Josh Scott: Welcome everyone and thanks for joining us for this Pensions and Investments webinar, Emerging Markets: A Selective View. My name is Josh Scott. I'm a Senior Director here at P&I and just a little setup before we dive into the discussion and the reason that we're here.

Emerging markets are back in focus after a strong performance in 2025, but what we hear from allocators is not always just a broad push into the space because emerging markets is not just one story and there are many access points. The question becomes how investors are actually building exposure in markets that are multifaceted, and there's no one size fits all approach, and that's really what we'll explore today.

We've got a fantastic group of panelists here that span equity and debt, and I'm going to introduce each of them now. Joining us, we have Jason DeVito, Senior Portfolio Manager and Vice President at Federated Hermes, Brent David, Senior Portfolio Manager, Emerging Market Debt at RBC Global Asset Management, and Navin Hingorani, Portfolio Manager at Eastspring Investments.

And just a quick reminder before I dive into the first question that you all can submit your own questions at any point during the discussion. If you just look down into the bottom left-hand corner of your screen, type in your question there and make sure to click submit, and we'll get to those at some point during the broadcast.

But let's go ahead and jump right into the discussion and Navin, my first question here is for you and we're going to start big picture before we dive into some of the more portfolio construction elements related to building an exposure to emerging markets. But Navin, what are some of the longer term structural factors that make emerging markets interesting for institutional investors today?

Navin Hingorani: Thanks, Josh. Good morning and thank you for having me on. So I think let's take a step back and let's consider what are emerging markets. So we've got 24 different countries. We have more than 3000 investable stocks within emerging markets. It accounts for 84% of the global population and 80% of GDP growth.

But when we look at emerging markets, and we look at investors' allocations, at least from an equity perspective, what we see is that investors have been fundamentally under-allocated in EM and this is going back since the financial crisis. So, I guess two of the key ingredients you need for outperformance in emerging markets is valuation and low investor positioning. That's where we are right now.

But really, you could argue and say that's been the case for the last 15-16 years. So what's different? So let's take a step back, and I have some slides that would be useful to look at here, Josh, where we can touch upon really what's happened and what are the changes that we see happening in emerging markets.

So, on the first slide that we see. And what we're showing here is that over time in emerging markets, it's showing the performance of emerging markets versus the US. There've been a few components to why the US has substantially outperformed emerging markets. Now key amongst that has been earnings growth. Earnings growth has been much faster in the US than it has been in emerging markets. On top of that, you've had valuation re-rating in the US and as well as that, you've had the USD supported.

If we peel that back a little bit more and we go to the next slide. And then what we'll see there is that there have been a variety of different components to that. So on the left-hand chart, what we see is actually across emerging markets, going back to the early 2000s, earnings growth has been substantially ahead of the US. But where the real difficulty has come has been in terms of aggressive share issuance in emerging markets, which you see in the middle chart there. And what that has led to in the final chart on the far right is much lower EPS growth in EM.

So what we have seen and what we think is very positive over the last 2 to 3 years is what we show on the final slide. And that is that there has been improved corporate governance in emerging markets going back now for 2 or 3 years. And if we look at just 2 of the largest markets in emerging markets today, China and Korea.

So the far left chart here shows you Korea and what we're showing is the level of buybacks in Korea over the space of the last 5 or 6 years. So when the red bar is going up, it shows you that there've been increased buybacks. Korea went through a point where you had more than 50% of the Korean market trading at less than book value. And what you saw was a huge movement for Korean retail investors moving their exposure from local equities into US equities. And so what the government instigated was a value up program, something that had been very successful in Japan. And as a result of that, there's been a very much improved corporate governance within Korean companies.

Take that over to China, and what we show here is the exposure in terms of dividend payout for both the H shares and the A shares. And you'll see that there's been a meaningful increase in dividend payouts as well. So there is a self-help story in emerging markets that wasn't there if you were to go back 4 or 5 years ago. And that's really one of the key drivers that is driving EPS growth now in emerging markets. And what led to substantially higher earnings growth for EM last year versus the US and will lead to faster earnings growth this year and next year. And we are now in the longest sustained period of EM earnings growth that we have been in the last quarter of a century. So we think that's a very powerful tailwind for emerging markets and really the opportunity is still there for investors to get in, given the valuation and given the low positioning.

Josh Scott: Navin, thanks so much for that context as we kick things off here. Jason, I'm going to shift to you next. If we look at fixed income, what are the key macro factors or forces you think matter most for EM fixed income right now and how does that differ from developed markets, for instance?

Jason DeVito: So there's a number of things we're looking at right now. And we all think they ultimately feed into what we envision as a tame inflationary environment. So, one of the biggest word is inflation. Inflation is a very dangerous word in emerging markets, and the ability to disinflate, to tame inflation, become very critical drivers of expected FDI flows, gross capital formation, the buildup of reserve levels. All positive things related to the investment environment really depend on a tame inflation picture.

So the first macro we really look at and we think it has more of a delta to emerging markets than DM is inflation, but there's a number of things that we think contribute, a lot of other macro factors that we think contribute to the inflation picture. One is political shifts. So we've seen a lot of conservative regimes come into power, and that leads to very strong fiscal consolidation measures. We've seen central bank credibility improve and begin to tamp inflationary impulses.

