demand side,
but I do think it will take time, so I
do not see an immediate catalyst. We also have the
(20:15):
presidential election happening in the US, which you depending on
which party wins, could affect you know, the economic situation
in China to particularly around around tariffs. Interest rates coming
down in the US actually will be a little bit
of a benefit for China because that eases China has
(20:36):
been had quite tight monetary policy. Actually, if you look
at where real interest rates are nowhere near the level
of Latin American real interest rates like Brazil or Indonesia,
but they are relatively high, and obviously when you've got
quite a weak economy that need they need to come down.
But I think the government has always been worried about
the level of the currency. So once you start to
(20:57):
see the dollar stabilize a little bit or maybe even
weakend again certain countries on rates coming down. That just
gives the Chinese monetary system and ability to cut rates.
But I think the real, real catalyst of China needs
is on the fiscal side, and we wouldn't really see
it happening in one big, you know, in one big
(21:18):
sort of trigger point. It will be incremental and probably
incrementally driven in the net between after the election and
going into next summer, after the Workers Council in Economic
Workers Council in December and then the two sessions in March.
Speaker 2 (21:37):
Yes, speaking of the you know, the FED interest rate
cut being a benefit for China, you know, how how
should we be positioning for the Fed the expected rate cuts,
you know, in terms of small caps versus large caps?
You know, you know we've seen the India small caps
really outperformed this year. Is that going to be boosted
by this you know, this cutting?
Speaker 3 (22:00):
Yeah? I think it's it's different things to all markets,
I think, I mean, I think the first thing is
is that you know, the FED cutting isn't automatically positive
for em It isn't automatically positive for EM currencies with
a weaker dollar. It depends on the growth outlook. So
the most benign environment for emerging markets in Asia is
(22:23):
when the FED is cutting, the dollar is weak, and
global growth is outpacing US growth. And so it really
comes down to why is the FED cutting? And so
you know, if the FED is cutting and we you
knowed the US economy is not going to a recession,
and even if it does, it's a shallow recession, then
(22:44):
that is pretty positive for markets because it's cutting and
it's going to help growth. If it's cutting because the
US economy is going into recession, then it's actually risk off.
It's positive for the dollar, it's not positive for global markets.
Our scenario is the FED is cutting, the US economy
(23:04):
is strong. US economy, even with rate cutting and the
slowdown in the US economy, is going to grow more
than Europe and Japan, but there are certain other so
countries in emerging markets that can grow more. So overall,
the international growth is not going to surpass US growth,
(23:24):
but emerging market growth will. And then it depends then
in that scenario, what's going to do well. So anything
that benefits from interest rate cuts. The normal domestic story,
you know, Latin America, particularly Brazil, as I am, a
great benefit, but in the past it's also been the
cyclical side of North Asia, the sort of semi side,
(23:48):
the hardware side in Taiwan and Korea, And as we
discussed you know a few minutes ago, that area is
relatively expensive having performed, so I think we'll get a
different rally this time. So I don't think it's a
great catalyst for Taiwan and career. It might even be
a reason for money to come moreover to some of
the more domestically driven, consumption driven markets. I think in India,
(24:13):
you know, it's pretty much neutral. I think India benefits
much more in my opinion, from the oil price coming down,
because that's one of the inflationary issues, but also inflation
in India very much depends on them monsoon, and that
seems to be okay. The small cap effect is not
(24:36):
a rate issue. It's the fact that you know, the
MSCI India about four or five years ago had roughly
seventy stocks in it. It now has roughly one hundred
and fifty stocks. And those newer stocks are more reflective
of the new India, you know, they're more reflective of
the cap expends, the infrastructure you know, they're moving into
(24:59):
two other air is the competition financials have got more competition,
the housing policy that's changing, and so I do think
that there will be more of a still continuing to
be a structural change in India. You know, the larger
sectors in India that did incredibly well, the financials, the
(25:21):
IT companies, they were more a reflection they were doing
well when India wasn't doing well. They were more a
reflection of those great good conglomerates that managed to keep
costs down and grow market share in a difficult environment,
take share from other companies. That's changing now you're getting
more competition coming in, You're getting a wider nests of
(25:42):
the economic growth, and so it's more of a balanced view,
and I think the larger sectors probably don't do as
well going forward, although in the short term there's a
huge valuation gap between you know, mid cap and small
cap and large cap at the moment, and the area
that's the that offers the most value in India is
(26:02):
actually the financials, the larger banks, because they've been they've
suffered from everyone taking money out of them and putting
them into the faster growing errors. We are seeing now
with Moody three point zero, and I think this is
a really important question to look at for the next
few years. Is I think international money will really embrace
India in the next year, but they're looking at the
(26:25):
valuations going Actually, you know, the area I want to
buy is really expensive, so they might buy these bigger
sectors just to get exposure there. And why I'd say, well,
we should see more international exposure to India is I
think what Mody three point zero did with the volatility
(26:46):
around the election was it showed that India was a democracy,
that there are checks and balances, and I think from
international investors given the situation over the last few years
in Russia and you know in China and other markets,
people prefer to buy democracies. And you know, you can't
(27:08):
really ignore the growth story of India all the fact
that it's going to be you know that it really
is the leading democracy and emerging markets, and the growth
rates probably a bit more balanced. I mean probably Underno.
