June 5, 2025 • 37 mins
The global investment landscape is shifting beneath our feet, yet most investors remain fixated on US markets. Rohit Goel, Partner and Head of Global Macro at Breakout Capital, reveals why this myopia could prove costly in the years ahead.
Rohit drives home an alarming point: US fiscal deficits running at 6.5-7% of GDP during economic expansion represent an understated risk that markets have largely ignored. "If it is any other country on this planet, you would see a reaction, whether in bond yields or currency," he explains. This fiscal vulnerability could eventually force global investors to demand higher risk premiums on US assets, catalyzing capital flows toward international alternatives.
Where might this capital flow? Rohit points to markets starved of investment for fifteen years – Europe, Japan, and particularly emerging markets. Latin America stands at an inflection point with elections potentially delivering reform-minded leadership across major economies. Poland's investment-focused policies create another bright spot, while frontier markets from Nigeria to Sri Lanka implement meaningful reforms after pandemic-era financing constraints forced hard choices.
Perhaps most valuable is Rohit's framework for emerging market investing: "In emerging markets, 65% of returns are attributable to country selection." Unlike developed markets where sector selection drives performance, getting the country right is paramount in emerging spaces. And while liquidity remains challenging, patient investors with two-to-five-year horizons stand to benefit as capital eventually follows performance.
Rohit also dispels a common misconception about dollar cycles. The currency's likely depreciation over the next several years represents a normal economic cycle unrelated to reserve currency status. Since 1975, the dollar has experienced multiple significant bear markets without losing its position in the global financial architecture.
For investors willing to look beyond US borders, the coming years may offer extraordinary opportunities in markets long overlooked by global capital. The question is whether you'll position yourself ahead of this potential sea change or chase it after it's already underway.
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You and your team will race across t
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
The way we look at portfolio construction is get
the countries right at all ofthese levels.
The second part is look onceyou get the country right.
Question is how much you can.
A how much you should allocateand B how much you can
realistically allocate.
The truth of the matter is that, given the last 15 years, many
of these markets didunderperform and foreign capital
(00:21):
did go out right.
So, given this kind of ascenario, the actual liquidity
on ground is quite weak, right?
So even if you want to deploy alot of capital, it's
realistically not that feasible.
But the way around is twofold,right?
One, you look at these marketsfrom a long-term perspective.
In any case, it's verydifficult to trade in and out of
(00:41):
emerging markets.
So the view is, if you want toinvest in these markets, you
should have a two to five yearview.
And that's how you play it,because it's very difficult to
figure out the exact time whenthe themes will turn.
But the trend is in the rightdirection.
Speaker 2 (00:56):
My name is Michael Guy, a publisher of the Lead Lag
Report.
This is Lead Lag Live.
Joining me here is Rohit Gohale.
Rohit, the first time you're inour chatting.
I know we rescheduled this afew times, but introduce
yourself to the audience to memore formally.
Who are you, what's yourbackground, what have you done
throughout your career and whatare you doing currently?
Sure.
Speaker 1 (01:14):
Thank you so much for having me, michael.
It's been a long time coming.
I work with Breakout Capital.
I'm a partner here and head ofGlobal Macro.
My job is all things globalmacro and work on global
thematics as well as countryselection, so I'm quite deeply
involved.
We do invest in emergingmarkets, but my sort of analysis
(01:34):
spans beyond that.
Prior to this, I used to workwith the IMF and we used to
publish the global financialstability report and I used to
collate some of the sectionsthere.
So that was the job where I hadto look at the glass half empty
, and now I also have to look atthe glass half full.
So this is quite exciting.
(01:54):
Lastly, beyond the day job, Iam quite involved with CFA.
I'm a vice chair of theinternational investing group as
well as Bretton Woods committee.
I'm a big fan of Michael.
I'm quite excited to see wherethe conversation goes.
Speaker 2 (02:07):
All right.
So you mentioned global macro.
That's a term that's thrown outa lot.
I think we should go basic anddefine what exactly global macro
means.
Speaker 1 (02:13):
Sure?
No, basically look, ultimatelywe invest in emerging markets,
and for investing in emergingmarkets, you do need to have a
view on global fixed income,which includes US fixed income,
which includes the view ondollar, which includes the view
on individual countries morebroadly as well.
So that's what I mean by globalmacro.
The work span basicallyincludes more 30,000 feet
(02:38):
research, a la what we used todo at IMF, which pertains more
at the intersection of macro aswell as policy, and then,
ultimately, we do manage aportfolio right.
So it's an intersection of, Iwould say, macro and markets.
So that's what I meant byglobal macro, looking at US in
particular, but also alldeveloped and emerging markets.
Speaker 2 (03:00):
And obviously it's being aware of different asset
classes and sort of interactionsof different parts of the
marketplace.
And there are times when themarket is very much in sync in
terms of macro, sort of givingyou the same message across
multiple asset classes and thereare times, like now, when
there's a lot of conflictingsignals and typically when there
(03:24):
are conflicting signals, youcan argue that risk is perhaps
more elevated because there'sconfusion in the marketplace as
to what comes next.
Let's talk about risk.
Let's talk about what you thinkthe marketplace has right about
risk and what the marketplaceis missing about current risks.
Speaker 1 (03:33):
I mean, I think one of the I would say it's almost
like a common answer, like onetopic which keeps coming back
for all our conversationswhether you're having that with
policymakers or the sell side orthe buy side forums is that
ultimately, look, we areinvesting in global markets.
Us fixed income markets and UStreasury yields ultimately form
the bare bone of how we price inthese assets, right?
(03:55):
So these conversations where USfiscal deficits will go, how
important US yields are, wherethat trend will go it occupies a
ton of mind space.
But when we look at the market,I think that's the most
understated risk out there.
A lot of the conversation stillrevolves around tweets, what
happens in the last, uh, coupleof weeks, so on and so forth.
(04:17):
But more structurally speakingand that's what we sort of do
take a back seat and look at thebig picture, structural trends,
rather than forecasting monthlyor quarterly trends.
You do see that ultimately theblack swan event could be the US
yields.
We have seen bond vigilantes.
Obviously, emerging marketshave always been in the
(04:38):
forefront of that.
It did come to Europe as well.
Then we had the incident withUK.
Us obviously continues to sortof elude those issues, partly
because we have the exorbitantprivilege of dollar being dollar
.
But ultimately, if you look atthe trends, irrespective of how
effective Doge has been or nothas been, the reality is that
the fiscal deficits are throughthe roof and this is in a
(05:01):
pro-cyclical manner where it'slike 6.5-7% of GDP.
Imagine if we enter arecessionary time.
Then we can very easily imaginethese expanding to 8.5-9% of
GDP.
And if it is any other countryon this planet, you would see a
reaction, whether it is in bondyields or it is in the currency.
Us, for now, has been sort ofeluding that 10-year yields
(05:22):
continues to bob around.
But if you look underneath, wedo see that there are signs
building up that can actuallysurprise quite negatively.
Speaker 2 (05:30):
There used to be this I forget who said it, I think
it was Roosevelt or somebody.
He said something along thelines of you can always count on
America to do the right thingwhen all other options are
exhausted, or something alongthose lines.
Speaker 1 (05:41):
I think that's true.
I would say look, I mean, I'vebeen doing it for 15 years now
and that's the ultimate answer,and not just for US, I would say
for all countries in particular, the time when they actually do
the thing, the right thing, iswhen the back is against the
wall.
And this was exactly the jobback at the IMF, which is the
international monetary fund, towork with countries, especially
(06:02):
emerging markets, and figure outwhat went wrong and then try to
prevent the crisis right.
And when we look at all the imfprograms, which are countries
which actually do the rightthing, when they are out of
options and the free lunch isover, right, so ultimately and
that's what it has beenhappening in the us as well uh,
it, the back has not beenagainst the wall, partly because
(06:23):
of some of the factors which Ijust mentioned, and the right
thing will happen, has to happen, when the back will be against
the wall.
So that is still awaited.
Speaker 2 (06:33):
Okay, so let's go with that sort of the moment
that forces the change.
It seems to me it's hard toenvision that unless the Fed
lets the US bond market go andyou have like a Liz Truss moment
right where just yields have.
It's the whole failed auctionidea right, correct?
The thing is the Fed will stepin because that's their mandate
(06:56):
right to provide stability.
So how can you have the backagainst the wall when the Fed is
going to keep on trying tobreak the wall?