We think AI adoption globally is very important, we think that will spill over. AI and other forms of tech, will continue to kind of, they first adopted in DM but we think it will spill over into EM and that could lead to things such as greater crop planning, more development of arable land, crop rationalization.

We also think trade relations and just general relations with developed markets and multinationals is quite important. So we think from an inflation standpoint, low tariffs, you import goods, quite positive to have a low tariff environment. And also just from an FDI flow perspective, in our relations with developed markets, if we think we need better roads in a lot of EM countries, we think we need to diversify manufacturing and output. We think we need more sustainable and cheaper power generation. A lot of that capital can come from the developed world. So, broadly speaking, biggest macro inflation and all these kind of sub-macro variables roll up into the overall disinflation story we look for when investing in EM.

Josh Scott: Thanks, Jason. Yeah, a lot of those things, I don't think will be unfamiliar to a lot of investors that are used to investing within the developed markets. Brent, I'm going to shift to you next with this question on, I mentioned at the top sort of the renewed interest in emerging markets, but what is the most compelling reason for investors to be looking at emerging markets today versus in the past? And then in addition to that, how does the relative value of the dollar factor into those opinions?

Brent David: Well, yes, thanks, Josh. I think, as you maybe mentioned a little bit earlier in your presentation, one of the standout features that we see in emerging markets is really not a one size fits all and such a diverse universe. Navin had mentioned in the equity space, there were 24+ countries in the fixed income space. There's over 80 investable countries that we have in the universe, and that's just on the sovereign hard credit side. In the corporate side, you've got more than 15 sectors to be investing in. You've got more than 35 currencies, liquid currencies to be investing in. And this ranges in yields from anything between 3% in some of the low yielding Asian rates markets through to north of 15 to 20% in some of the other high yielding markets.

So the diversity amongst emerging markets is significant. It stands out. And it creates significant alpha opportunities amongst foreign investors, amongst the asset class. So from that perspective, when we think about one of the single biggest demands for investing in emerging markets fixed income, is to be able to access this pool of north of $32 trillion in assets out there in the fixed income space.

A large portion of that is in the local currency universe. We've seen huge growth in the local currency universe over the last 10 to 15 years. And I think this goes back to one of the points that Jason was making, that we've seen significant credibility gains from the central bank side, where broadly emerging market central bankers have gained a lot of credibility around inflation targeting, and with the credible inflation targeting mandates that you've seen amongst these central bankers in emerging markets, then you've ultimately seen a significant growth in local market assets that creates a more sustainable balance sheet amongst both sovereigns and corporates.

So it really makes for a very interesting diverse universe to be investing in across fixed income. And as you pointed out, the dollar plays a factor and quite significantly so, most specifically in the local currency investment universe. The dollar is overvalued. It has been overvalued for an extended period of time. Overvaluation needs a trigger to revalue. We think that there is a trigger in place. You've seen a significant move in the dollar over the last year that's created a significant tailwind to emerging market, local and hard currency assets, but as long as this continues, and we think that it can continue, then this is going to suck a lot of capital into the emerging market space where you get higher nominal and real yielding assets to invest in.

Josh Scott: Thanks for those comments, Brent. Yes, it's, as we've discussed a couple of times already, it sounds like there's a lot of access points. So let's go ahead and dive into some of the portfolio construction elements as investors start to think about building, or furthering exposure to this space. And Jason, I'm going to come back to you. So in a time where concentration seems to be top of mind for many investors, how does emerging markets enable diversification? How should institutional allocators be looking for diversification within different, let's say subcategories like for instance, corporates versus sovereigns?

Jason DeVito: Well, I will address one point very quickly on the sovereign side is that within sovereigns there's, as has been mentioned on the call, multiple ways to allocate, so there could be allocations to external debt sovereigns or local market sovereigns. What we found on the external debt side, that there's ample opportunities to play the high yield space where very idiosyncratic type stories, and those stories can play out, regardless of the broad macro environment.

If we look back over the past 3 years, EM high yield assets have outperformed developed market high yield assets. That's not to say they're completely uncorrelated or they won't move in the same direction, but we've seen significant outperformance. We think what occurred is very bottom-up type stories that we can analyze, that we can get our hands around, and in turnaround stories, whether it's fiscal, monetary policy, infrastructure stories, they allow positive returns regardless of the broad global backdrop, so we can extend that thesis, and we think in times of risk off, we can still see positive returns out of some of the real idiosyncratic sovereign stories.

But also in the local market space, as has been mentioned, there's ample opportunities to invest in very mid-beta, investment grade type sovereigns. Maybe their external debt, their dollar denominated debt looks a little too rich at this point, but the local curve still offers some interesting carry, as mentioned, very high real yields, and the opportunities for currency appreciation. So within this umbrella of assets, we feel we can navigate, given the various opportunity sets.

Josh Scott: Thanks, Jason. Let's keep it on fixed income and I'll come back to you, Brent. How are you thinking about positioning emerging market fixed income within a broader portfolio as a beta and alpha strategy and related to that, why is it important to take a bottom-up approach in this space?

Brent David: So, we think that there's a number of different ways to approach investing in emerging market fixed income. You can use the broader beta components of the asset class, or whether that's investing in the relative return products in the benchmark products, hard currency, sovereigns, corporates, or local markets, or really focusing on an absolute return-minded mentality, where you're focusing on all components of the emerging markets, where ultimately the investor has the ability to go and invest in different components of the market, depending on the cycle.

