Moderator

Hello, everyone. Thank you for joining us for today's webcast, the Emerging Markets Opportunity Building the Case for a New Supercycle, sponsored by RBC Global Asset Management. Today's webcast will provide one CFP when and when CFA CE credit. If you have questions on credit, please give us a call via the number on the console. We welcome and encourage your questions.

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With that, it is my pleasure to introduce our first speaker today, Alyssa Howard, Institutional Portfolio Manager at RBC Global Asset Management. I will now turn the webcast over to Alyssa. Welcome, Alyssa. The floor is yours.

Alissa

Great. Thank you so much. And hello, everyone, and thank you so much for joining us today in our discussion of emerging markets, particularly a timely topic with the expanding opportunities, but definitely in an elevated geopolitical risk environment. So, we'll talk a lot about the long-term trends in emerging markets, but also what we're seeing today.

And before we dive in, I'll do a quick introduction. So, my name is Alissa Howard. I serve as the Emerging Market Equity product specialist, working with US based clients and prospects. And I'm joined today by Laurence Bensafi, CFA RBC's deputy head of emerging market equity. With nearly 30 years of experience in the asset class. Laurence joined RBC back in 2013 to serve in this role and has grown alongside the team and EMEA platform with over 30 billion of assets globally.

RBC itself is a global asset management firm comprising 16 specialist investment teams across fixed income and equity strategies. I'd say the emerging market equity strategies have become flagship capabilities at the firm over the years across debt and equity. But today we're here to talk about equities, the opportunities, the risks and the possibility of a new multi-year cycle of relative outperformance as investors look to diversify away from US assets and maybe even the US dollar.

So, with that, Laurence, thank you for joining us today. I'm going to dive right in, into what is probably at the top of most people's minds today. And that is, in fact, the conflict in the Middle East. Could you give us some context around where we stand today in terms of geopolitical risk versus history, and how you've been assessing the risks in the region as well, kind of broadly across emerging markets?

Laurence

 First, thank you so much, Alyssa. Thank you so much for joining us for this podcast. Talking about the opportunities in emerging markets. So, if we move to the first slide, we wanted just to put a little bit in context of the type of geopolitical risk we're seeing at the moment. So yes, it's quite elevated. As you can see here, it's a peak, clearly quite a high one.

But when you think about it, we had over the past few years, quite a few of those events even, you know, one year ago, Liberation Day was also a very volatile environment, especially for equity markets. We had the war in Ukraine and Russia. And before that, obviously several events, the way we approach it, is that, it's obviously a very difficult, event, and moving, you know, every day we have new developments is very uncertain to know all that's going to hand.

But I think we’re taking an approach, of more medium to long term where, the conflict would be resolved at some point. It's a question of, you know, how is going to be resolved exactly when is going to be resolved? But we think that, there won't be necessarily a very long-lasting impact on to, the economies, oil prices obviously elevated at the moment.

And we talk a little bit about it. That's the main impact, obviously, from that conflict. But we are confident that we're going to see a resolution, of the in the next few weeks, for that conflict. If we move to the next slide, we obviously, you know, as I mentioned, oil prices are really the biggest, issue.

I would say, for emerging markets, on average emerging markets and to be dependent on, on price, some of our biggest markets are all, net importers of oil, namely China, India, Korea, Taiwan, the countries all import oil. And obviously the oil price, I jump quite a lot. Having said that, compared to previous, big oil shocks, we can really say that the economy globally is less dependent on oil and a higher oil price than has been, over the past 50 years.

So, you can see the chart on the right showing you the lower oil intensity of the economy. Think said that if we moved in the next slide, it really depends on countries. Some countries import a lot of the oil from the Gulf, and some countries have very low reserves. Having said that, when we look a little bit more in detail, the country that are importing, the most oil and are the most dependent, on, sorry, on the second chart, the one at the bottom, the country that are using the most oil in terms of primary energy consumption are actually the oil producers, which makes sense because they have some oil. And actually, if you look at I mentioned China, India, for instance. Yes. They depend quite a lot on oil from the Middle East. But over the years they've really diversified the way they generate energy. So, for instance, both of them use quite a lot of coal, which they have a lot in abundance in their country in terms of China.