D one point zero and two point zero you had
a real boost on infrastructure and you know milk Od's
(27:30):
viewers build it make in India and it will trickle
down to consumption. But one of the problems has been
is that only a certain part of society's got wealthier
at the top of the property market, the stock market,
but it hasn't really filtered down into the overall economy.
So it hasn't impacted GDP per capita as much. I say,
(27:52):
even China has over the last ten years, where you know,
the wealthy have got less wealthy, but the gdpeper capita
of the average person and has got wealthia. And so
I think now with Modi three point zero, there's going
to be a transition and a balance, and so I
think you'll see more focus on domestic demand, on consumption,
on help for the population. I don't think we'll go
(28:13):
back to the sort of handouts that this area is
not doing well, so we're going to hand out more support,
you know, because I think the Modi government really believed
that the best way of getting long term growth in
India is infrastructure, urbanization, a more efficiency, more service, more
(28:33):
manufacturing jobs, and so I do think that's a transition
going point. So I do think, you know that that
mid cap small cap bias in India might remain for
a while, and it's also supported by local funds. You know,
you see the amount of local money going into the
market every month that it's incredible, it's structural, and so
that's obviously been a very very big support, and they
(28:55):
prefer to buy these faster.
Speaker 2 (28:57):
Growing Yeah, speaking of democracies, just one last question for me.
You know, with the US elections and the potential for
more tariffs, you know, it's not really just a China issue.
Obviously China could be more exposed to further terrifikes, but
you know, it's really are we going to see a
(29:18):
more trend of deglobalization and how is that going to
impact Asia?
Speaker 3 (29:22):
Yeah? I think I think in one way, we we
we've been seeing that start. I mean, I don't I
don't believe in the longer run that there'll be a huge,
you know, true deglobalization because I just think, you know,
I think COVID showed us and the transport links across
the world that the world is pretty globalized already and
you can't really undo that, and so it's really difficult
(29:46):
to unwind these global global trade But I think the
emphasis will change. I think the emphasis has already changed.
I mean, I think when you look at the exports
of China, they haven't particularly gone down as a percentage
of global exports, but they've just gone different places, you know,
and you know, US imports have come from different places.
So I do think there'll be a rebalancing like that.
(30:08):
I mean, obviously, you know, trade tariffs. You know, if
Trump's talking about sixty percent tarifs to China, you know,
I think that you know, probably China is is more
immune to that than it was the first time around,
because it's obviously had this threat, it's preparing for it.
It's probably less of an impact on the market, but
it's obviously not good news. It's inflationary. You know, it's
(30:32):
not good news if tariffs and other areas come up
as well, and that's something that will what we know
we'll obviously have to impact, will impact into emerging market growth.
It will also impact probably rates coming down quicker. You know,
maybe that you know, if you've got that inflationary impact,
I mean, my my, my inkling would be that you know,
(30:55):
even if Trump got in, it wouldn't be as severe
as the talk as it has been in the past,
but it was obviously something that is that we're that
we're aware of. And I think that in that way,
you know, it makes it, you know. That's why we
really do prefer in this environment, particularly after the run
in South Korea and Taiwan, we really prefer those markets
(31:18):
that have really domestic demand and are very old economy
stories that you know already these economies are picking up
two years later after COVID. The banking system wasn't like
the US or the UK or Europe, where you know,
aggregate demand was kept in check by the government. You know,
aggregate demand fell in these countries. There weren't subsidies, there
(31:40):
wasn't much fiscal spending, so it's a slower recovery and
interest rates being cut in the US just helps that recovery.
And so that's really where we focused on the moment.
There much of that area is much more immune, much
more protected from overall trade. India is much more protected
from overall trade. So that's where our biases at the moment.
And just really you know, wait, wait, wait, wait, wait
(32:03):
and see.
Speaker 1 (32:05):
Well, I've got one last question before we wrap up.
In your opinion, how is investing in emerging markets changed
over the last twenty or so years.
Speaker 3 (32:17):
Yeah, I think the most significant change, and the indexes
seem to change every couple of years is the role
of the domestic investor. So you know, you're take in
a market like India or Indonesia, you know, they are
the main investors there are domestic you know, China, actually
(32:39):
the main investor is domestic. It's just not in a
very good confident mood at the moment. And that that
that is, you know, a very very important point. And
you know also from the debt markets as well. Ninety
percent of Asian debt issuance is taken up by Asian investors,
and it makes emerging markets much you know, more protected
(33:01):
from international capital coming in and out. And I think
that's a very very important point. So we tend to
prefer to invest in those markets overall as an entity.