Speaker 1 (07:02):
No, but honestly, that channel is true across all
cases.
Right, most of the centralbanks do have financial
stability as one of theirmandates, right, and they do try
to salvage the markets orprevent any kind of a crisis.
But the truth of the matter is,at some point of time, they do
need the markets to functionproperly, right, and that's
(07:23):
where Fed's hands will be tied.
So in previous crises it was adifficult situation.
If you look at the last 15-20years, inflation was quite low,
so Fed had the bandwidth toignore its other mandates and
say, okay, look, financialstability takes precedence over
almost anything else.
Now, if you imagine the nextfew years, we are in a very
difficult regime.
(07:44):
Inflation is not necessarilylow, it is anchored to some
extent, but clearly the risksare two-sided versus the last 15
years when the risks wereone-sided, right, so that is a
bit of a problem for Fed.
I would say in general that howmuch effective it would be.
Again, the question is not that, look, next month, suddenly
there'll be a shock and they'llbe out of ammo.
(08:06):
The leaking channel would bethat when we have such kind of
an event and Fed comes andsalvages the market, eventually
global investors will realizethat there does need to be some
sort of a risk premia on USassets, on US assets, and that's
(08:27):
what we have started to see inUS assets this year.
There's still a long way to go,given the valuation gap and
given the positioning gap ingeneral, but my view is that
ultimately, it won't be a casewhere just US goes into a
massive crisis, but it will be acase where there is a global
recognition that, look, thingshave become too overextended in
favor of US outside of otherassets, and then we will start
to see the flows moving quiteaggressively in the other
(08:49):
direction, so that, I think, isthe channel through which the
rebalancing would happen, ratherthan a pure play crisis.
Speaker 2 (08:55):
So play that out for me.
Where does that money then flowto?
Some people will argue that itgoes to gold, it goes to Bitcoin
.
I mean, under a scenario likethat, what happens?
Speaker 1 (09:02):
Look some of that is already happening, right?
So I mean, under a scenariolike that, what happens?
Look, some of that is alreadyhappening, right?
So I mean, gold has been thereand it's obviously the last 12
to 15 months it has become quitecenter of the normal attention
span.
But I mean, we have seen thistrend playing out.
But if you look more broadly,there are enough and more
markets globally, enough andmore asset classes globally
which have been starved off of,I would say, capital in the last
(09:24):
15 years.
And if you look at it, last 15years, the only asset class
which work quite decisively wereus big tech in a way.
Right.
So all international markets,whether it is europe or japan or
emerging markets, they sort ofunderperformed, um, in the last
15 years and we could see thatthe flows were also aggressively
directed towards us perspective, right?
(09:47):
So if you look at decade tilldate trends, 80% of the flows
actually went to the US and notreally other markets globally,
right?
So that's sort of my point thatif you want to create a steady
state scenario or if you want tocreate a situation where things
get normalized, there areplenty of more regions and asset
classes where flows can go.
(10:08):
Now take it to the second step.
The first step is okay.
The US market is overextendedwhen it comes to valuation or
sentiment or general riskpremium involved.
So we need to diversify outsideof the US.
Where can we do that?
And I would argue that Europe,japan and even emerging markets.
They have enough and morecapacity to absorb these flows.
And, given the starting pointwhere the valuations are quite
(10:32):
low, the positioning is quiteweak.
And many of those markets,especially in emerging markets,
are doing the right thing whenit comes to the policy mix, when
it comes to the economic growthmodel.
So that can actually benefitquite a lot.
Speaker 2 (10:46):
From an asset class perspective, if we're talking
about considering other parts ofthe marketplace, do we want to
think in terms of equities?
Do we want to think in terms ofcommodities as an asset class
play?
Do we want to think more interms of those countries' bond
markets?
I mean, how should we go aboutthe asset class decision?
Speaker 1 (11:04):
Sure.
So I think the big picture, Iwould say one is the private and
the public debate.
I think on that angle, what wesaw in the last 10 to 15 years,
private asset class in generalhas exploded quite aggressively
globally.
Right, and we can debate aboutthe volatility laundering and
all those pieces.
That's one part of the argument.
But my belief is, at some pointof time normalization has to
(11:27):
happen, right so, and we havestarted to see some of that
playing out in the privatemarkets.
Right, many of the globalendowments have started to come
under pressure and they have todo secondary market sales.
But even otherwise, when youlook at the stock price of
private players and so on, soforth, you do see pressure
building up in the private classand this is somehow also
related with us.
Ultimately, a ton of theprivate flows do flow to north
(11:50):
america and us in particular.
So they are sort of related.
But I would say, in terms ofthe broad big picture asset
classes, the tide had shiftedquite aggressively towards
private markets in the last 15years, and I'm not saying it's
the end of private asset class,I'm just saying this is how
cycles behave, right, so youhave a boom in a particular
asset class for 10, 15 years andthen the cycles turn and then
(12:13):
you would see things normalizing.
So I would argue that the nextfive to 10 years we would see
some sort of a normalizationagain for the same reasons that.
Look, valuations andpositioning are quite
overextended in the favor ofprivates.
So this is one.
The second, very correctly,rightly mentioned, is
commodities.
Obviously gold sort of comes tothe limelight for it, but I
would argue it's much morebroader and it's not just
(12:37):
because of the cycle and theyhave sort of underperformed.
But we do see that the bigpicture playing out globally is,
uh, the industrial ring fencingand the fortification which
many countries are doing right.
So commodities not all of them,many of them very much come
into the limelight because ofthe strategic importance.
You can argue whether it isagriculture or whether it is
(12:58):
commodities like copper,aluminum and so on, so forth,
but they are in the limelightnot just because of the usual
economic supply and demandsituations but because many
countries do want to stockpile.
So I would argue commodities ingeneral are a good asset class
to also look at for the next uh,three to five years.
And the last is the bondmarkets.
But here I have a slightlydifferent view, I would argue
(13:20):
bond markets.
It sort of depends where youare looking at.
In the, the US, as I rightlymentioned, this remains one of
those asset classes where therisks are relatively underpriced
.
But one segment where I wouldwant to highlight is emerging
markets.
Again, it's the cycle.
These are the countries whichare doing many of them are doing
the right economic policy mix.
(13:42):
They have enough buffers interms of cheap currencies.
They have enough buffers interms of cheap currencies.
They have enough buffers interms of relatively high real
rates, and inflation has beenwell getting controlled, quite
aggressively, right.
So when you look at that kindof a policy mix, you do expect
that.
Look, emerging market assets onthe fixed income side can be
quite attractive and honestly,it's not a new thing.
(14:03):
In the last one, one and a halfyears, the local currency asset
class has done quite well.
But my argument is that now,since the dollar has turned and
I am quite aggressively in thatdirection that this is not a
short-term blip but it's a trendwe can expect for the next five
to seven years.
In that kind of a regime,emerging market asset classes,
be it equities or fixed income,can be quite, quite lucrative.
Speaker 2 (14:27):
How do you go about identifying the right emerging
markets?
I say that very purposelybecause I think it's debatable
to argue China is an emergingmarket.
I think we have to kind ofdefine what an emerging market
is.
Speaker 1 (14:38):
And that's a $2 trillion question, right.
It's always a challenge whereyou draw the line when it comes
to emerging markets, right.
But to simplify, I would arguethat, rather than just saying
emerging markets, the bigpicture view is that this is
about international markets andnot just emerging.
So this is number one, that,look, I believe in the next five
years we are in an environmentwhere dollar will depreciate,
(15:03):
and I mean it could be avolatile right, but the
structural direction will be low.
In that kind of environment,you do see international markets
, uh, outperforming.
So this is step one.
Now, which kind of markets tolook at within that segment?
Then you look at two types ofmarkets.
So one where the domesticmarket is large enough to
provide some sort of aninsulation against tariff issues
(15:27):
and if globalization sort ofrolls back to an extent.
That is one.
And the second is you wouldwant to look at the markets
where they are reformist leadersand trying to do the right
thing, even if it comes at acost.
And one such example and againit's too small, uh, in the big
picture of things, but it doeshighlight that change is
(15:47):
underfoot is argentina, and whatmelee has been doing there.
Argentina has been a countryand I used to work at the imf
right, so it's been a countrywhich has been under severe
crisis for the last 125 years,but now it has become the poster
child of neoliberalism andsetting what should be done when
it comes to the policy mix.
So the argument is that lookbeyond US.