Now, the way that we were thinking about things, certainly heading into the geopolitical crisis that kicked off in the beginning of March, was that the structural tailwinds to emerging market local as an asset class was significant. The weakness in the dollar, we felt that this was a trend that was going to continue. So within our broader portfolios, we think it made sense to be far more allocated toward the local components of the asset class because those tailwinds to the currencies ultimately anchored inflation expectations over the long term and gave central banks the ability to ease policy rates a lot more aggressively than they would have in the past and certainly given that they've built up these credibility gains over the last 10 to 15 years.

So from a portfolio construction perspective, increasing exposure to local market assets was a significant additive beta component to a broader portfolio, given that you've got not just these duration gains, but obviously also then the currency gains to the portfolio.

Now, as we come into where we are now, and we still think that there is a lot to be said about the headwinds to the dollar tailwind to other currencies. But it's a little bit more nuanced now when we think about oil prices remaining elevated. There's ultimately, and this is the beauty of emerging markets. When you've got 80+ countries or 35+ currencies to be investing in, they are very clearly going to be winners and losers. Oil exporters versus oil importers, most simply. And so really thinking about building in the portfolio from that perspective, who are really going to be the winners out of an elevated oil price for an extended period of time and running longs and shorts. So from an absolute return mindset to be thinking about building your portfolio from that bottom-up perspective, because it's not just a beta play. There really is idiosyncratic stories at play within the universe.

Josh Scott: Thanks, Brent. Let's shift gears again and go back to the equity side of the equation and Navin, in equity specifically, how should investors be thinking about breaking down emerging markets? Is it geographic or sector-based and can investors get true exposure from a broad index?

Navin Hingorani: Sorry, can you hear me?

Josh Scott: Yes.

Navin Hingorani: All right. It's a great question, Josh, and I think one of the things that we look at when we're looking at the index. So if you just take MSCI for example, the MSCI index, that has got roughly 1200 stocks. If you actually broaden that out, there are more than 3000 investable stocks in the EM index. So just by going passive, you're reducing your universe size by more than half.

But more broadly within that, right now in terms of concentration, 77% of the EM index is Asia, and it's basically four countries in Asia. There are 24 countries in the EM. There are huge amounts of opportunities. So that concentration that you get if you just go into passive and investing in the index doesn't give you the true breadth of exposure that you can get when you go active and you've got the opportunity to ignore the index and really look for bottom-up opportunities that represent the best opportunity to get alpha.

Now, it's interesting, I think if you were to look at the US or probably a lot of developed markets, and you were to look at how the index performs, you'll probably find it comes close to 1st quartile, if not 2nd quartile. EM is completely different. Look at EM over the last 3, 5, 7, 10 years, and what you'll see is that if you'd been invested in the index, that you'd have been in the 3rd or 4th quartile. And that just shows you the huge opportunity there is for alpha generation through active management in emerging markets.

Now, as I mentioned, when you get these huge shifts, when you get large concentration, whether it's in individual stocks, or whether it's in countries or even sectors within the index, that means a lot of other opportunities tend to be crowded out. And that's where we really find a lot of opportunity, where stocks have been crowded out because investors have flocked towards the big large cap names. We find opportunities that are unloved, and they're really not being appreciated.

One of the biggest shifts we're seeing in EM at the moment is this movement of opportunity, reshoring away from China to other markets. China, for example, used to be 40% of the EEM index. It's come down now. It's actually now the second largest country, roughly 24% of the index. But within that, what you're finding is that this marginalization is ignoring countries that are benefiting from nearshoring and reshoring. Markets in ASEAN, markets in LATAM. And if you just take, for example, manufacturing value add in China is roughly $5 trillion on an annual basis. If you take 10% of that and you move it to markets in ASEAN, or you move it to markets in LATAM, it more than doubles their manufacturing value add. If you're invested in the index, you wouldn't get exposure to those markets. You pretty much just get exposure, as I said, to those largest 4 countries. So there's a huge opportunity for active management, which I think is really significantly different to what you find if you're invested in the US or other developed markets.

Josh Scott: I think that's a key distinction to point out, Navin, and I wanted to, before I continue with the discussion here, I just want to remind attendees that they can submit questions via the ask a question text box in the bottom left-hand corner of their screen. Just type in your question there and click submit, and we'll get to it in a little bit, but I'm going to jump back into some of the questions that we prepared on the prep call.

Brent, I'm going to shift back to you and we've talked a lot about sort of broad strokes, what could an exposure to emerging markets look like, but if we were to get a little bit more specific from your perspective, where are you finding the most attractive opportunities today and are there regions or markets you have contrarian views about?

Brent David: So where we think the most attractive opportunities are, are maybe not specifically to a region, but as I mentioned a little bit earlier on, it's more specifically to those economies that are seeing a very positive terms of trade shock. Now those terms of trade shocks have come in two different forms. If we think about prior to the conflict in Iran, that terms of trade shock was very specifically driven by huge increases in precious metals and copper prices, largely driven by AI gains and then a shift toward gold as an alternative investment in reserve management and a number of emerging market economies benefited significantly from these positive terms of trade shocks certainly in the second half of last year and coming into this year.