And obviously it's a very differentiated market. The balance sheets
are much better, I mean, even compared to the Taper
(33:22):
tantrum years twenty thirteen, twenty fourteen, the current account balances
of a are much better. The debt levels are lower,
the inflation structural inflation is much lower. So they're in
a much much better state than they were before. And
that's been reflected in credit ratings and sovereign ratings. And
(33:42):
then I think the opportunities are much more broader. It's
not just a China story. But obviously China has a
huge element. You know, if you've got in these domestic
stories like India, like Indonesia, like the Philippines. We still
have the cyclical commodity stories like Brazil, but now you've
also got the the AI and tech stories like South
(34:04):
Korea and Taiwan. And I think Japan coming back into
the fold is very important as well, because there's a
lot of links between career and Taiwan and Japan in
that sort of supply chain. So yeah, I don't think
you know much much more more positive in a medium
term story. But I think at the end of the day,
you've got to ask the question is em is underperformed.
(34:26):
For the last ten years, the US has outperformed, you know,
ten years before that, emerging markets performed. And it always
goes down to our formula. The earnings came through. So
you used to have eight to ten percent earnings twenty
years ago for ten years and that led to good returns.
If you look at the US since the nineteen forty five,
you've had on average, you know, seven seven and a
(34:48):
half percent earnings growth, seven to seven and a half
nearly eight percent performance in the the US stock market.
I mean, obviously in the last ten years with tech
with AI recovering from k best than the rest of
the world, those earnings and returns have been much better.
But you know, we foresee it the next five to
ten years in Asia, particularly where we're getting back to
(35:10):
that eight to ten earnings growth without any real valuation
lift supported by domestic demand, which is which is a
positive story because you know, local investors put more money
in their own markets, they take money out of their
own bond markets. You know, they buy their growth stories.
(35:31):
So yeah, the outlook, we have to get through obviously
the race cycle, the election, but they're going forward there.
We do see some tremendously good opportunities across emerging markets
in Asia.
Speaker 1 (35:46):
Well, it'll be interesting to see what happens over the
next five or ten years. Sean. I really want to
thank you for joining us today.
Speaker 3 (35:52):
Look, it's been a pleasure. Thank you very much for
giving me the opportunity to present.
Speaker 1 (35:56):
To you in Marvid. Thank you for being my cost
Thank you.
Speaker 2 (36:00):
Those are great insights, Sean.
Speaker 1 (36:01):
Until our next episode, this is David Cole with Inside
after h
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
i lead mutual fund and Active Research at Bloomberg Intelligence.
Today my co host is Marvin Chen, Senior Asia Equity
strategist at Bloomberg Intelligence. Marvin, thank you for joining me
(00:32):
today as my co host.
Speaker 2 (00:34):
Thank you, David.
Speaker 1 (00:35):
So, Marvin, can you tell our listeners about the BI
Emerging Markets Equity Scorecard and what countries are currently on top?
Speaker 2 (00:43):
Yeah. The Emerging Market Equity Scorecard is a scorecard where
you rank very emerging markets across various factors such as
prize performance, breadth, as well as fundamentals and currency and
commodity exposure.
Speaker 1 (00:58):
We do this review quarterly.
Speaker 2 (00:59):
And currently Vietnam, while technically still not an emerging market yet,
sits the top of our scorecard as it ranks well
versus many of the emerging markets. But the broader message
for the scorecard is that you know, investors should focus
stay focused on Asia, with Turkey being the only non
Asian country within the top echelon of our scorecard. Amongst
(01:23):
major markets, Korea sits pretty well and the first half
outperformers such as India and Taiwan have slipped a few
notches due to valuation concerns. China is still at the
bottomwear scorecard. It has moved up a few slots, but
challenges are There's still challenges for the outlook and more
(01:45):
policy support is needed there.
Speaker 1 (01:48):
Great well, speaking of emerging markets, I'd like to welcome
Sean Taylor, chief investment officer of Matthews Asia and portfolio
manager for the firm specific Tiger Fund specific your active
ETF for Emerging Markets Equity Fund and the ETF as
well in the Emerging markets ex China Active ETF. Thank
you so much for joining the podcast.
Speaker 3 (02:09):
John Pleasure, thank you for being invited.
Speaker 1 (02:11):
So I'd like to begin by asking you how you
got your start in the business.
Speaker 3 (02:14):
Actually, I originally was in the military, having been brought
up abroad, and when I went to the business world
after business school, I was very interested in working in
in what I knew about, which was, you know, anything
(02:34):
non developed Middle East, Asia, Eastern Europe, and got the
opportunity to go and work on an Asian desk at
James Capele, who were at the time one of the
the main sort of Asian brokers, and I sort of
got in that way, and you know, it was very
fortunate that a lot of places that I had lived
(02:55):
in suddenly became markets. A bit like you know, talking
about Vietnam Vy going from not being an emerging market
to being one in the future. I was sort of
you know, they're in the Middle East and in Eastern Europe,
which was which was very interesting.
Speaker 1 (03:11):
Nice. Well, you know, one of the things we wanted
to talk about, or at least you know, definitely hear more about,
is the Matthews Emerging Markets Equity Active ETF, which is
the ticker simill em. Can you tell us the investment
process for this fund.