They've developed their renewable energy generation, electricity generation. So, you can see on the right-hand side those big countries where people are the most worried about, actually some that have the lowest energy consumption that comes from oil and gas. And we put Air China, on in yellow. And China has also been preparing for that event because it's obviously one of their big weaknesses.

And, and China has been very large reserves. So, India is a little bit less I would say a little bit more issues in terms of those reserves. But overall, we still think that we are in an okay situation for the time being. But obviously every day passing where the Strait of Hormuz is blocked, is making things the situation a bit more difficult for those countries overall.

We should be expecting, as I mentioned, a resolution in the coming weeks and, and a return to normal situation for our countries. And we will talk about it later. But, if we if you look at the performance for a lot of those countries, I mean, has not been impacted, over the past two months, if anything, some of those countries are reaching new highs.

So clearly, what is driving those markets at the moment is more important than, than the elevated oil price in the short term.

Alissa

Great. Well, thanks, Laurence, and thanks for kind of addressing the elephant in the room. Right off the bat. So now that we have addressed that, maybe we can move on to the broader asset class where it's there. And today, in terms of long-term cycles, what you see is maybe some of the signals that we may be entering into this new period of maybe longer term, outperformance.

Laurence

So, you know, we, we put this chart that shows you the performance of emerging market equities compared to developed market equities over a long period of time. I mean, emerging markets have not been around for so long for a long period of time is only about 25 years. Right. And what we have seen is that indeed, over the past ten, 12 years, emerging markets have consistently underperformed developed markets.

You were better off being in developed market, especially US equities, because if you were an emerging market, you were disappointed pretty much every year where we underperformed US equities. Having said that, if you look at that chart, the reason was trying to show a bit of a longer-term history is that is not it hasn't been always the case.

There has been a very good cycle for emerging markets where they consistently outperform developed markets. So, one of those periods where when China was rising, when they entered the WTO, that we had this amazing period of growth for China, and at that time, yeah, the excellent performance really doing a lot better, than the economy, especially US equities.

What are we seeing? We are seeing that right now. We're entering one of those new cycles that EM equities that are been underinvested, I would say ignored a little bit unloved, are about to come back and they've been doing so for about a year now to come back and perform a lot better. So, you can see we put this blue circle around the ribbon is still looking small, which I think in a way is good because it means it's not too late.

If you think, you know, everyone has seen amazing performance of emerging markets last year when you double the performance of the S&P 500 even since the beginning of the year, much higher performance, much stronger performance than this and 500. But it's early days. We think there is a lot more to go. So first, before we go to the reason we think, we are seeing this, this change, this turn, of cycle.

If we go to the next slide, explaining a little bit more why EM hasn't done so well. Well, at the end of the day, what drives an equity market is not so much the GDP growth or population growth, but its EPS growth. That's really what drives an equity market. And if you see the previous cycle I mentioned before the GFC, the financial crisis, we had very strong earnings growth in the year.

So that's the blue line. You can see strong EPS growth, higher than what we see at the time in the US. But that trend completely changed after the GFC. GFC really hurt emerging market a lot more. I would say informed longer than the US economy. And you see a change where EPS growth for emerging markets were well flat overall, quite volatile apart from the recently but for the US they were quite strong for various reasons.

Some of them were a bit of engineering obviously a lot of share buyback using very low interest rates to, you know, raise cash and buy back shares. A strong focus, obviously, on the bottom-line text, a lot of different reason. And in the meantime, in the Em, we have less of a focus on them, on the bottom line for those years.

A lot of corporates used to focus more on the top line. We have a lot more of state-owned enterprises that don't necessarily, again, focus on the on the profit generation, but also a lot of, liquidity coming into those markets, especially China was a good example. Lots and lots of ideas. More recently, lots, not more in India, as with having said that again, the good news is that we are seeing the trend change.