The second round of this terms of trade shock has now obviously been in oil prices. And so when we think about what this means for a number of economies and their currencies with these positive terms of trade shock, that becomes a very significant tailwind to the currencies, but it also impacts the fiscal revenues and therefore the balance sheets of these sovereigns and the outlook for bonds.

And so when thinking through the opportunity set and particularly now given the conflict in Iran, really it's Latin America broadly who still looks relatively attractive for us. On average, broadly, they tend to be commodity exporters, they've seen positive terms of trade shock. And proximity to the war is obviously very different. In terms of those who are oil exporters, they don't rely on the Strait of Hormuz to export their oil, so they're still exporting at elevated prices, and this becomes a very significant tailwind to a number of those through bond prices, but also on the currency side.

So that would be the focus, but the others would also be where we have seen over the past couple of months or couple of years even, positive political changes, domestic political changes. Now we're seeing a number of those once again in Latin America, we're seeing a shift to the political right in a number of the LATAM economies, the anchoring of the political right in Argentina. So a number of Latin American economies and we still have some elections coming up in Latin America which are going to be a very important role, but in South Africa as an example, you've seen quite a significant political shift over the last couple of years, and this has led to positive gains, and we continue to expect that to happen. And more recently in Hungary, where you've had a change in government, where the Orban government was in power for the last 15 years, and that should ease up relations within Europe. So from that perspective, it is really thinking about the bottom up, winners and losers around the geopolitical conflict, but also then domestic idiosyncratic changes that we're seeing on a political front.

Josh Scott: Navin, let's move back to the equities discussion and I want you to, I want to revisit, you mentioned China in your last answer. I want to revisit that and sort of ask you more specifically how should investors think about China today within an EM allocation? How is it different than before and where are the best opportunities in equities?

Navin Hingorani: Yeah. I think China is, you can't have a discussion about emerging markets without talking about China. Now, as I mentioned in my last answer, China, if you go back to 2020, China was 40% of the EM index. And that was by far the largest ever index weight the country had had within the EM index over the course of time. It's subsequently come back down, but as it's come back down, that's really dragged down EM returns. So if you actually did a comparison of how EM has performed compared to the MSCI world, it's substantially underperformed, that's been driven by China. If you took China out of EM, if you looked at EM ex-China and you compare that to World ex-US returns have actually been comparable.

But there has been change in China, and probably foremost amongst that is that you've started to see some supportive government measures, which are much more supportive of how the equity market there can perform. So firstly, you went through this period whereby there was a, you could probably say private investment, private entrepreneurs were being somewhat marginalized within China. That has changed now. There's been this renewed embracing of these private entrepreneurs and private enterprises. You've also seen a huge buildup in terms of the savings rates of consumers in China. China has the highest savings rate globally. So what that means is that there's a lot of ammunition there to be put to play as and when the macro situation starts to turn, and we think there are some green shoots of recovery starting to come through.

What I've learned throughout my time investing in EM is that sometimes you don't need to see things necessarily improving, just that sometimes a slowdown and deterioration can be sufficient for markets to start to perform better. Recent policy measures in China have been supportive. You've started to see less focused on fixed investments. You've started to see the government looking to reduce excesses in terms of state companies competing with each other. And as I showed in the slides earlier, you're starting to see an increased movement towards higher payouts by corporates within China.

That's China, but I think your question also touched upon what are we seeing outside of China. And similar to some of the answers that we've had from Brent, we also see huge opportunities within LATAM. We think there's a very supportive environment within LATAM right now, whether it's from a valuation perspective, or in terms of tailwinds. It's very much oil, they are very much reliant upon their own oil, they're not reliant upon importing oil within LATAM. That gives them a huge benefit in this current environment. You're also seeing, as I would agree with what Brent said, this movement towards right-wing governments which tend to be supportive of equity valuations.

And more broadly within LATAM and outside of LATAM we are seeing a huge opportunity within the consumer segment. This is something that we haven't seen for a long time. The consumer segment had been very expensive, but we're starting seeing increasing opportunities there. And sometimes those increasing opportunities are coming about because so much of the focus now for investors is just investing in tech. Tech has been on a great run. It probably has a little bit more to go, but sometimes you then find those pockets of opportunity where other people are ignoring them. And we think for the consumer segment across LATAM, across emerging Europe, Middle East, Africa, and across Asia, there are some strong opportunities.

Josh Scott: Thanks, Navin, and Jason, I wanted to shift back, shift back to the debt side of the equation and stick with similar that I asked Navin around China. Does the China view seem the same as in equities as in debt? How is it different, and where are you seeing the most compelling opportunities across countries or regions right now?

Jason DeVito: Well first, China is a much smaller portion of fixed income, EM fixed income benchmarks than it is for equities, but it's not something that we disregard. So, we follow China more to get a feel for how the rest of the world may behave. Chinese sovereign bonds, government-related bonds, don't have a ton of yield to them, limited corporate space to invest in, but capital goods output from China, demand for commodities from China drives a lot of the corporate sectors or sovereign performance outside of China, particularly in Latin America.