Speaker 3 (03:25):
Yeah, we've really got four stages of it. The first
principle is we think that the value of an equity
or the value of an equity index is a simple
formula of earnings plus a dividend translated into US dollars,
and then we give it a p rerating or a
(03:45):
D rating. You know, we have the four stage process. One,
we think countries matter, so we have a country target
based on that formula for every market. We then rank
those countries. We take an account volatility, so we get
you know, earning what's the best earnings growth, you know,
(04:06):
what's what's in the price of that earnings growth, and
we come up with a series of over neutral and underweights.
And then from the bottom up basis, we're very fortunate
to Matthews to have a team of country managers, people
that are focused were you know, we run a lot
of single country funds and ETFs that feed up into that,
(04:27):
and so our country teams give us the best ideas
and then the fund managers based on the fund put
the portfolio construction to work. We use a system called
marginal contribution of active risk, so we really beat to
adjust everything to make sure that we were taking you
(04:47):
intended positioning and we don't have any unintended overweights and underweights,
and that sets the sizes of the overweights and underweights,
so the country level at the stock level, and that
enables us to dial up the beta and dial down
the beta. And then finally we have an ongoing monitoring
(05:09):
process that happens and that that cycle that's that cycle continues.
Now we're probably a slightly differentiated thinking that countries matter,
but you know, if you just look at the facts
in an example this year, that the outperformance of Asia
relative to to Latin America, the outperformance of India relative
(05:30):
to China, the outperformance even in Latin America of Brazil
relative to Mexico. So at the end of the day,
we're picking stocks, but we have this country framework that
enables us to hopefully damp and risk or take the
opportunity of whether it's a you know, a good a
good country story. For instance, you know, we do across
(05:51):
many strategies have a non index overweight to Vietnam because
you know, we like the growth story there. In the
valuations we think of a lot more upside.
Speaker 1 (06:00):
So you know, you mentioned looking at countries and so
it's kind of top down. But when you're looking at
individual stocks, you know, in terms of fundamental analysis, what
do you look for, for instance, in company balance sheets?
Speaker 3 (06:14):
Yeah, you know, obviously depends on the growth state of
the company, But what we look at is whether the
balance sheet has enough the ability to fund that country
that company going forward that it doesn't need to go
for external finance. So either if it's a sort of
newer growth yer company, then it has the sources in
(06:36):
place that it knows where it's next growth is going
to come from, so that we have going down the
road to sustainable cash flow. And then those companies that
are mature that you know that the balance sheet is
good and that we have good cash flow. We think
cashflow goes into earnings is the most important thing because
what we're really looking for is the sustainability of earnings
and the sustainability of dividend streams within that.
Speaker 1 (07:01):
What about more on the qualitative side, do you look
at management teams? You know kind of how do you
evaluate them?
Speaker 3 (07:09):
Yeah, So one thing that we we do, and we've
it's always been the DNA of Matthews over the last
thirty years, is being on the ground. So we have
part of the team in Hong Kong, part of the
team in San Francisco, and you know, the San Francisco
side is very driven by what's happening in global tech
and using that knowledge base to you know, look at Asia.
(07:31):
You know, where are those trends being seen in Asia?
You know, for instance, the whole AI build, how that's
seen in the supply chain in areas and then in
Hong Kong, you know where we also cover maybe couple
a lot of the Asian markets. From here, it's really
been on the ground visiting companies. We have a huge
amount of fund managers traveling you know constantly and seeing companies,
(07:56):
and we place a really big emphasis on meeting management,
you know, both in the offices or on the ground
seeing the competitors and also with our you know esg team,
we do a lot of engagement with companies. So we
write to them on factors and we go and see
them and we attend a GMS and we think that's
(08:17):
very very important because although we have this country framework
where we think we can add value at a country
level by selecting countries, at the end of the day
we are buying companies and so we have to get
that balance. You know, we're really looking for the right
stop for the environment. But it's very important what the
what the management is up to. I mean, we could
(08:38):
go to a management that we've seen as you know,
not up to standard that we think is changing. So
you know, one of the engagement parts of engagement is
is you know, where we're seeing companies that are turnaround
where they are pricing in you know, an old situation,
but we do believe that you know, things are changing
and that change will affect one of the valuation that
(08:59):
people will pay for that company. But you know, more
importantly the fundamentals, the cash flows. Maybe they're getting rid
of you know, non core activities, they're becoming more more transparent.
That dividend policy, which could have been weak, is getting
much stronger. They're more aware about capital management. You know,
if we see situations like that, then that's a perfect
(09:20):
story that we like to look for. That's sort of
you know, I suppose a turnaround story.
Speaker 2 (09:24):
Yeah, Sean, you mentioned AI and tech. I just kind
of wanted to go into the themes you know, around
markets this year. You know, AI has been a big
theme for Asia. You know, Taiwan has outperformed on the
back of this, but now we're seeing some volatility. What's
review Is it, you know, time to rotate out of
this theme or does this have more legs to go
(09:48):
room to run? And you know is do you think
Southeast Asia is a shelter for kind of this tech
volatility that we've seen over the past month or so.