And you can see on the chart here that, EM earnings growth, I've been on a nice uptrend, over the, the past couple of years. So, if we move to the next slide, you can see that indeed. We've seen strong earnings momentum in EM, partly due to the technology sector, which is a very big sector in emerging market where we have really some champions in Korea and in Taiwan.

And, and they have delivered extremely strong earnings growth. So, what we see for this year, and that's one way and one of the reasons why emerging markets are performing this year, is that we have earnings growth. And I expect it to be twice as high in emerging market competitive market. So that's going to be a very, very strong support, for this year at least.

Alissa

Yes, absolutely. And I think related to all those comments around earnings and you know, emerging markets have always been an asset class where investors are looking for long term growth in terms of demographic GDP growth. It has really been that long-term story of increase consumption etc. Clearly earnings growth is a key driver, but we can go into some other tailwinds for the asset class, particularly as it relates to U.S assets or maybe U.S. policy that's going on and how some of those things we think could actually benefit emerging markets in the near future.

Laurence

Yes. So particularly good point. If you look at the next slide, I think m countries where I've forgotten basically over the past few years, U.S. equities have been doing so well. Why would you go abroad, especially if you U.S. based investor, why would you go abroad in countries’ economies you do not really know? Some risk in terms of geopolitical, in terms of currency when you're doing so well, at home, having said that, when you consider, when you ignore emerging markets, you ignore 60% of the population growth and the young population, you ignore 50% of the world GDP, 65% of global GDP growth.

You can see it. We put some of the charts here. I mean, we are huge economies in emerging markets. So, what we've seen is that, you know, we've seen the buildup of a complete disconnect between the size of emerging market economies and even stock market and the exposure in portfolios, because the way to an emerging market in global equity for use and really become really, really, really small.

And when you look at the next slide, you see that U.S. equities in particular have been extremely dominant. When you look at the weight of MSCI, US equities in the MSCI, old Country World Index, I mean we think we may have peaked. We will see. But we reached a level of 66%. If you look at where it was only ten years ago, that's a huge, huge increase.

And obviously with a very strong concentration also in that index. So, you know, since last year, especially with the developments in terms of politics, and, and, and the different announcement we have seen on tariffs, for instance, in the US, there's been a lot of calls, on thinking maybe we've seen the peak of the U.S. market for now at least.

And we're going to see maybe a leadership in other countries. So, one of the main reasons for that is because of the US dollar. And, you know, when we've seen the big rotation last year, a little bit outside of U.S. equities into emerging market equities, I would say that the main the first reason would be a move away from the US dollar into other currencies.

So, it was a quiet currency shift, as we call it here, but we really see a movement of dollarization that has accelerated, since the election. At the end of 2024, in the US, where especially some central banks, really shifted, their exposure out of treasuries into US treasuries, into gold, for instance.

And we have seen obviously the massive run in, into, into gold. So, we believe that is the beginning of a longer trend. It is not going to happen overnight. But there is clearly in terms of reserves, but also in terms of trading, more and more countries don't necessarily want to trade in U.S. dollar when they trade with another country, which is not the US.

So, we are seeing slowly moves away from the US dollar. And in that environment, it obviously makes sense to have a part of our portfolio invested, in other currencies that may benefit from the situation and what we've seen since last year, especially since Liberation Day is the depreciation of the dollar and appreciation of, the majority of the currencies in particular.

And, it was it was actually a big movement. I would say, at the beginning. And then it slowed down and obviously then we had the war, etc., but we think there's more to go, not only because everything explained, but also because the US dollar has been overvalued for some time. And even after the move we have seen since last year, we believe that the dollar is still overvalued.

You can see the, the valuation bench and we are still at an extreme level. And you can see here that in the past; it is not as if we have not paid you whether you got the US dollar really depreciated. We have seen that in the past again. And then we expect that to see one of those cycles again, of a depreciating US dollar.