But as Brent mentioned, as Navin had mentioned, we are very bullish, Latin America, see a lot of great opportunities there given the energy issues that have been mentioned, but also I want to reiterate, same as Brent had, we're very idiosyncratic and bottom-up in how we look for things. We have a DNA kind of a genetic sequence of our investment process and what we look for in stories. And a lot of times it truly relates to fiscal turnaround, political transition. Hungary has been mentioned, we have looked at extensively and very favorably upon Nigeria for reforms that have occurred there, that constant combating of inflation, the Indian economies with the political shifts, Argentina has had massive monetary and fiscal improvements, so those types of cohorts become places that we look to invest.

And again, the commodity story, it's one by one. Right now, oil is in favor and that benefits even stories, such as Venezuela, it propels Ecuador moving forward, gives them more of a runway to continue their fiscal reforms and investments in security, but that could be a little more transient depending on that path of commodities, but currently it's definitely a story propelling Latin America, but broadly, we look for, as we like to say, convergent story. So where fiscal, monetary policy, infrastructure type investments resemble or project a picture of developed markets, say 3 to 5 to 7 years out, and that's the fundamental backbone of what we look for in long-term investments.

Josh Scott: Thanks, Jason. That's super helpful. It sounds like there's consensus around Latin America amongst our panelists here today, amongst others, obviously, but I want to shift the conversation from sort of looking at opportunities to managing risk, right? The other big component that a lot of allocators on the call will be thinking about, and Brent, I'll come to you first with a question here. How are you thinking about managing downside risk in debt, especially in an environment with high dispersion across countries?

Brent David: So, look, I think that's a really interesting question, but one that very much depends on the type of strategy that you're running. So we will run a whole host of strategies, some which are long only and benchmark constrained, and the others which are absolute return minded. So, given the dispersion in countries and corporates, we could very clearly be running an environment where we'd be short in a number of economies which we feel are not looking favorable in this current environment.

Now, in the type of long only portfolios though, I think the way we like to think about it is we'd have a tool of macro hedges that we would ultimately always be looking at and using to try and protect the portfolio in these shocks. Now, I think February was an environment which was one that is useful pointing out because Vol markets in particular were at almost historical lows. If you looked at FX Vol, given that you continue to see the sort of tailwind to FX stories and the dollar continuing to sell off, that you'd seen vol markets grinding significantly lower. The VIX was very low, S&P Vol was very low.

So, in times of very low vol markets, we would very aggressively then use option structures to go and hedge the portfolio, to hedge against any type of risk off scenario. It's always very difficult to pinpoint, particularly in the sort of geopolitical environment that we find ourselves in. It's always very difficult to pinpoint what is going to be the exact trigger and when, but I think it's very important for us to be able to utilize macro hedges when Vol is so low to protect the portfolio so that you're not fire selling assets, particularly as bottom-up investors, that you're not fire selling assets on investments that you think are money good over the medium term, rather use macro hedges to protect the portfolio, to be able to warehouse the risk through these volatile times to then come out of it and be in a position where you're still holding on to your assets that you think are really good and potentially adding into them. So the use of macro hedges for us, and that could be CDS indices, it could be equity vol, it could be FX Vol, and a host of those would be a part of the toolkit that we often use to protect the portfolios.

Josh Scott: Thanks, Brent and Jason, I'll ask you a similar question, what are the biggest risks investors may be underestimating in emerging markets today?

Jason DeVito: Well, we've throughout this panel touched a lot about elections and political transitions, and I know personally, we tend to get very comfortable with this optimism or this hope that we continue to see right-wing, pro-fiscal, conservative governments take office and that encourages investment, FDI we're going to see stable currencies, we're going to see low inflation. That roadmap may not continue to persist in every upcoming election. Definitely played out well in Indian economies. Consistently have noted Argentina, Hungary, but in the upcoming elections in Brazil, in Peru, Colombia, we may not see such favorable outcomes, so there, it's easy to get caught up in the momentum of what's occurred and try to rationalize or attribute that to some broad shifting North American influence shift in how the electorate looks at things, but that may not necessarily be the case moving forward.

A couple of other things, and I don't actually think that this is underestimated, but obviously a continued conflict, high oil prices for a long period of time, it's not our base case scenario, but that would definitely have some ramifications beyond just kind of the winners and losers argument in the oil story, then you may have a more deleterious effect on global growth.

And one other thing, and it's a little more of a nuanced or esoteric concern, but I have a lot of faith in global central banks, and I think they'll be vigilant, but also be mindful that inflation could be exogenous and somewhat transient, but I do fear that the market as a whole, may become a little bit impatient and want to see more hawkish behavior if oil prices stay high. That may not be the right course of action, but that may begin to weigh on oil prices. I think there needs to be patience with how central bankers behave, and I hope that the market as a whole is mindful of that.

Josh Scott: Thanks, Jason. And Navin, I'll shift to you with a similar question, on the equity side, but I want to sort of pull a little bit further on some of those geopolitical themes that Jason touched on and think about how are you factoring political and policy uncertainty into your investment process in EM equities.

Navin Hingorani: Yeah, look, Josh, it's forefront of what we do because ultimately, when you're investing in EM, you're investing in so many different countries, you have to be cognizant of the risk that you're taking. But one thing I would say is that, and I've heard this a lot of times and I've spoken to investors, is that when you mention emerging markets, one of the key things that often comes up is risk. It's riskier, and they talk about political risk, economic risk. I think that was true of emerging markets of old, and I really think that emerging markets where they are today look very different to where they were 20 or 25 years ago.