Speaker 3 (09:58):
Yeah, I think on the first question on AI, I
mean AI, I think is going to be a really
cool driver of Asia and emerging markets going forward, you know,
because I think at the moment, you know, it's all
about Ai going onto the computer and then it will
be going on to the hand said the humanoid. The
supply chain in particularly in Taiwan and even certain companies
(10:20):
in Malaysia, certain companies in Vietnam. You know, it's growing,
and the growth is you know, the capex is there
and the growth is there. And then you've also got
the semi side as well. So obviously career much more
affected by the semiconductor side. Short term, there is a pause.
I think, you know, we are seeing much more selectivity.
(10:41):
So actually we've lightened positions in Taiwan. We've really lightened
positions in career, much more on the domestic side of career.
But in the longer run, you know, we are still
invested in certain Taiwanese companies, but we've been a lot
more STOP companies. Specific it's a very alpha orientated because
we do think that you know, some stop's got overvalued
(11:03):
in the hype, and probably the earnings will disappoint, but
certainly the theme is there, and I think it's a
really important I think it's a really important driver for
Asia because you know, in the last five years. Probably
the debate has always been India's expensive, but we like it,
and the earnings are going China's cheap, but the earnings
aren't coming through. But actually there's so much more to
(11:26):
em and you know, the sort of the extra ai
the tech supply chain in North Asia is very very important.
I think it's gonna be a big driver of markets
going forward. And also actually the domestic demand story and
the sort of value up story and career has worked
pretty well. But Asian is probably my favorite place to
(11:49):
invest at the moment, and for a number of reasons.
One is it's always relative. You know, even China looks
relatively better when other markets don't look as good because
they've worked and China's still been a laggard, but Asiyan
has been a laggard. It's been a laggard because rates
in some markets have had to go up during this
(12:11):
this year, particularly Indonesia. The growth is coming through and
it will be the main beneficiary of interest rate policy
easing in the US. It's cheap, it's under owned, and
so you know it deserves a place on its own merit.
But it's even more interesting now where you know, we've
(12:34):
been taking money, taking profits from the North Asian area
and India, you know, is it's still a very solid market,
but it's looking quite expensive. You know, it's stead it's
still steadily going up, but you can't put all your
money in India in an emerging market or an asient
fund at the moment. So it's a great, great balance.
And within Asian Indonesia our favorite index country, and that's
(12:59):
probably the most sensitive to rates coming up. It's had
a little bit of a sort of policy vacuum because
of the handover from Jockovy to Provoa and that the
new president will be he will take over in October,
and so people are sort of wasting the cabinet and
you know the direction there, so that might cause a
(13:23):
bit of volatility, but you know, the growth is growth
story is very good. Rates will help that growth story.
Vietnam and as I mentioned earlier, remains our favorite Asian market,
but isn't in the index yet, so it depends on
the degree of how much we have invested in in ETFs.
And then Philippines I think is one behind it is
(13:45):
it's a bit less liquid, but it's becoming more interesting growth,
very cheap valuations, growth picking up Malayser has been a
very good story. It's already done pretty well this year,
so we're a little bit more selective there, but we
still like the market. And then Thailand, and actually Thailand's
had a pretty good run but having underperformed for a while,
(14:05):
but it was a very sudden movement when we had
a change in politics. So we we're a bit worried
about the growth in Thailand. Still it's not really coming through,
but we're just you know, really seeing how this political
change will affect that growth there. So that's probably the
market we're less convinced about.
Speaker 1 (14:27):
I know, Marvin's got more questions relating to countries and
things happening, but I just wanted to have one more
follow up. You mentioned valuations, you know, as part of
the process, and in you know, the last question, I
guess if you could dig deeper a little bit into
valuations as you know, what do you look at specifically
and you know, does it help when you're determined to
(14:49):
you know, decide to sell the position.
Speaker 3 (14:52):
Yeah, Well, we target price everything. We target price and index,
so we're not really top down investors in a way
that we just set t targets for country indexes. So
we will take MSCI India, which is essentially a collection
of all the earnings for those companies that are in
MSCI India and then all the valuations, and we set
targets at a country level, and we set every stock
(15:13):
we put in the portfolio, we set a target for
on a valuation and an earning spaces, and we track
those earnings all the time. It's very easy to track
earning's upgrades and earnings down grades, and that can obviously
sort of adjust. So you know, when we start to
reach our target prices, then that is a warning point.
(15:34):
So when we would change and now then it depends
obviously on the relative illness of how that target price
is relative to everything else in your portfolio and other
ideas coming in. But we have a very disciplined approach
on that. I mean, I'll give you an example. At
the beginning of the year, we increased our having been
very underway China. We increase positions in the end of
(15:55):
January to China because the market had really underperformed and
it was eight point five times earnings, and we thought
that there was sort of better news coming out from
the government property and actually the larger stocks in the
in the index when talking to the companies were you know,
we're going to have less subsidies. They were promising more
(16:16):
capital management in terms of higher paybacks, buybacks, and that
happened actually, and some of the larger stocks have have
done pretty well. We increased our positions there. But then
by the middle of May, the market had gone to
eleven and a half time's earnings, and we thought, given
that we hadn't seen that much of an economic recovery,
(16:37):
a lot of good news was priced in, so we
lightened up those positions, and you know, so that it
made it May, It does make a big difference. And
then when you have you know, on a on a
change of government for instance. I mean we went into
the beginning of the year a bit more cautious on
Mexico on valuations. Market was pricing in a very good
situation and we knew there was some election coming up.