Alissa

Great. And I think what's also related, I mentioned a bit we have emerging market debt strategies at RBC as well. And we have already started to see a turn in performance for EM debt, but we haven't really seen that come through in equities. If you talk a bit about that, the valuation gap we're seeing you know you mentioned that they're under own under.

But just maybe how under load they've become.

Laurence

Yes, you're right. I think that's been one of the frustrations I guess for us investing in equities for a long time. We have seen those countries changing for the better. I think a lot of the countries that I mentioned, all the crises that went through and that were hit harder than developed market. And we really feel like a lot of those countries have learned their lesson.

They tend to have better governments that tend to have a lot more orthodox policies. Central banks are a lot stronger as well. They have been a lot more prudent with their money. And, and for instance, you can see it on the chart on the left. You know, we often talk about the elevated level of debt in Europe, in the US, the level of debt, government level of debt in emerging market is half the level of what you see in the US or in developed economies.

So that gives them really a lot more potential to be able to, you know, when, when, when a tough situation happens to act, when it's a lot more difficult for countries where basically there's no money, right. And it's the same in terms of current accounts. Again, a few years back, a lot of those countries, I mentioned the dependance on oil, for instance, for a lot of the big countries.

But what I have been doing, they've been really working hard at developing more the exports industry, and they've been quite successful. Obviously, China would talk about it, what being one of the most successful. And so now what we see, we see a situation where on aggregate EM countries have a positive current account, current account surplus as a percentage of GDP.

When the U.S is actually going lower and lower. And obviously that's what the president is trying to reverse, which is not easy to do. But that means that the situation is a lot more comfortable with emerging market deficits. Also, fiscal deficits are a lot better in emerging market compared to the world market in particular.

So, we've seen a much better fundamentals in emerging markets on the top down. And then as I mentioned, you know, we work with that emerging quite closely. That has translated actually in really good performance in terms of end debt, where the spread has really, you know, narrowed. And that asset class has been doing really well, for quite some time.

But as I mentioned at the beginning, it didn't happen in GM equities, mainly because of the lack of earnings growth, something that is finally changing. So, Alissa, you were mentioning performance if we move to the next slide. So, evaluation if we move to the next slide. Last year just before Liberation Day we were at the lowest of the lowest.

If you remember, when just maybe before China was seen as non-investable, you know, people were not interested into, equities at all. Liberation day happened. And that was really a bit of, reminder to investors that actually you should not write off completely emerging markets because, when those stories were announced, it was quickly, apparent that actually the people that would be the most hurt by those tariffs were actually the US, especially the US consumers and the US corporates.

And that is why we've seen such a quick move to reverse, the majority of those tariffs. So, what this did is to put back the spotlight into emerging market. And people realize that China, Korea and Taiwan have really great products. That really depends a lot for the West. And if there are tariffs actually that's going to hurt you more than them.

So, at that point we had the lowest valuation ever compared to developed markets or emerging markets were traded at about 50% discount before the GFC when EM equities were doing really well. People liked them, and they were trading at a premium to develop market. So, we went from a premium to 50% discount. That was extreme. The premium was a little bit extreme.

Maybe we don't. We don't expect to go back there very quickly. Usually, it's a sell signal. But we moved from a 50% discount to about a 40% discount. So still quite extreme. You can see on the right, on the chart on the right-hand side where you can see that because obviously, you know, GM equities have continued to, to rise as well.

So, the gap has hardly narrowed. So, we've got these reports of valuation support. The valuation is not enough usually. You do need more than valuations but now we've got other drivers that are helping to narrow this big discount.

Alissa

That's really helpful. And I think maybe even talking a bit more about tariffs and maybe a little bit of an update of what transpired because, you know, this year we have the Middle East conflict. Last year the big news was around tariffs. And just like you said, I think it's really interesting how this US policy really exposed the West's dependency on emerging markets.

You know, EM has capitalized on this de-industrialization of the West. Could you speak a little bit about that? Again, the tariff update and maybe just kind of broadly on the evolution of EM trade over the past decade or so?