And in fact, what's interesting to us is that a lot of the conversations that you could have had about emerging markets in terms of political uncertainty about independence of central banks, about fiscal policy, monetary policy are questions that we are now having about countries in developed markets. So, I just think there has to be a reorientation of how we consider risk within emerging markets.

For us, when we're looking at risk, we are also cognizant of the fact that sometimes within emerging markets, you will get great opportunities because that emerges because of risk that is attached to a country as a whole. So we have been able to pick up opportunities whereby the political or economic risk may have increased in the country and so everything is sold off. But when everything is sold off, it doesn't necessarily mean that every single stock is impacted equally. So we shouldn't run away from the opportunity that the risk presents. And that is one of the things that we try and do as long-term equity investors because our investment horizon tends to be longer than the rest of the market. We tend to be invested for 3 to 5 years, and we have the patience to ride through periods of turbulence.

That said, the key determinant of your long-term return is the price that you pay when you go in. And when we look at things from a bottom-up perspective, the question that we're asking ourselves is, what does the current share price tell us about future expectations that are built into this company's valuation at the moment. And if we find that there's an attractive opportunity, even after taking into account political risk, macro risk, then that can be something that we can ride on over the next 3 to 5 years.

Specifically, for each of the 24 countries in emerging markets, we will assign a discount rate and we will assign a growth rate to that market, but where we will be very different to how we think the rest of the market operates in the equity world is that we're not going to be emotional and change that based on short-term measures. I can think of many examples where there's been a short-term measure and the sell side will have moved from a cost of equity of 15 and pushed it up to 30%. If you discount anything back at 30%, you're going to find it very hard to find an attractive opportunity. But if you start, if you take a slightly more nuanced and longer term approach, still being cognizant of the risk, we think it can create a huge opportunity to find great stocks.

Josh Scott: Thanks, Navin. I want to take a pause here from the questions that I had prepared from our panelists and move into some of the questions that were submitted by our audience. And just as a reminder, you can still submit questions. There's that text box in the bottom left-hand corner of your screen, you can type in a question and hit submit, and we'll try to get to them during today's discussion.

But shifting into some of those questions, Navin, I'm going to toss this first one to you. And how does EM factor into the AI disruption we see today and are there opportunities outside AI in emerging markets?

Navin Hingorani: Yeah, I was wondering when we were going to get onto AI from an equity perspective. Look, one thing I would say is that Asia accounts for roughly 70% of imports into the US from an AI perspective. So the money that is being spent in the US is benefiting these tech companies in Asia. The difference is you're getting them at much cheaper valuations than you're getting for companies in the US. On top of that, the conversation you're having, at least that we see for the large companies in the US is what are the long term returns they're going to get for this money that they're investing. When you're looking at the tech companies in Asia, they're already seeing the revenues, they're already seeing the profits coming through from this increased capex that's being spent by the hyperscales in the US.

So there are huge opportunities in AI within EM within Asia, and that is flowing through because if you think about it as the wealth of the countries picks up that eventually flows down all the way through to consumers. But more broadly, the other opportunity that it creates, Josh, is that, as I said, when that index concentration builds up, and now tech is roughly 32% of the EM index, it then means that you're finding other pockets of opportunity that are being ignored. And as a value investor. So that's where we tend to get really excited. You find something that's unloved, that's cheap, where its current price doesn't reflect the long-term return that that company can generate. That's where we can go in and we can make a lot of money. So there are opportunities within AI, but then there's opportunities with market crowding into those is also creating opportunities we find elsewhere.

Josh Scott: Thanks, Navin. This next question that came in, Jason, I'll toss to you. We've talked a lot about different ways, different access points to emerging markets, but what are some other ways that you think of to gain exposure to emerging markets within a portfolio?

Jason DeVito: So beyond core EM products which could consist of external sovereigns, external corporates, local corporates, local government debt, there's also trade finance or loan vehicles. So a lot of times project loans where you're guaranteed an output from a smaller entity that has a large North American counterpart per se, say, CSN and Brazilian steel company hypothetically is promising to deliver a good. And you have an off-taker in North America, you can finance that loan and you're guaranteed by the execution of the delivery of that loan, and there's lots of protections to the loan, reserve accounts, underlying commodities, you're sharing risk with the banks that underwrote that structure, so, in our minds can be low risk assets that offer a little bit of a premium relative to similar type of items, cause it's not a highly trafficked or well lent space. So that's another area we've looked at in the past.

Josh Scott: Thanks, Jason, and Brent, this next question I'll toss to you, we're talking a lot about active management and emerging markets. Why does the EM debt universe provide a ripe opportunity set for a long short investment strategy?

Brent David: So, I think it's ripe for a long short opportunity because as we've spoken about throughout the course of this discussion, is that it's such a vast universe, and in all of this, and particularly in the current environment that we face, there are environments where there is a very clear beta thematic, and we felt that we were in that beta thematic over the last 12 months with the tailwinds in FX markets. But there's going to be environments where it's all about the alpha, and the opportunities that you have across emerging markets are so vast that running a long short portfolio and fixed income using hard currency, using CDS, using interest rate swaps to be received or paid depending on the direction of travel for different central banks, but then also in currency space is ripe for harnessing those different opportunities.