(17:00):
But when the election came up, and you know, it
was obviously unfriendly to that, we thought to investors we
had to assign a lower pe for Mexico, you know,
depending on because of that political risk. On the other hand,
Brazil went down almost to six and a half seven
times earnings, with the sort of news on Mexico where
actually the situation wasn't as bad, and we took that
(17:22):
as an opportunity to increase our Brazilian exposure. And the
companies know that we had met on in Brazil. We're
not giving the same negativeness as the market, and so
we just sort there's a good upside there in our
target price that we weren't expecting Brazil to go back
to ten eleven times earnings, but certainly could go back
to sort of eight eight and a half times earnings.
(17:43):
And so that valuation is used really as a as
a reward risk tool, and it just it just sort
of tries to keep you safe. You look at it
every day, say what, what's what's priced? In Valuations alone
aren't aren't aren't a catalyst, but they are definitely a level.
(18:04):
You know, for instance, in China at the moment, you know,
the valuation of China is at eight point seven times
I think in the MSCI China, but that is you know,
looking at an earnings growth of about fourteen percent. Now,
given the macro data that's come through, you've seen a
couple of seal side houses in the last twenty four
(18:25):
hours take the China GDP number down. You know, you
could say that, you know, if that if the fourteen
percent growth of the consensus expecting was taken down to
six or seven, then obviously China's trading on eleven times
and so isn't so cheap. So you really have to
you have to balance the valuations with what's happening on
(18:46):
the earning side.
Speaker 2 (18:49):
Yeah, for China, you know, you after that rally we
saw earlier in this year, we're really back at square one,
you know, back at the eight nine times earnings level.
And you're right, I agree, it all comes down to catalysts.
Do do you guys see any catalysts on the horizon
for China.
Speaker 3 (19:07):
Look at the moment, we're focusing really on what are
the winners and losers from the situation in China, And
there are clear winners at a stock level, and there
are clear losers. They were pretty cautious on consumption. But
some of the some of the sort of e commerce
companies of the capital management are producing better earnings and
(19:28):
so actually within the earnings changes in China, there is
huge differentiation and that gives us a good opportunity being
on the ground. I think, you know, at the moment,
the government is probably a little bit more prepared to
see the situation declining because the word of deflation has
(19:51):
been sort of put up to the party and that
that's always a scary word. But I do think the
catalysts will take time. So I do think there will
be more support on the property side for China. I
do think we'll get more support on the demand side,
but I do think it will take time, so I
do not see an immediate catalyst. We also have the
(20:15):
presidential election happening in the US, which you depending on
which party wins, could affect you know, the economic situation
in China to particularly around around tariffs. Interest rates coming
down in the US actually will be a little bit
of a benefit for China because that eases China has
(20:36):
been had quite tight monetary policy. Actually, if you look
at where real interest rates are nowhere near the level
of Latin American real interest rates like Brazil or Indonesia,
but they are relatively high, and obviously when you've got
quite a weak economy that need they need to come down.
But I think the government has always been worried about
the level of the currency. So once you start to
(20:57):
see the dollar stabilize a little bit or maybe even
weakend again certain countries on rates coming down. That just
gives the Chinese monetary system and ability to cut rates.
But I think the real, real catalyst of China needs
is on the fiscal side, and we wouldn't really see
it happening in one big, you know, in one big
(21:18):
sort of trigger point. It will be incremental and probably
incrementally driven in the net between after the election and
going into next summer, after the Workers Council in Economic
Workers Council in December and then the two sessions in March.
Speaker 2 (21:37):
Yes, speaking of the you know, the FED interest rate
cut being a benefit for China, you know, how how
should we be positioning for the Fed the expected rate cuts,
you know, in terms of small caps versus large caps?
You know, you know we've seen the India small caps
really outperformed this year. Is that going to be boosted
by this you know, this cutting?
Speaker 3 (22:00):
Yeah? I think it's it's different things to all markets,
I think, I mean, I think the first thing is
is that you know, the FED cutting isn't automatically positive
for em It isn't automatically positive for EM currencies with
a weaker dollar. It depends on the growth outlook. So
the most benign environment for emerging markets in Asia is
(22:23):
when the FED is cutting, the dollar is weak, and
global growth is outpacing US growth. And so it really
comes down to why is the FED cutting? And so
you know, if the FED is cutting and we you
knowed the US economy is not going to a recession,
and even if it does, it's a shallow recession, then
(22:44):
that is pretty positive for markets because it's cutting and
it's going to help growth. If it's cutting because the
US economy is going into recession, then it's actually risk off.
It's positive for the dollar, it's not positive for global markets.