There are a lot of marketswhich are cheap, which are doing
(16:10):
the right thing, and then pickthe ones where you think the
leader is supportive of growthand less state control.
Speaker 2 (16:19):
So China obviously would not factor into that.
So let's talk about some of thebest countries there.
Right that you think look themost attractive, the cheapest,
that have the right mix.
Speaker 1 (16:27):
Sure, I mean, look, I mean one region which I would
want to highlight is LATAM ingeneral.
I mean, if you look at the lastuh many decades, latam always,
almost always, has been acountry which is almost
exclusively about commodities,right.
That commodity cycle happensand latam in general outperforms
aggressively and then the cycleturns and most of the latam
markets remain quite weak and wecan sort of see that kind of an
(16:50):
issue in their productivitygrowth as well, that it has been
quite reliant on this commoditycycle and hasn't really seen a
very meaningful increase ininvestment or manufacturing or
productivity growth, right.
So that's why the region hasremained very cyclical, uh, but
uh, cheap right now.
If we look at the next three tofive years, uh, one change
(17:13):
which is happening in LATAM isobviously, the starting point is
different Very cheap assets,underpositioned and so on and so
forth, and cheap across allcategories, whether it is
equities or FX and also manybonds.
The one thing which is playingout quite well for LATAM in the
next one and a half years we'llsee elections coming up for all
major economies.
(17:34):
For LATAM in the next one and ahalf years we'll see elections
coming up for all majoreconomies.
We start with Chile in Novemberthis year and then obviously
the big election is Brazil in 26next year, but in October next
year.
But if you look at theunderlying pools and if you look
at the direction of the travelthere, you see that the tide is
turning quite aggressivelytowards orthodox leaders.
(17:55):
Obviously, mille in argentinaset the trend in 23, um, but
even beyond that, that's theregion where we think things can
perform quite positively uh,especially if the political
trends uh are quite supportive.
So I would say argue that thatcan be one of the regions which
is and quietly, I would say, andsilently outperforming and
(18:17):
becoming of interest.
If you look at year to datetrends, that has been the region
which has outperformed acrossthe world and if trends continue
this way, this is just thebeginning, this is one, this is
one.
And then on the other side wealso have countries like Poland,
which is obviously got impactedquite aggressively due to the
(18:40):
Russia-Ukraine war.
It still sort of is at theforefront of it.
But when you look at the policymix, when you look at the
direction of the travel, thingsare pretty supportive.
Government is investing in theright things.
There's a lot of focus oninvestment and not just the
Ukraine reconstruction efforts,but much beyond that.
So when you look at some ofthose markets, you do see that
the policy is relativelyorthodox, the policy is
(19:03):
reformist, the assets arerelatively cheap and the
companies are quite high quality.
So that is again one of themarkets which can continue to
outperform.
And one bucket which I wouldalso want to put in is the
frontier markets in general,without naming individual
country names.
This is the exact same examplewhich you gave in the beginning
that, look, the only real changeuh can happen when you run out
(19:27):
of options, and I would say,during the pandemic and
financing crisis.
After that, most of thefrontiers did run into that kind
of a situation where they wereout of free money and they had
to do the right steps.
So we see a ton of reforms,ranging from Nigeria to Sri
Lanka to Zambia and many othercountries where the leaders are
(19:48):
reformist and they're going downthe right path.
Speaker 2 (19:52):
Okay so and I think Ola makes sense when you mention
frontier markets.
I don't hear anybody talkingabout frontier markets and that
was such a very hot term for awhile, kind of the emerging of
the emerging, so to speak.
But how should we think aboutrisk management if we're going
to go with that way ofallocating right?
I mean, it's hard to get properdata on individual companies.
Yes, you can do broad-basedETFs.
(20:14):
Data on individual companies,yes, you can do broad-based ETFs
, but even that doesn'tnecessarily tell you much about
weightings.
And a lot of the broad-basedETFs are primarily going to be
focused on certain sectors, likefinancials, which may not be
ideal for real country exposure.
So talk through portfolioconstruction, sure.
Speaker 1 (20:29):
No, I think one big picture view which, if you look
at emerging markets or frontiersin particular and this is where
they differ from developedmarkets if you do the
decomposition, where do actualreturns and alpha sort of comes
from?
In emerging markets, the mostimportant variable is country
selection.
As long as you can get thecountry selection right, the
(20:51):
stock selection will sort offollow suit.
So if you do the actualdecomposition, 65% of returns in
emerging markets areattributable to country
selection.
Now, this is very differentfrom what we see in US and
Europe in direct markets inparticular, because there the
sector selection and theindustry and the thematic makes
a much more important differenceright.
(21:12):
So when you go down the curveand start investing in emerging
and frontier markets, the firstfocus is let's get the country
right.
After that comes to the secondstep okay, what kind of
companies we should invest inwhich is where you're absolutely
right.
The data sometimes can be a bittricky and there are obviously
corporate governance issuesthere as well, but you would see
(21:32):
that the correlation between uhthe overall market and actual
uh the quality of the countryremains very high.
So you get the country right.
Very difficult to find etswhich are completely represented
, which is true, but to a greatextent, you will be on the right
path, like the one thing whichwe always see is that as long as
you get the country right, evenif you pick the second best
(21:53):
stock or the third best stock,you will be fine.
But if you get the countryright, even if you pick the
second best stock or the thirdbest stock, you'll be fine.
But if you get the countrywrong, even if you pick the best
performing stock in that market, it won't really make a
difference.
So for emerging markets ingeneral and frontiers which are
emerging, of emerging inparticular, this becomes the
most important thing, and whichis what we have.
Also, sort of the way we lookat portfolio construction is get
(22:14):
the countries right at all ofthese levels.
The second part is look once youget the country right.
Question is how much you can A,how much you should allocate,
and B how much you canrealistically allocate.
The truth of the matter is that, given the last 15 years, many
of these markets didunderperform and foreign capital
did go out.
So, given this kind of ascenario, the actual liquidity
(22:36):
on ground is quite weak.
So even if you want to deploy alot of capital.
It's realistically not thatfeasible.
But the way around is twofoldright.
One you look at these marketsfrom a long-term perspective.
In any case, it's verydifficult to trade in and out of
emerging markets.
So the view is, if you want toinvest in these markets, you
should have a two to five yearview.
(22:58):
And that's how you play it,because it's very difficult to
figure out the exact time whenthe themes will turn.
But the trend is in the rightdirection and I would argue
that's sort of the big picture.
I think the second argumentwhich we have seen if you're
long-term investors, especiallyin these markets, the liquidity
is pro-cyclical.
Markets turn, foreign capitalcomes in, domestic investors
(23:20):
also become more exuberant andthen you see that liquidity
comes in and that sort of makesit much easier to invest in
these markets.
So question is you wait for thetide to turn or you position
yourself beforehand and thenwhen the tide turns you're
already there in the market.
So that's some of thechallenges and in fact also the
opportunity when it comes toinvesting in emerging as well as
frontier markets.
Speaker 2 (23:42):
Any concerns around how tariffs deglobalization
anything policy-wise couldimpact the thesis?
Speaker 1 (23:50):
Right?
No, I mean, look, I think onebig, I won't call a myth.
The debate is obviously aroundglobalization, right, and the
big picture is that, look, us issort of pulling back and that
means almost like an end ofglobalization and that will
impact emerging markets quiteaggressively.
I have a slightly differentview here.
I do think we have been in thisnew regime for quite some time,
(24:10):
but if you look at theunderlying data, us is the only
country globally and I meanthere is New Zealand and a
(24:32):
couple of other smaller oneswhere trade to GDP has actually
declined since 2016 end.
So, since Trump came In all ofthe markets almost 90% of
emerging and developed marketstrade to GDP has actually
increased in the last eightyears.
So the question is that it'snot as if trade is weak in the
(24:52):
world outside of the US.
It's just that the tradearchitecture is sort of getting
realigned, it's moving away fromUS and more and more countries
are trying to trade within eachother.
Now, look, the reality is US isstill very important.
It is very difficult to imaginea world where all the countries
can very easily bypass us andjust trade within themselves.
Uh, but the reality also isthat if you want to imagine a
(25:15):
steady state world that, okay,all this tariff chaos settles in
.
Three years down the line, fouryears on the land, what's the
steady state new normal?
It's very difficult to imaginea world where most of the
factories are in the us unit.
Economics will just not justifythat.