Laurence

Yes, you're absolutely right. I think we can obviously regret, the dependance we have, in the West, in Europe, in the US on the emerging markets. But you're right, it’s 20 years of, globalization and the industrialization in the West. And those emerging market countries massively benefit from that. So, at the beginning, they were benefiting because they were, you know, cheaper cost producers.

They had more labor. But then through the years they moved up the value chain. And a lot of those products are actually really high-tech that cannot be easily replicated, not in the, in the West. So, if you put tariffs on them then you just hurt yourself. So, as you know, we've seen maybe only temporary, but the tariffs have been reduced which is really positive for EM countries.

So, most of our countries really benefited from that trend to be honest, after, you know, when we had Liberation Day a year ago, there's a bit of panic everywhere. And, but we I think we talked about it the first week, and since then it's really, no agenda to discuss about because as we mentioned several times, it's going to be very tricky to implement high tariffs, especially on the countries.

You can see on the right-hand side, Mexico is a bit of special situation, is the biggest trading partner of the US for obviously graphical reasons. But if you look at, Taiwan for instance, I mean all their electronic products are coming from that country. It's very difficult to implement tariffs on those ones. Another reason, which makes the tariff less effective.

I would say, than expected if you move to the next slide. And that's something that is also underappreciated that EM countries, as we mentioned, that change for the year has really improved, but it becomes also a lot richer. So, you know, when in the past we had a few, you know, very rich countries, mainly in Europe and the US, maybe Japan, Australia.

You now have really the rise of a lot of superpowers, you know, in India and China, Saudi Arabia, Brazil, a lot of the countries out there. And one of those countries I've been doing is trading a lot more between each other. So, the EM equity trade has been rising, and even more since we started to have some trade barriers implemented during the first trade war.

And you see now more than 50% of the trade is between the EM countries. And this is something that is just going to continue to rise just because of the big size of those countries and because the growth is there, the younger population is there. And if we look at a good illustration to that, on the next slide, it shows you the percentage of countries that are trading more with China than in the US than with the US, and the change in 24 years.

It's quite striking that now a lot of countries have China as their biggest trading partner. So, the same, you know, all Africa, all Asia, most of Latin America, you can see the two pockets, which is really Europe and North America. So that's a huge change. That maybe has been under-appreciated when the tariffs were implemented.

But also for us, is under appreciated when looking at emerging markets and the size of, you know, the exposure should be in portfolios. For instance, for investors.

Alissa

And maybe kind of staying on the topic, of China, you know, it's very clearly become this world trading superpower at this point. Let me speak a little bit about how the economy is evolved. I think traditionally when we think about China, we think of the kind of low-cost manufacturing, cheap manufacturing that they really built their economy on in the early 2000.

We're not seeing that as much anymore. And maybe talk a little bit how they've moved from that sort of cheap manufacturing into these kind of higher value added exports, as well as kind of a much more innovative economy?

Laurence

Yeah, sure. So, look, China is a fascinating country. Obviously. They have a lot of issues, but there are some things they have done successfully as well. It remains, you know, one of the biggest countries in emerging markets and was the 25% of the index, two years ago, it was, you know, seen as non-investable. I think investors have been positively surprised with some of the developments we've seen, especially as you mentioned in, high tech industry.

So quietly, I guess over the past ten years, China implemented in 2015, a program called China 2025. And it really paid off. So, the idea was really to invest a lot of money into high tech industries, something the West maybe should do if, if we want to, to bring back AI industries. But China has done it at the, at a, at a huge level and it means that if we look, to the next slide, we've seen really, a huge, improvement, in, in a lot of different areas, that have been helped by the fact that we had, a good, electricity generation, which has, you know, been more of the constraints, in the US. But in, in China, the bases are there. I mean, it was a country that always put a lot of emphasis on industrials. So, it's quite different from most countries in the world, most countries in the world, based on domestic consumption.

That's what drives the GDP growth. China has always been more picks up that investment. And industrial investment CapEx led, economy. And that's, that's been really it's paying off now, I would say. So, if we move to the next slide, in terms of the advantage they have, they are just the leaders in many fields now.