Our scenario is the FED is cutting, the US economy
(23:04):
is strong. US economy, even with rate cutting and the
slowdown in the US economy, is going to grow more
than Europe and Japan, but there are certain other so
countries in emerging markets that can grow more. So overall,
the international growth is not going to surpass US growth,
(23:24):
but emerging market growth will. And then it depends then
in that scenario, what's going to do well. So anything
that benefits from interest rate cuts. The normal domestic story,
you know, Latin America, particularly Brazil, as I am, a
great benefit, but in the past it's also been the
cyclical side of North Asia, the sort of semi side,
(23:48):
the hardware side in Taiwan and Korea, And as we
discussed you know a few minutes ago, that area is
relatively expensive having performed, so I think we'll get a
different rally this time. So I don't think it's a
great catalyst for Taiwan and career. It might even be
a reason for money to come moreover to some of
the more domestically driven, consumption driven markets. I think in India,
(24:13):
you know, it's pretty much neutral. I think India benefits
much more in my opinion, from the oil price coming down,
because that's one of the inflationary issues, but also inflation
in India very much depends on them monsoon, and that
seems to be okay. The small cap effect is not
(24:36):
a rate issue. It's the fact that you know, the
MSCI India about four or five years ago had roughly
seventy stocks in it. It now has roughly one hundred
and fifty stocks. And those newer stocks are more reflective
of the new India, you know, they're more reflective of
the cap expends, the infrastructure you know, they're moving into
(24:59):
two other air is the competition financials have got more competition,
the housing policy that's changing, and so I do think
that there will be more of a still continuing to
be a structural change in India. You know, the larger
sectors in India that did incredibly well, the financials, the
(25:21):
IT companies, they were more a reflection they were doing
well when India wasn't doing well. They were more a
reflection of those great good conglomerates that managed to keep
costs down and grow market share in a difficult environment,
take share from other companies. That's changing now you're getting
more competition coming in, You're getting a wider nests of
(25:42):
the economic growth, and so it's more of a balanced view,
and I think the larger sectors probably don't do as
well going forward, although in the short term there's a
huge valuation gap between you know, mid cap and small
cap and large cap at the moment, and the area
that's the that offers the most value in India is
(26:02):
actually the financials, the larger banks, because they've been they've
suffered from everyone taking money out of them and putting
them into the faster growing errors. We are seeing now
with Moody three point zero, and I think this is
a really important question to look at for the next
few years. Is I think international money will really embrace
India in the next year, but they're looking at the
(26:25):
valuations going Actually, you know, the area I want to
buy is really expensive, so they might buy these bigger
sectors just to get exposure there. And why I'd say, well,
we should see more international exposure to India is I
think what Mody three point zero did with the volatility
(26:46):
around the election was it showed that India was a democracy,
that there are checks and balances, and I think from
international investors given the situation over the last few years
in Russia and you know in China and other markets,
people prefer to buy democracies. And you know, you can't
(27:08):
really ignore the growth story of India all the fact
that it's going to be you know that it really
is the leading democracy and emerging markets, and the growth
rates probably a bit more balanced. I mean probably Underno.
D one point zero and two point zero you had
a real boost on infrastructure and you know milk Od's
(27:30):
viewers build it make in India and it will trickle
down to consumption. But one of the problems has been
is that only a certain part of society's got wealthier
at the top of the property market, the stock market,
but it hasn't really filtered down into the overall economy.
So it hasn't impacted GDP per capita as much. I say,
(27:52):
even China has over the last ten years, where you know,
the wealthy have got less wealthy, but the gdpeper capita
of the average person and has got wealthia. And so
I think now with Modi three point zero, there's going
to be a transition and a balance, and so I
think you'll see more focus on domestic demand, on consumption,
on help for the population. I don't think we'll go
(28:13):
back to the sort of handouts that this area is
not doing well, so we're going to hand out more support,
you know, because I think the Modi government really believed
that the best way of getting long term growth in
India is infrastructure, urbanization, a more efficiency, more service, more
(28:33):
manufacturing jobs, and so I do think that's a transition
going point. So I do think, you know that that
mid cap small cap bias in India might remain for
a while, and it's also supported by local funds. You know,
you see the amount of local money going into the
market every month that it's incredible, it's structural, and so
that's obviously been a very very big support, and they
(28:55):
prefer to buy these faster.
Speaker 2 (28:57):
Growing Yeah, speaking of democracies, just one last question for me.
You know, with the US elections and the potential for
more tariffs, you know, it's not really just a China issue.
Obviously China could be more exposed to further terrifikes, but
you know, it's really are we going to see a
(29:18):
more trend of deglobalization and how is that going to
impact Asia?
Speaker 3 (29:22):
Yeah? I think I think in one way, we we
we've been seeing that start. I mean, I don't I
don't believe in the longer run that there'll be a huge,
you know, true deglobalization because I just think, you know,
I think COVID showed us and the transport links across
the world that the world is pretty globalized already and
you can't really undo that, and so it's really difficult
(29:46):
to unwind these global global trade But I think the
emphasis will change. I think the emphasis has already changed.