So either the MNCs will justeat up the tariffs and the
margins will come down, orthere'll be some supply chain
(25:37):
realignment and factories willmove from Vietnam to Bangladesh
and so on and so forth, but thefactories will still remain
outside of the US and the tradewill still sort of continue.
Fact is, we'll still remainoutside of the US and the trade
will still sort of continue.
So that's my view on tariffs ingeneral that there will be
idiosyncratic issues dependingupon how US wants to sort of
play these games and a lot of itis obviously unmodellable,
(25:59):
depends on the day and the hourof the tweet.
But more generally I would arguethat this is a big change which
we have seen in the globalmarkets and policy space in the
last, not just one year it hasbecome quite aggressive in the
last six months but in the lastfew years that they know that
they need to de-risk theireconomic supply chains and they
(26:19):
have been trying to do that.
In fact, if you look at and ifyou talk to policymakers in
ASEAN specifically becausethat's one of the regions which
has been in the eye of the storm, they're very clear that, look,
we are not in a position tonegotiate aggressively versus US
, so we'll have to deal withwhatever cards we are given with
(26:42):
.
But what we know is that weneed to increase the intra-ASEAN
trade, intra-asean payments andintra-ASEAN linkages.
So I think more important thanjust creating a single
derivative view thatglobalization is under stress
and tariffs will actually have anegative impact on trade, I
think it just opens up a lotmore opportunities for investors
to pick up the countries whichcan actually benefit from this
(27:04):
kind of a trade fragmentationand attract the supply chains.
Speaker 2 (27:08):
I want to go back to commodities for a bit.
I happen to be of the samemindset, but maybe for different
reasons.
I mean, it seems to me thateverything going on with China
as far as Trump and tariffs anddeals and all that stuff,
probably benefits China morethan the US, because in my mind
it means it's a reinforcement tothe policymakers there that
(27:28):
they have to focus more ondomestic consumption and rely
less on the US.
If Trump becomes a catalyst forthat, whether they can succeed
or not, it's enough to get some,you know, some annals.
First, right in the commodityspace, how much of a commodity
cycle is dependent purely onjust China as opposed to, you
know, broader underinvestmentand somehow it starts to work.
Speaker 1 (27:51):
I mean, I think to a great extent it still will.
China still consumes a lot moreand has been a growth survivor
for a while.
So it's quite difficult to justcompletely discount China's
view, even though the focus hasbeen shifting, and you can sort
of see that in the prices aswell.
If you look at the last one anda half two years of trend,
obviously China's growth hasbeen relatively weak and people
(28:13):
have been arguing for differentreasons behind that.
But despite that the commodityimport demand from China has
remained quite robust andobviously they have been
stockpiling and they have beensort of fortifying their own
economy.
But the truth of the matter isthat the correlation between
pure play China's usage of thesecommodities versus the global
(28:34):
demand for these commodities hassort of broken in the last
couple of years and I wouldargue this is a trend which is
here to stay, as more and morecountries sort of realize that,
look, we have entered into aworld where it is increasingly
transactional and we can't justrely on old existing supply
chain partners, right?
So in that kind of environmentyou would expect more and more
(28:56):
people to fortify, more and morepeople to stockpile these
commodities.
So I think that's a much morebroader trend.
The second part also is truethat, purely because of base and
how the global economies move,china will continue to play a
relatively uh important role.
The question is, uh the mix canchange.
(29:17):
Whether it is agriculture orwhether it is copper, it depends
upon how they sort of viewtheir strategic industry uh
focus.
But china is quite critical.
Uh, to look at the commoditycycles, I mean, if you want to
create a more sustainable view,right, I mean the argument about
underinvestment and all thosethings are absolutely true.
I very much believe in thoseparts as well, but some of that
(29:39):
can prove to be more tactical.
But if you want to create amore durable three to five year
super cycle view, I thinkChina's role has to be price
placed here.
Speaker 2 (29:49):
You had sent me a note saying dollar depreciation
in the next few years does notmean the dollar is the one we're
going to be the reservecurrency.
I think we need to really kindof unpack that, because I think
a lot of people keep using thatterm the demise of the dollar
and use that as an excuse forthe new system which is coming
in most people's minds around,you know, using gold or Bitcoin
(30:11):
or combination of the two andhard money and all that stuff.
Let's maybe counter some ofthat.
Speaker 1 (30:17):
Sure no, I think.
Thank you.
I think this is a topic whichI'm very passionate about in the
sense that, especially thisyear, right, obviously, dollar
has depreciated quiteaggressively.
And a big comment not just fromyou know, simple analysts, from
very, very senior, seasonedpeople we keep hearing is the
dollar has depreciated because,as you rightly said, it's a
(30:38):
demise of the dollar andthere'll be other contenders for
reserve currency.
And da, da, da, da da.
The argument which many peopletake is that that's not possible
.
It's very difficult to dethronedollar.
It's very difficult to findreasonable dollar alternatives,
which means that dollar will notdepreciate.
Now, my problem with thisargument is that these two
things are sort of uncorrelated.
(30:59):
If you take the next three tofive years time frame, which is
what is we generally look at,since 1975, when dollar started
to trade more freely, right, uh,dollar has depreciated.
There have been multiple bearmarkets in dollars, there have
been multiple bull markets indollar, and this is exactly how
the cycles behave.
If you see, in fact, in 75there have been two pretty
(31:22):
massive bear markets in dollar.
Dollar depreciated for almostseven years on an average in
each and was down 45 percentover a seven-year time period.
It had nothing to do withdollar getting replaced as the
reserve currency.
That can continue, but then theeconomic cycles also need to be
taken into account.
So that's my quite strongconviction that, look, we should
(31:43):
take the entire view about whatTrump is doing where US role is
in the global architecture.
Entire view about what Trump isdoing where US role is in the
global architecture.
That is out of the window forthe next three to four years.
When you want to talk aboutwhere dollar should be and where
its fair value should In aproper cycle.
Dollar was overextended.
You look at BIS, google, any ofthose estimates.
It was the most expensive since1960 and predicated on the fact
(32:07):
that 80% of global portfolioflows were flowing into the US,
which obviously supports dollar,and predicated on the fact that
US economy was exceptional.
And we can argue that it wasexceptional for the wrong
reasons fiscal deficits and soon and so forth but dollar was
being supported in a large partby those factors.
Now you want to create the nextthree to five year view, you
(32:27):
would see much of it gettingdiluted away.
We very strongly believeportfolio flows will get
reallocated to other markets.
It doesn't mean that nothingwill flow into us, it just means
that, look, 80 percent of flowsdon't need to flow into the us.
It could be 50, which is whereits global share of earnings are
right.
So when that kind of a thinghappens, when we finally realize
(32:48):
that, look, the growth premiumthat dollar had, that us had
built, versus internationalmarkets is finally getting
normalized, which is where itshould be given the cycle, then
again dollar will see some kindof a pressure.
So that's sort of my view that,look, there is a cyclical uh
view on dollar where it shoulddepreciate for the next three to
(33:08):
five years, and so far itdefinitely seems to be playing
out that way.
That has nothing to do withdollar will not be the reserve
currency.
Now, if you want to talk aboutdollars role in the global
architecture, that's a separateargument and we have seen some
chipping at the margin.
Right, dollar used to be 70percent of global reserves in
(33:28):
2000s.
Right now it's 57 percent,continues to tickle down slowly
and steadily.
We do see more and more numberof countries trying to diversify
away from dollar as best asthey can.
There is a fantastic paper byimf, sarkhan and barry I can
read in 22.
It shows that there are a ton ofcountries which are trying to
diversify away from US dollars.
(33:50):
Now, in the big picture schemeof things, in aggregate many of
these countries don't matter.
They're quite small.
But if you look at thatresearch and if you look at the
data, you do see that the trendis definitely there that they
want to diversify out of dollarin a slow, manageable fashion.
So that's my view that, look,dollar is the reserve currency
will be in the foreseeablefuture.
(34:11):
We can be in a multipolar world, but it is getting chipped away
at the margin.
But the dollar weakness that wewill likely see over the next
two to five years, it hasnothing to do with that.
That is pure economic cycle inprogress.
Speaker 2 (34:27):
Rohit.
Talk about the company, whatyou do, what you can provide to
those who might be interested inyour services.
Speaker 1 (34:33):
Look, ultimately we are institutional investors, we
manage money and we invest inemerging market assets globally.
But the main discussion pointand view for me is to just
engage in some of these globalmacro themes and try, and I
would say, bust some of themyths which we keep seeing in
(34:55):
many of these global discussionforums, whether it comes to US
dollar or the underappreciatedrole of international markets.