So when we think about and have discussions with end investors. A lot of the discussion is often around whether the investors want to build their own portfolios from a building blocks approach, as to they think that they feel that there's a ripe opportunity in a certain component of the beta, or whether you want to be thinking about the opportunity within emerging markets is vast, and there's an opportunity to make money on both the long and short side running relative value plays across the space.

Josh Scott: Thanks, Brent. I'm going to shift back to some of the questions I had prepared before we go back to any audience Q&A to wrap things up. Specifically because I wanted to get to this discussion, Jason, this one's for you. We've mentioned commodities a few times during the discussion, and they can be a big factor in certain regions and countries within emerging markets. Has the recent oil shock changed any of your opinions or how has it?

Jason DeVito: In the short term, it definitely highlights the idea of winners and losers. With the oil spikes, obviously the oil exporters are been stronger investments over the past 1 to 6 weeks. One thing we've noticed that's not concerned us, but recontextualized our investment process a little bit is a little bit of a decoupling from other key commodities and oils. So copper, gold have not had the big rally that oil has had, so that shifts our narrative a bit, but we still think these are somewhat transient short-term effects, but we're very mindful of them. We still believe longer term, that the push for AI technology and the metals that fuel AI will be very supportive of precious metals long-term, but right now, anything oil related is a very healthy, very strong trade.

Josh Scott: Thanks, Jason. And Navin, how should institutional investors be thinking about access and identifying true outperformers in markets where there sometimes requires deep expertise?

Navin Hingorani: Yeah. So it comes down to knowing what you want to research and what you want to invest in. And so that's why when you're looking at more than 3000 opportunities, you kind of need to have a funnel to get to those lists of opportunities that you can spend your time researching. So for us, that's valuation and really looking to exploit behavioral biases in the market and at its core, those behavioral biases of fear and greed. So when the market gets fearful about a stock, it creates this valuation opportunity, which then for us creates an opportunity to buy something which doesn't reflect at a price that doesn't reflect its long-term opportunity.

So we will apply kind of like a quantitative screen that looks to identify opportunities on a relative or absolute basis. And that's important because it removes that degree of bias and emotion from the initial stage of investing, which is where you look to focus your time. Oftentimes when you've looked at a stock in the past, you have some degree of association with it. And that association could be positive, it could be negative. We kind of want to remove that and go to where the opportunity is regardless of what our past experience may have been with the stock.

So when you're looking at it from that basis, and you're focused on where you want to do your research, you can really do in-depth research on a select group of stocks that offer that valuation opportunity. And then you don't end up needing to have a team of 50 people doing maintenance research on stocks that you're never going to buy. We find it's a lot more productive to focus research on stocks that actually fit the criteria of what you want to end up owning in your portfolio.

And then when you build the portfolio, what's important is you're being very cognizant that to ensure that there's stock because we want stock specific risk to dominate the total risk in the portfolio. So being aware of where we're taking risk and ensuring that we are being compensated for risk in the portfolio is what's key for us.

Josh Scott: And Brent, a big picture question for you. What is one theme or shift in emerging markets that you think investors aren't paying enough attention to?

Brent David: I wouldn't say that people aren't paying enough attention to it, but I would say that the an extended period of geopolitical risk. And whether it's in the Middle East or whether it extends beyond, if under the current geopolitical framework, if we have quote unquote, a ceasefire or a deal, who knows whether that deal actually is a good deal or not, and then we move on to the next one, and whether the next one is talk about Greenland again and we have conflict between the US and Europe, or whether it's moving back toward Cuba and the regional vice.

So it's, I don't think it's one that people are not paying attention to. It's just very difficult to get certainty around what that means ultimately for emerging markets. And for us, I guess what it means is elevated Vol for an extended period of time. What elevated Vol means is really an opportunity for us because at the end of the day, it's about having conviction in your underlying process. Vol is going to create opportunities in terms of dislocated prices in assets that, as long as you do your core bottom-up research, is going to be an opportunity to buy some very cheap assets or sell some very expensive assets.

So, I think it's trying to get our heads around what's an extended period of time of heightened geopolitical risk means, not just in the Middle East, ie where does it extend to next? Is it China and Taiwan? Is it Greenland? Is it, how does this evolve? And that's, I think, a very important question and one we all need to get our heads around.

Josh Scott: Yeah, definitely a lot to think about there. And Brent, I want to touch a little bit further on the piece you mentioned around Vol, because we had a question come in around how can managers harness the volatility found in this opportunity set to deliver a compelling track record. I wonder if there's anything you would add to what you mentioned already.

Brent David: I mean, I think it's to that point that I was trying to make, which is that we ultimately, we see Vol as an opportunity, and as long as you have conviction in your process, whatever that process may be, as long as you have a robust process that you backtrack with analysis, risk and mean reverting models, whatever it may be, having conviction in the process, heightened vol, is always going to be an opportunity, and we see that for sure. Being able to harness that is about being able to commit to your process when the markets are going through periods of stress.

Josh Scott: Thanks, Brent. Another question that came in, Jason, for you, how should investors think differently about hard currency versus local currency, EM debt? I know we've talked a lot about currency risk, but anything that you would add for that question?