I mean, I think when you look at the exports
of China, they haven't particularly gone down as a percentage
of global exports, but they've just gone different places, you know,
and you know, US imports have come from different places.
So I do think there'll be a rebalancing like that.
(30:08):
I mean, obviously, you know, trade tariffs. You know, if
Trump's talking about sixty percent tarifs to China, you know,
I think that you know, probably China is is more
immune to that than it was the first time around,
because it's obviously had this threat, it's preparing for it.
It's probably less of an impact on the market, but
it's obviously not good news. It's inflationary. You know, it's
(30:32):
not good news if tariffs and other areas come up
as well, and that's something that will what we know
we'll obviously have to impact, will impact into emerging market growth.
It will also impact probably rates coming down quicker. You know,
maybe that you know, if you've got that inflationary impact,
I mean, my my, my inkling would be that you know,
(30:55):
even if Trump got in, it wouldn't be as severe
as the talk as it has been in the past,
but it was obviously something that is that we're that
we're aware of. And I think that in that way,
you know, it makes it, you know. That's why we
really do prefer in this environment, particularly after the run
in South Korea and Taiwan, we really prefer those markets
(31:18):
that have really domestic demand and are very old economy
stories that you know already these economies are picking up
two years later after COVID. The banking system wasn't like
the US or the UK or Europe, where you know,
aggregate demand was kept in check by the government. You know,
aggregate demand fell in these countries. There weren't subsidies, there
(31:40):
wasn't much fiscal spending, so it's a slower recovery and
interest rates being cut in the US just helps that recovery.
And so that's really where we focused on the moment.
There much of that area is much more immune, much
more protected from overall trade. India is much more protected
from overall trade. So that's where our biases at the moment.
And just really you know, wait, wait, wait, wait, wait
(32:03):
and see.
Speaker 1 (32:05):
Well, I've got one last question before we wrap up.
In your opinion, how is investing in emerging markets changed
over the last twenty or so years.
Speaker 3 (32:17):
Yeah, I think the most significant change, and the indexes
seem to change every couple of years is the role
of the domestic investor. So you know, you're take in
a market like India or Indonesia, you know, they are
the main investors there are domestic you know, China, actually
(32:39):
the main investor is domestic. It's just not in a
very good confident mood at the moment. And that that
that is, you know, a very very important point. And
you know also from the debt markets as well. Ninety
percent of Asian debt issuance is taken up by Asian investors,
and it makes emerging markets much you know, more protected
(33:01):
from international capital coming in and out. And I think
that's a very very important point. So we tend to
prefer to invest in those markets overall as an entity.
And obviously it's a very differentiated market. The balance sheets
are much better, I mean, even compared to the Taper
(33:22):
tantrum years twenty thirteen, twenty fourteen, the current account balances
of a are much better. The debt levels are lower,
the inflation structural inflation is much lower. So they're in
a much much better state than they were before. And
that's been reflected in credit ratings and sovereign ratings. And
(33:42):
then I think the opportunities are much more broader. It's
not just a China story. But obviously China has a
huge element. You know, if you've got in these domestic
stories like India, like Indonesia, like the Philippines. We still
have the cyclical commodity stories like Brazil, but now you've
also got the the AI and tech stories like South
(34:04):
Korea and Taiwan. And I think Japan coming back into
the fold is very important as well, because there's a
lot of links between career and Taiwan and Japan in
that sort of supply chain. So yeah, I don't think
you know much much more more positive in a medium
term story. But I think at the end of the day,
you've got to ask the question is em is underperformed.
(34:26):
For the last ten years, the US has outperformed, you know,
ten years before that, emerging markets performed. And it always
goes down to our formula. The earnings came through. So
you used to have eight to ten percent earnings twenty
years ago for ten years and that led to good returns.
If you look at the US since the nineteen forty five,
you've had on average, you know, seven seven and a
(34:48):
half percent earnings growth, seven to seven and a half
nearly eight percent performance in the the US stock market.
I mean, obviously in the last ten years with tech
with AI recovering from k best than the rest of
the world, those earnings and returns have been much better.
But you know, we foresee it the next five to
ten years in Asia, particularly where we're getting back to
(35:10):
that eight to ten earnings growth without any real valuation
lift supported by domestic demand, which is which is a
positive story because you know, local investors put more money
in their own markets, they take money out of their
own bond markets. You know, they buy their growth stories.
(35:31):
So yeah, the outlook, we have to get through obviously
the race cycle, the election, but they're going forward there.
We do see some tremendously good opportunities across emerging markets
in Asia.
Speaker 1 (35:46):
Well, it'll be interesting to see what happens over the
next five or ten years. Sean. I really want to
thank you for joining us today.
Speaker 3 (35:52):
Look, it's been a pleasure. Thank you very much for
giving me the opportunity to present.
Speaker 1 (35:56):
To you in Marvid. Thank you for being my cost
Thank you.
Speaker 2 (36:00):
Those are great insights, Sean.
Speaker 1 (36:01):
Until our next episode, this is David Cole with Inside
after h
Host
Gina Martin Adams
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