I'm on LinkedIn.
Rohit Goel Goelrohit is mypublic username.
I'm also on Twitter, not veryactive there, but, yeah, I'm
very much available on LinkedIn.
Speaker 2 (35:11):
Appreciate those that watch this live.
I enjoyed the conversation.
I think the emerging marketfrontier market point is
important, as well as the dollardemise one.
This again will be podcastunder LeadLag Live and hopefully
I'll see you all on the nextepisode.
Thank you, rohit, appreciate it.
Thank you, roy.
Speaker 1 (35:26):
Appreciate it.
Thank you so much for having me, Michael, and the usual
disclaimer the views are my own,not Breakout Capital or
Rockefeller.
Thank you so much for having me.
Speaker 2 (35:33):
Cheers buddy.
The way we look at portfolio construction is get
the countries right at all ofthese levels.
The second part is look onceyou get the country right.
Question is how much you can.
A how much you should allocateand B how much you can
realistically allocate.
The truth of the matter is that, given the last 15 years, many
of these markets didunderperform and foreign capital
(00:21):
did go out right.
So, given this kind of ascenario, the actual liquidity
on ground is quite weak, right?
So even if you want to deploy alot of capital, it's
realistically not that feasible.
But the way around is twofold,right?
One, you look at these marketsfrom a long-term perspective.
In any case, it's verydifficult to trade in and out of
(00:41):
emerging markets.
So the view is, if you want toinvest in these markets, you
should have a two to five yearview.
And that's how you play it,because it's very difficult to
figure out the exact time whenthe themes will turn.
But the trend is in the rightdirection.
Speaker 2 (00:56):
My name is Michael Guy, a publisher of the Lead Lag
Report.
This is Lead Lag Live.
Joining me here is Rohit Gohale.
Rohit, the first time you're inour chatting.
I know we rescheduled this afew times, but introduce
yourself to the audience to memore formally.
Who are you, what's yourbackground, what have you done
throughout your career and whatare you doing currently?
Sure.
Speaker 1 (01:14):
Thank you so much for having me, michael.
It's been a long time coming.
I work with Breakout Capital.
I'm a partner here and head ofGlobal Macro.
My job is all things globalmacro and work on global
thematics as well as countryselection, so I'm quite deeply
involved.
We do invest in emergingmarkets, but my sort of analysis
(01:34):
spans beyond that.
Prior to this, I used to workwith the IMF and we used to
publish the global financialstability report and I used to
collate some of the sectionsthere.
So that was the job where I hadto look at the glass half empty
, and now I also have to look atthe glass half full.
So this is quite exciting.
(01:54):
Lastly, beyond the day job, Iam quite involved with CFA.
I'm a vice chair of theinternational investing group as
well as Bretton Woods committee.
I'm a big fan of Michael.
I'm quite excited to see wherethe conversation goes.
Speaker 2 (02:07):
All right.
So you mentioned global macro.
That's a term that's thrown outa lot.
I think we should go basic anddefine what exactly global macro
means.
Speaker 1 (02:13):
Sure?
No, basically look, ultimatelywe invest in emerging markets,
and for investing in emergingmarkets, you do need to have a
view on global fixed income,which includes US fixed income,
which includes the view ondollar, which includes the view
on individual countries morebroadly as well.
So that's what I mean by globalmacro.
The work span basicallyincludes more 30,000 feet
(02:38):
research, a la what we used todo at IMF, which pertains more
at the intersection of macro aswell as policy, and then,
ultimately, we do manage aportfolio right.
So it's an intersection of, Iwould say, macro and markets.
So that's what I meant byglobal macro, looking at US in
particular, but also alldeveloped and emerging markets.
Speaker 2 (03:00):
And obviously it's being aware of different asset
classes and sort of interactionsof different parts of the
marketplace.
And there are times when themarket is very much in sync in
terms of macro, sort of givingyou the same message across
multiple asset classes and thereare times, like now, when
there's a lot of conflictingsignals and typically when there
(03:24):
are conflicting signals, youcan argue that risk is perhaps
more elevated because there'sconfusion in the marketplace as
to what comes next.
Let's talk about risk.
Let's talk about what you thinkthe marketplace has right about
risk and what the marketplaceis missing about current risks.
Speaker 1 (03:33):
I mean, I think one of the I would say it's almost
like a common answer, like onetopic which keeps coming back
for all our conversationswhether you're having that with
policymakers or the sell side orthe buy side forums is that
ultimately, look, we areinvesting in global markets.
Us fixed income markets and UStreasury yields ultimately form
the bare bone of how we price inthese assets, right?
(03:55):
So these conversations where USfiscal deficits will go, how
important US yields are, wherethat trend will go it occupies a
ton of mind space.
But when we look at the market,I think that's the most
understated risk out there.
A lot of the conversation stillrevolves around tweets, what
happens in the last, uh, coupleof weeks, so on and so forth.
(04:17):
But more structurally speakingand that's what we sort of do
take a back seat and look at thebig picture, structural trends,
rather than forecasting monthlyor quarterly trends.
You do see that ultimately theblack swan event could be the US
yields.
We have seen bond vigilantes.
Obviously, emerging marketshave always been in the
(04:38):
forefront of that.
It did come to Europe as well.
Then we had the incident withUK.
Us obviously continues to sortof elude those issues, partly
because we have the exorbitantprivilege of dollar being dollar
.
But ultimately, if you look atthe trends, irrespective of how
effective Doge has been or nothas been, the reality is that
the fiscal deficits are throughthe roof and this is in a
(05:01):
pro-cyclical manner where it'slike 6.5-7% of GDP.
Imagine if we enter arecessionary time.
Then we can very easily imaginethese expanding to 8.5-9% of
GDP.
And if it is any other countryon this planet, you would see a
reaction, whether it is in bondyields or it is in the currency.
Us, for now, has been sort ofeluding that 10-year yields
(05:22):
continues to bob around.
But if you look underneath, wedo see that there are signs
building up that can actuallysurprise quite negatively.
Speaker 2 (05:30):
There used to be this I forget who said it, I think
it was Roosevelt or somebody.
He said something along thelines of you can always count on
America to do the right thingwhen all other options are
exhausted, or something alongthose lines.
Speaker 1 (05:41):
I think that's true.
I would say look, I mean, I'vebeen doing it for 15 years now
and that's the ultimate answer,and not just for US, I would say
for all countries in particular, the time when they actually do
the thing, the right thing, iswhen the back is against the
wall.
And this was exactly the jobback at the IMF, which is the
international monetary fund, towork with countries, especially
(06:02):
emerging markets, and figure outwhat went wrong and then try to
prevent the crisis right.
And when we look at all the imfprograms, which are countries
which actually do the rightthing, when they are out of
options and the free lunch isover, right, so ultimately and
that's what it has beenhappening in the us as well uh,
it, the back has not beenagainst the wall, partly because
(06:23):
of some of the factors which Ijust mentioned, and the right
thing will happen, has to happen, when the back will be against
the wall.
So that is still awaited.
Speaker 2 (06:33):
Okay, so let's go with that sort of the moment
that forces the change.
It seems to me it's hard toenvision that unless the Fed
lets the US bond market go andyou have like a Liz Truss moment
right where just yields have.
It's the whole failed auctionidea right, correct?
The thing is the Fed will stepin because that's their mandate
(06:56):
right to provide stability.
So how can you have the backagainst the wall when the Fed is
going to keep on trying tobreak the wall?
Speaker 1 (07:02):
No, but honestly, that channel is true across all
cases.
Right, most of the centralbanks do have financial
stability as one of theirmandates, right, and they do try
to salvage the markets orprevent any kind of a crisis.
But the truth of the matter is,at some point of time, they do
need the markets to functionproperly, right, and that's
(07:23):
where Fed's hands will be tied.
So in previous crises it was adifficult situation.
If you look at the last 15-20years, inflation was quite low,
so Fed had the bandwidth toignore its other mandates and
say, okay, look, financialstability takes precedence over
almost anything else.
Now, if you imagine the nextfew years, we are in a very
difficult regime.
(07:44):
Inflation is not necessarilylow, it is anchored to some
extent, but clearly the risksare two-sided versus the last 15
years when the risks wereone-sided, right, so that is a
bit of a problem for Fed.
I would say in general that howmuch effective it would be.