Jason DeVito: We think the local currency markets, as mentioned, are more tied to the domestic central banking story, and there's a lot of those credibility gains are beginning to accrue to the FX levels and the stability of those yield curves and the risk premiums built in those yield curves, but to contextualize, over the past 20 years, we've had a lot of shocks. COVID-19, taper tantrums, multiple geopolitical incursions, but we've seen very stable local markets and more stable FX than we would have seen in the late 90s when I was sitting in college during the Asia financial crisis.

So, we're very bullish on that long-term improvements in central bank credibility and policy. And we also see it as a little bit of a different trade, so the curves that have the most issuance that we find to be the most investable are kind of the triple B or investment grade space. Now there are some other opportunities outside of that, people have dipped into Argentina, or Nigeria, or Egypt at times, not all of the investable curve, most investable curves are IG. South Africa could be a great trade, as can Turkey, but a lot of the issuance comes from, as we like to call it the more mid-beta or investment grade type curves.

So we, again, we think of this as picking the cheapest part of a very good credit, if I think of the ABS world, you could buy a pool of underlying collateral and buy the triple B tranche, and in our minds sometimes buying local rate Brazil is buying the yieldiest part of one of the better credits. So that's kind of how we approach this, we see a little bit of different type of risk, in some ways, it might be less idiosyncratic than triple C external dollar sovereigns, the frontier markets of the turnaround stories, such as Ecuador, Argentina, or Egypt, which drove the past three years of EM high yield returns beyond developed markets terms.

So it's a little bit of a different story, but it's fundamentally is rooted in as we like to use that term, the convergence of central bank behavior and policymaking to what we see in developed markets and we're still very bullish on that story moving forward.

Josh Scott: Thanks, Jason, and Navin, there's a question here that I'll toss to you. And it's kind of big picture, maybe it will be nice to wrap things up, but why is this time different for emerging markets prior to other periods in history? I think you might be muted Navin.

Navin Hingorani: OK, I was going to say, Josh, one of the first lessons I learned when I started my investing career is the four most dangerous words are this time it's different. And so I'm not going to turn around and say, this time it's different. All I'm going to say is that depending upon your level of experience, you may never have been through an environment where you've seen EM outperforming, but it has been through periods of outperformance. It's just that it's been in a prolonged period of underperformance versus the US.

But when you look back at other periods when emerging markets have outperformed, there've been a few key drivers, and some of those key drivers are in place right now. So firstly, as I mentioned earlier, you're starting to see faster EPS growth in emerging markets versus developed markets in particular, the US. A large part of that is being driven by improved corporate governance within emerging markets themselves. On top of that, as other panelists have mentioned, a weaker US dollar is beneficial for emerging markets. We've been through one of the longest periods of US dollar strength. It seems to be the policy of this administration to want a weaker US dollar that has in all environments been bullish for EM equities.

On top of that, when you see an environment where Capex is increasing, that tends to lead to EM outperformance. Now, you went through a very long period from the financial crisis through until roughly 22, 23 where Capex was decreasing. That has now started to increase, whether it's at the corporate or at a government level, and every time Capex increases emerging markets outperform. Why? It's because emerging markets are producers and manufacturers for the rest of the world.

So, it's not that this time it's different, it's just that it's been such a long time since emerging markets have had these tailwinds behind them. The key benefit right now is that you've got these tailwinds, but you've also got huge valuation support, and you've got investors being underpositioned. So it's really a ripe environment to be able to make outsized returns we feel in the emerging market equity space.

Josh Scott: Thanks, Navin. And there was a question that came in. I just wanted to toss out to see if anyone had a response and anyone can sort of jump in on this one. But with the increased focus on, we had a lot of discussion of risk over the course of the call, just like increased focus on liquidity, whether that be from overallocation or increased allocation to private markets. I think there's a lot of allocators that are focused on liquidity within their portfolio, any ideas or conversations you've had with investors on realistic allocation size within your respective areas, whether that be debt or equity?

Navin Hingorani: So, from an equity perspective, we've looked at it and what we've seen that investors have been roughly, or are currently roughly 700 basis points underweight benchmark allocation in EM. So they're underweight EM and obviously that means they're then overweight DM and in particular, the US. That may have made sense at various points of time over the last 15 years. We don't necessarily think that makes sense right now, given what we've just discussed.

Liquidity is not an issue within EM at the moment. EM equities, as I mentioned, there's 3,000 stocks that we consider the investable universe, large enough and liquid enough to allow us to be able to own them and to be able to trade in and out of them efficiently. So, whether you're looking at the smaller markets in EM or whether you're looking at the larger markets in EM, there are plenty of opportunities and I guess maybe a lot of the constraints that would have been in place 15-20 years ago are not in place today.

Josh Scott: Thanks, Navin. Brent or Jason, anything to add on your end in the last couple of minutes we have here?

Jason DeVito: We've had no issues. At times, we weaken our portfolio, to follow up on something Navin had mentioned, we kind of have the idea of a core satellite approach. We have a framework and then depending on the current backdrop, we may dip into more oil stocks or, I'm sorry, oil bonds or oil positions, but as we've done that through this type of environment, it's been very smooth, so no constraints on our end.

Josh Scott: I think that's a great place to wrap. Navin, Jason, Brent, thank you so much for joining us today. I want to thank everyone for watching as well. I think we got some really great insight into opportunities and risks that all allocators should be looking for, and whenever looking to increase or build out an allocation to emerging markets. So thank you all for watching. We look forward to seeing you next time here at Pensions and Investments. Thanks.