Again, the question is not that, look, next month, suddenly
there'll be a shock and they'llbe out of ammo.
(08:06):
The leaking channel would bethat when we have such kind of
an event and Fed comes andsalvages the market, eventually
global investors will realizethat there does need to be some
sort of a risk premia on USassets, on US assets, and that's
(08:27):
what we have started to see inUS assets this year.
There's still a long way to go,given the valuation gap and
given the positioning gap ingeneral, but my view is that
ultimately, it won't be a casewhere just US goes into a
massive crisis, but it will be acase where there is a global
recognition that, look, thingshave become too overextended in
favor of US outside of otherassets, and then we will start
to see the flows moving quiteaggressively in the other
(08:49):
direction, so that, I think, isthe channel through which the
rebalancing would happen, ratherthan a pure play crisis.
Speaker 2 (08:55):
So play that out for me.
Where does that money then flowto?
Some people will argue that itgoes to gold, it goes to Bitcoin
.
I mean, under a scenario likethat, what happens?
Speaker 1 (09:02):
Look some of that is already happening, right?
So I mean, under a scenariolike that, what happens?
Look, some of that is alreadyhappening, right?
So I mean, gold has been thereand it's obviously the last 12
to 15 months it has become quitecenter of the normal attention
span.
But I mean, we have seen thistrend playing out.
But if you look more broadly,there are enough and more
markets globally, enough andmore asset classes globally
which have been starved off of,I would say, capital in the last
(09:24):
15 years.
And if you look at it, last 15years, the only asset class
which work quite decisively wereus big tech in a way.
Right.
So all international markets,whether it is europe or japan or
emerging markets, they sort ofunderperformed, um, in the last
15 years and we could see thatthe flows were also aggressively
directed towards us perspective, right?
(09:47):
So if you look at decade tilldate trends, 80% of the flows
actually went to the US and notreally other markets globally,
right?
So that's sort of my point thatif you want to create a steady
state scenario or if you want tocreate a situation where things
get normalized, there areplenty of more regions and asset
classes where flows can go.
(10:08):
Now take it to the second step.
The first step is okay.
The US market is overextendedwhen it comes to valuation or
sentiment or general riskpremium involved.
So we need to diversify outsideof the US.
Where can we do that?
And I would argue that Europe,japan and even emerging markets.
They have enough and morecapacity to absorb these flows.
And, given the starting pointwhere the valuations are quite
(10:32):
low, the positioning is quiteweak.
And many of those markets,especially in emerging markets,
are doing the right thing whenit comes to the policy mix, when
it comes to the economic growthmodel.
So that can actually benefitquite a lot.
Speaker 2 (10:46):
From an asset class perspective, if we're talking
about considering other parts ofthe marketplace, do we want to
think in terms of equities?
Do we want to think in terms ofcommodities as an asset class
play?
Do we want to think more interms of those countries' bond
markets?
I mean, how should we go aboutthe asset class decision?
Speaker 1 (11:04):
Sure.
So I think the big picture, Iwould say one is the private and
the public debate.
I think on that angle, what wesaw in the last 10 to 15 years,
private asset class in generalhas exploded quite aggressively
globally.
Right, and we can debate aboutthe volatility laundering and
all those pieces.
That's one part of the argument.
But my belief is, at some pointof time normalization has to
(11:27):
happen, right so, and we havestarted to see some of that
playing out in the privatemarkets.
Right, many of the globalendowments have started to come
under pressure and they have todo secondary market sales.
But even otherwise, when youlook at the stock price of
private players and so on, soforth, you do see pressure
building up in the private classand this is somehow also
related with us.
Ultimately, a ton of theprivate flows do flow to north
(11:50):
america and us in particular.
So they are sort of related.
But I would say, in terms ofthe broad big picture asset
classes, the tide had shiftedquite aggressively towards
private markets in the last 15years, and I'm not saying it's
the end of private asset class,I'm just saying this is how
cycles behave, right, so youhave a boom in a particular
asset class for 10, 15 years andthen the cycles turn and then
(12:13):
you would see things normalizing.
So I would argue that the nextfive to 10 years we would see
some sort of a normalizationagain for the same reasons that.
Look, valuations andpositioning are quite
overextended in the favor ofprivates.
So this is one.
The second, very correctly,rightly mentioned, is
commodities.
Obviously gold sort of comes tothe limelight for it, but I
would argue it's much morebroader and it's not just
(12:37):
because of the cycle and theyhave sort of underperformed.
But we do see that the bigpicture playing out globally is,
uh, the industrial ring fencingand the fortification which
many countries are doing right.
So commodities not all of them,many of them very much come
into the limelight because ofthe strategic importance.
You can argue whether it isagriculture or whether it is
(12:58):
commodities like copper,aluminum and so on, so forth,
but they are in the limelightnot just because of the usual
economic supply and demandsituations but because many
countries do want to stockpile.
So I would argue commodities ingeneral are a good asset class
to also look at for the next uh,three to five years.
And the last is the bondmarkets.
But here I have a slightlydifferent view, I would argue
(13:20):
bond markets.
It sort of depends where youare looking at.
In the, the US, as I rightlymentioned, this remains one of
those asset classes where therisks are relatively underpriced
.
But one segment where I wouldwant to highlight is emerging
markets.
Again, it's the cycle.
These are the countries whichare doing many of them are doing
the right economic policy mix.
(13:42):
They have enough buffers interms of cheap currencies.
They have enough buffers interms of cheap currencies.
They have enough buffers interms of relatively high real
rates, and inflation has beenwell getting controlled, quite
aggressively, right.
So when you look at that kindof a policy mix, you do expect
that.
Look, emerging market assets onthe fixed income side can be
quite attractive and honestly,it's not a new thing.
(14:03):
In the last one, one and a halfyears, the local currency asset
class has done quite well.
But my argument is that now,since the dollar has turned and
I am quite aggressively in thatdirection that this is not a
short-term blip but it's a trendwe can expect for the next five
to seven years.
In that kind of a regime,emerging market asset classes,
be it equities or fixed income,can be quite, quite lucrative.
Speaker 2 (14:27):
How do you go about identifying the right emerging
markets?
I say that very purposelybecause I think it's debatable
to argue China is an emergingmarket.
I think we have to kind ofdefine what an emerging market
is.
Speaker 1 (14:38):
And that's a $2 trillion question, right.
It's always a challenge whereyou draw the line when it comes
to emerging markets, right.
But to simplify, I would arguethat, rather than just saying
emerging markets, the bigpicture view is that this is
about international markets andnot just emerging.
So this is number one, that,look, I believe in the next five
years we are in an environmentwhere dollar will depreciate,
(15:03):
and I mean it could be avolatile right, but the
structural direction will be low.
In that kind of environment,you do see international markets
, uh, outperforming.
So this is step one.
Now, which kind of markets tolook at within that segment?
Then you look at two types ofmarkets.
So one where the domesticmarket is large enough to
provide some sort of aninsulation against tariff issues
(15:27):
and if globalization sort ofrolls back to an extent.
That is one.
And the second is you wouldwant to look at the markets
where they are reformist leadersand trying to do the right
thing, even if it comes at acost.
And one such example and againit's too small, uh, in the big
picture of things, but it doeshighlight that change is
(15:47):
underfoot is argentina, and whatmelee has been doing there.
Argentina has been a countryand I used to work at the imf
right, so it's been a countrywhich has been under severe
crisis for the last 125 years,but now it has become the poster
child of neoliberalism andsetting what should be done when
it comes to the policy mix.
So the argument is that lookbeyond US.
There are a lot of marketswhich are cheap, which are doing
(16:10):
the right thing, and then pickthe ones where you think the
leader is supportive of growthand less state control.
Speaker 2 (16:19):
So China obviously would not factor into that.
So let's talk about some of thebest countries there.
Right that you think look themost attractive, the cheapest,
that have the right mix.
Speaker 1 (16:27):
Sure, I mean, look, I mean one region which I would
want to highlight is LATAM ingeneral.
I mean, if you look at the lastuh many decades, latam always,
almost always, has been acountry which is almost
exclusively about commodities,right.
That commodity cycle happensand latam in general outperforms
aggressively and then the cycleturns and most of the latam
markets remain quite weak and wecan sort of see that kind of an
(16:50):
issue in their productivitygrowth as well, that it has been
quite reliant on this commoditycycle and hasn't really seen a
very meaningful increase ininvestment or manufacturing or
productivity growth, right.
So that's why the region hasremained very cyclical, uh, but
uh, cheap right now.
If we look at the next three tofive years, uh, one change
(17:13):
which is happening in LATAM isobviously, the starting point is
different Very cheap assets,underpositioned and so on and so
forth, and cheap across allcategories, whether it is
equities or FX and also manybonds.
The one thing which is playingout quite well for LATAM in the
next one and a half years we'llsee elections coming up for all
major economies.
(17:34):
For LATAM in the next one and ahalf years we'll see elections
coming up for all majoreconomies.
We start with Chile in Novemberthis year and then obviously
the big election is Brazil in 26next year, but in October next
year.
But if you look at theunderlying pools and if you look
at the direction of the travelthere, you see that the tide is
turning quite aggressivelytowards orthodox leaders.
(17:55):
Obviously, mille in argentinaset the trend in 23, um, but
even beyond that, that's theregion where we think things can
perform quite positively uh,especially if the political
trends uh are quite supportive.
So I would say argue that thatcan be one of the regions which
is and quietly, I would say, andsilently outperforming and
(18:17):
becoming of interest.
If you look at year to datetrends, that has been the region
which has outperformed acrossthe world and if trends continue
this way, this is just thebeginning, this is one, this is
one.
And then on the other side wealso have countries like Poland,
which is obviously got impactedquite aggressively due to the
(18:40):
Russia-Ukraine war.
It still sort of is at theforefront of it.
But when you look at the policymix, when you look at the
direction of the travel, thingsare pretty supportive.
Government is investing in theright things.
There's a lot of focus oninvestment and not just the
Ukraine reconstruction efforts,but much beyond that.
So when you look at some ofthose markets, you do see that
the policy is relativelyorthodox, the policy is
(19:03):
reformist, the assets arerelatively cheap and the
companies are quite high quality.
So that is again one of themarkets which can continue to
outperform.
And one bucket which I wouldalso want to put in is the
frontier markets in general,without naming individual
country names.
This is the exact same examplewhich you gave in the beginning
that, look, the only real changeuh can happen when you run out
(19:27):
of options, and I would say,during the pandemic and
financing crisis.
After that, most of thefrontiers did run into that kind
of a situation where they wereout of free money and they had
to do the right steps.
So we see a ton of reforms,ranging from Nigeria to Sri
Lanka to Zambia and many othercountries where the leaders are
(19:48):
reformist and they're going downthe right path.
Speaker 2 (19:52):
Okay so and I think Ola makes sense when you mention
frontier markets.
I don't hear anybody talkingabout frontier markets and that
was such a very hot term for awhile, kind of the emerging of
the emerging, so to speak.
But how should we think aboutrisk management if we're going
to go with that way ofallocating right?
I mean, it's hard to get properdata on individual companies.
Yes, you can do broad-basedETFs.
(20:14):
Data on individual companies,yes, you can do broad-based ETFs
, but even that doesn'tnecessarily tell you much about
weightings.
And a lot of the broad-basedETFs are primarily going to be
focused on certain sectors, likefinancials, which may not be
ideal for real country exposure.
So talk through portfolioconstruction, sure.
Speaker 1 (20:29):
No, I think one big picture view which, if you look
at emerging markets or frontiersin particular and this is where
they differ from developedmarkets if you do the
decomposition, where do actualreturns and alpha sort of comes
from?
In emerging markets, the mostimportant variable is country
selection.
As long as you can get thecountry selection right, the
(20:51):
stock selection will sort offollow suit.
So if you do the actualdecomposition, 65% of returns in
emerging markets areattributable to country
selection.
Now, this is very differentfrom what we see in US and
Europe in direct markets inparticular, because there the
sector selection and theindustry and the thematic makes
a much more important differenceright.
(21:12):
So when you go down the curveand start investing in emerging
and frontier markets, the firstfocus is let's get the country
right.
After that comes to the secondstep okay, what kind of
companies we should invest inwhich is where you're absolutely
right.
The data sometimes can be a bittricky and there are obviously
corporate governance issuesthere as well, but you would see
(21:32):
that the correlation between uhthe overall market and actual
uh the quality of the countryremains very high.
So you get the country right.
Very difficult to find etswhich are completely represented
, which is true, but to a greatextent, you will be on the right
path, like the one thing whichwe always see is that as long as
you get the country right, evenif you pick the second best
(21:53):
stock or the third best stock,you will be fine.
But if you get the countryright, even if you pick the
second best stock or the thirdbest stock, you'll be fine.
But if you get the countrywrong, even if you pick the best
performing stock in that market, it won't really make a
difference.
So for emerging markets ingeneral and frontiers which are
emerging, of emerging inparticular, this becomes the
most important thing, and whichis what we have.
Also, sort of the way we lookat portfolio construction is get
(22:14):
the countries right at all ofthese levels.
The second part is look once youget the country right.
Question is how much you can A,how much you should allocate,
and B how much you canrealistically allocate.
The truth of the matter is that, given the last 15 years, many
of these markets didunderperform and foreign capital
did go out.
So, given this kind of ascenario, the actual liquidity
(22:36):
on ground is quite weak.
So even if you want to deploy alot of capital.
It's realistically not thatfeasible.
But the way around is twofoldright.
One you look at these marketsfrom a long-term perspective.
In any case, it's verydifficult to trade in and out of
emerging markets.
So the view is, if you want toinvest in these markets, you
should have a two to five yearview.
(22:58):
And that's how you play it,because it's very difficult to
figure out the exact time whenthe themes will turn.
But the trend is in the rightdirection and I would argue
that's sort of the big picture.
I think the second argumentwhich we have seen if you're
long-term investors, especiallyin these markets, the liquidity
is pro-cyclical.
Markets turn, foreign capitalcomes in, domestic investors
(23:20):
also become more exuberant andthen you see that liquidity
comes in and that sort of makesit much easier to invest in
these markets.
So question is you wait for thetide to turn or you position
yourself beforehand and thenwhen the tide turns you're
already there in the market.
So that's some of thechallenges and in fact also the
opportunity when it comes toinvesting in emerging as well as
frontier markets.
Speaker 2 (23:42):
Any concerns around how tariffs deglobalization
anything policy-wise couldimpact the thesis?
Speaker 1 (23:50):
Right?
No, I mean, look, I think onebig, I won't call a myth.
The debate is obviously aroundglobalization, right, and the
big picture is that, look, us issort of pulling back and that
means almost like an end ofglobalization and that will
impact emerging markets quiteaggressively.
I have a slightly differentview here.
I do think we have been in thisnew regime for quite some time,
(24:10):
but if you look at theunderlying data, us is the only
country globally and I meanthere is New Zealand and a
(24:32):
couple of other smaller oneswhere trade to GDP has actually
declined since 2016 end.
So, since Trump came In all ofthe markets almost 90% of
emerging and developed marketstrade to GDP has actually
increased in the last eightyears.
So the question is that it'snot as if trade is weak in the
(24:52):
world outside of the US.
It's just that the tradearchitecture is sort of getting
realigned, it's moving away fromUS and more and more countries
are trying to trade within eachother.
Now, look, the reality is US isstill very important.
It is very difficult to imaginea world where all the countries
can very easily bypass us andjust trade within themselves.
Uh, but the reality also isthat if you want to imagine a
(25:15):
steady state world that, okay,all this tariff chaos settles in
.
Three years down the line, fouryears on the land, what's the
steady state new normal?
It's very difficult to imaginea world where most of the
factories are in the us unit.
Economics will just not justifythat.
So either the MNCs will justeat up the tariffs and the
margins will come down, orthere'll be some supply chain
(25:37):
realignment and factories willmove from Vietnam to Bangladesh
and so on and so forth, but thefactories will still remain
outside of the US and the tradewill still sort of continue.
Fact is, we'll still remainoutside of the US and the trade
will still sort of continue.
So that's my view on tariffs ingeneral that there will be
idiosyncratic issues dependingupon how US wants to sort of
play these games and a lot of itis obviously unmodellable,
(25:59):
depends on the day and the hourof the tweet.
But more generally I would arguethat this is a big change which
we have seen in the globalmarkets and policy space in the
last, not just one year it hasbecome quite aggressive in the
last six months but in the lastfew years that they know that
they need to de-risk theireconomic supply chains and they
(26:19):
have been trying to do that.
In fact, if you look at and ifyou talk to policymakers in
ASEAN specifically becausethat's one of the regions which
has been in the eye of the storm, they're very clear that, look,
we are not in a position tonegotiate aggressively versus US
, so we'll have to deal withwhatever cards we are given with
(26:42):
.
But what we know is that weneed to increase the intra-ASEAN
trade, intra-asean payments andintra-ASEAN linkages.
So I think more important thanjust creating a single
derivative view thatglobalization is under stress
and tariffs will actually have anegative impact on trade, I
think it just opens up a lotmore opportunities for investors
to pick up the countries whichcan actually benefit from this
(27:04):
kind of a trade fragmentationand attract the supply chains.
Speaker 2 (27:08):
I want to go back to commodities for a bit.
I happen to be of the samemindset, but maybe for different
reasons.
I mean, it seems to me thateverything going on with China
as far as Trump and tariffs anddeals and all that stuff,
probably benefits China morethan the US, because in my mind
it means it's a reinforcement tothe policymakers there that
(27:28):
they have to focus more ondomestic consumption and rely
less on the US.
If Trump becomes a catalyst forthat, whether they can succeed
or not, it's enough to get some,you know, some annals.
First, right in the commodityspace, how much of a commodity
cycle is dependent purely onjust China as opposed to, you
know, broader underinvestmentand somehow it starts to work.
Speaker 1 (27:51):
I mean, I think to a great extent it still will.
China still consumes a lot moreand has been a growth survivor
for a while.
So it's quite difficult to justcompletely discount China's
view, even though the focus hasbeen shifting, and you can sort
of see that in the prices aswell.
If you look at the last one anda half two years of trend,
obviously China's growth hasbeen relatively weak and people
(28:13):
have been arguing for differentreasons behind that.
But despite that the commodityimport demand from China has
remained quite robust andobviously they have been
stockpiling and they have beensort of fortifying their own
economy.
But the truth of the matter isthat the correlation between
pure play China's usage of thesecommodities versus the global
(28:34):
demand for these commodities hassort of broken in the last
couple of years and I wouldargue this is a trend which is
here to stay, as more and morecountries sort of realize that,
look, we have entered into aworld where it is increasingly
transactional and we can't justrely on old existing supply
chain partners, right?
So in that kind of environmentyou would expect more and more
(28:56):
people to fortify, more and morepeople to stockpile these
commodities.
So I think that's a much morebroader trend.
The second part also is truethat, purely because of base and
how the global economies move,china will continue to play a
relatively uh important role.
The question is, uh the mix canchange.
(29:17):
Whether it is agriculture orwhether it is copper, it depends
upon how they sort of viewtheir strategic industry uh
focus.
But china is quite critical.
Uh, to look at the commoditycycles, I mean, if you want to
create a more sustainable view,right, I mean the argument about
underinvestment and all thosethings are absolutely true.
I very much believe in thoseparts as well, but some of that
(29:39):
can prove to be more tactical.
But if you want to create amore durable three to five year
super cycle view, I thinkChina's role has to be price
placed here.
Speaker 2 (29:49):
You had sent me a note saying dollar depreciation
in the next few years does notmean the dollar is the one we're
going to be the reservecurrency.
I think we need to really kindof unpack that, because I think
a lot of people keep using thatterm the demise of the dollar
and use that as an excuse forthe new system which is coming
in most people's minds around,you know, using gold or Bitcoin
(30:11):
or combination of the two andhard money and all that stuff.
Let's maybe counter some ofthat.
Speaker 1 (30:17):
Sure no, I think.
Thank you.
I think this is a topic whichI'm very passionate about in the
sense that, especially thisyear, right, obviously, dollar
has depreciated quiteaggressively.
And a big comment not just fromyou know, simple analysts, from
very, very senior, seasonedpeople we keep hearing is the
dollar has depreciated because,as you rightly said, it's a
(30:38):
demise of the dollar andthere'll be other contenders for
reserve currency.
And da, da, da, da da.
The argument which many peopletake is that that's not possible
.
It's very difficult to dethronedollar.
It's very difficult to findreasonable dollar alternatives,
which means that dollar will notdepreciate.
Now, my problem with thisargument is that these two
things are sort of uncorrelated.
(30:59):
If you take the next three tofive years time frame, which is
what is we generally look at,since 1975, when dollar started
to trade more freely, right, uh,dollar has depreciated.
There have been multiple bearmarkets in dollars, there have
been multiple bull markets indollar, and this is exactly how
the cycles behave.
If you see, in fact, in 75there have been two pretty
(31:22):
massive bear markets in dollar.
Dollar depreciated for almostseven years on an average in
each and was down 45 percentover a seven-year time period.
It had nothing to do withdollar getting replaced as the
reserve currency.
That can continue, but then theeconomic cycles also need to be
taken into account.
So that's my quite strongconviction that, look, we should
(31:43):
take the entire view about whatTrump is doing where US role is
in the global architecture.
Entire view about what Trump isdoing where US role is in the
global architecture.
That is out of the window forthe next three to four years.
When you want to talk aboutwhere dollar should be and where
its fair value should In aproper cycle.
Dollar was overextended.
You look at BIS, google, any ofthose estimates.
It was the most expensive since1960 and predicated on the fact
(32:07):
that 80% of global portfolioflows were flowing into the US,
which obviously supports dollar,and predicated on the fact that
US economy was exceptional.
And we can argue that it wasexceptional for the wrong
reasons fiscal deficits and soon and so forth but dollar was
being supported in a large partby those factors.
Now you want to create the nextthree to five year view, you
(32:27):
would see much of it gettingdiluted away.
We very strongly believeportfolio flows will get
reallocated to other markets.
It doesn't mean that nothingwill flow into us, it just means
that, look, 80 percent of flowsdon't need to flow into the us.
It could be 50, which is whereits global share of earnings are
right.
So when that kind of a thinghappens, when we finally realize
(32:48):
that, look, the growth premiumthat dollar had, that us had
built, versus internationalmarkets is finally getting
normalized, which is where itshould be given the cycle, then
again dollar will see some kindof a pressure.
So that's sort of my view that,look, there is a cyclical uh
view on dollar where it shoulddepreciate for the next three to
(33:08):
five years, and so far itdefinitely seems to be playing
out that way.
That has nothing to do withdollar will not be the reserve
currency.
Now, if you want to talk aboutdollars role in the global
architecture, that's a separateargument and we have seen some
chipping at the margin.
Right, dollar used to be 70percent of global reserves in
(33:28):
2000s.
Right now it's 57 percent,continues to tickle down slowly
and steadily.
We do see more and more numberof countries trying to diversify
away from dollar as best asthey can.
There is a fantastic paper byimf, sarkhan and barry I can
read in 22.
It shows that there are a ton ofcountries which are trying to
diversify away from US dollars.
(33:50):
Now, in the big picture schemeof things, in aggregate many of
these countries don't matter.
They're quite small.
But if you look at thatresearch and if you look at the
data, you do see that the trendis definitely there that they
want to diversify out of dollarin a slow, manageable fashion.
So that's my view that, look,dollar is the reserve currency
will be in the foreseeablefuture.
(34:11):
We can be in a multipolar world, but it is getting chipped away
at the margin.
But the dollar weakness that wewill likely see over the next
two to five years, it hasnothing to do with that.
That is pure economic cycle inprogress.
Speaker 2 (34:27):
Rohit.
Talk about the company, whatyou do, what you can provide to
those who might be interested inyour services.
Speaker 1 (34:33):
Look, ultimately we are institutional investors, we
manage money and we invest inemerging market assets globally.
But the main discussion pointand view for me is to just
engage in some of these globalmacro themes and try, and I
would say, bust some of themyths which we keep seeing in
(34:55):
many of these global discussionforums, whether it comes to US
dollar or the underappreciatedrole of international markets.
I'm on LinkedIn.
Rohit Goel Goelrohit is mypublic username.
I'm also on Twitter, not veryactive there, but, yeah, I'm
very much available on LinkedIn.
Speaker 2 (35:11):
Appreciate those that watch this live.
I enjoyed the conversation.
I think the emerging marketfrontier market point is
important, as well as the dollardemise one.
This again will be podcastunder LeadLag Live and hopefully
I'll see you all on the nextepisode.
Thank you, rohit, appreciate it.
Thank you, roy.
Speaker 1 (35:26):
Appreciate it.
Thank you so much for having me, Michael, and the usual
disclaimer the views are my own,not Breakout Capital or
Rockefeller.
Thank you so much for having me.
Speaker 2 (35:33):
Cheers buddy.
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