So, this ten-year program, because again, it takes some time became apparent. Over the past, I would say two years that they're not leading in a lot of industries, such as when you go on energy, but also robotics, for instance. Really in a lot of different areas. So actually, if we move to the next slide, it's even more striking to show that that's translated into massive exports to the rest of the world.

I mean, the China trade surplus is reaching new highs every month. And if we look at where that's coming from, much change to what it was 20 years ago when there was no value-added product, maybe done with cheap labor, textile or toys, no, not at all, really. Best cars in the world, for instance. The batteries, the leader, the leader in the world, as well, in terms of cheap, they're excellent as well.

So that's been, I would say, a big success. I know people worry about how we always talk about overcapacity. So, there's no need maybe to. Well, in a way that, you know, the the strategy was to give opportunities to a lot of corporates to launch their own businesses. And now there are still a lot that are kind of surviving.

So, the big challenge for China in the coming years would be to really, making sure that the capacity, is removed because it lowers margins for everyone. But they are in a strong, in the strong situation to do so in terms of the industrial size, I think where China has more of a challenge is on the consumption side, because you're not going to continue to, massively, export your products.

It creates some challenges. We've seen, it creates, but the, the, you know, that's why the tariffs were implemented so. Well, we need to see it really. And the government is very well that, we need to see, a switch towards more consumption driven economy. So, if you look at the next slide, it's exactly the numbers I was talking about.

On the left-hand side, the China alcohol consumption share of GDP is one of the lowest in the world. Very few countries have such a low number in the world. It's been improving slightly recently. But we need to see a lot more consumption. It's not really a goods consumption. It's more services consumption, where China is very low and where it's going to be positive.

Not only would create GDP growth, obviously, but it will create jobs as well because China has a problem with jobs at the moment. Manufacturing is all, you know, automatic, robotics. You create very few jobs in those brand-new factories. But where you can create a lot of jobs is, services. So, you know, one of the reasons consumption has been low, is the past few years have also been the real estate sector not doing so well and lack of confidence.

People are saving a lot of money. So, China has a lot of challenges ahead. They need to get people to spend more money rather than saving it. They need to create jobs, especially in the service industry. But we, I would say cautiously optimistic. The government is very well, that I mean, all those goals, you know, obviously stated that that's where they want to go to, but it doesn't happen overnight, overnight.

So, we'll have to see, in a, in a few, in a few years or things ongoing in the meantime, one thing that is quite positive about China is, a much stronger focus on shareholder value creation. So, I mentioned at the very beginning, the Chinese market didn't do too well because of a lot of issuance and also, relatively poor corporate governance from some of the corporates.

And no, focus on the shareholder operational. Bottom line, that has changed. There's been a strong focus recently. We've seen share buybacks, something that really didn't exist in this country two years ago is we, a tool that is widely used now. And the government is really asking corporates to do better. Basically. And finally, finally, I'm sure now why we can be positive as well is that the government really wants the stock market to do well.

They want to move away the money from the cash. They want to prevent money going back again to much on the real estate market to prevent further, you know, price increase in that sector. So, we are well aligned with the government if we are investing in the stock market. So again, I mentioned it's not easy.

It's not going to be, you know, it's a medium term on China. But at the moment valuation is quite interesting. China has done very well. So, it's not a bad timing to, to be invested in the, in a highest quality corporates in particular in China.

Alissa

That makes a lot of sense. I think we've spent a lot of time talking about China over the past few years and its underperformance, and now we're starting to see some of that performance come back. But there's been a lot of bright spark spots in EM. We've seen, especially those countries that are related to the I trade Taiwan, Korea and their exposure to semiconductors have done really well.

But that said, there has been one major Em that has underperformed in more recent periods and that's India. So, could you put some context around India's more recent performance, but then maybe alongside the kind of longer-term opportunities and why we tend to find really good opportunities in general in that country?

Laurence

Yes. Thank you. Yeah, you're absolutely right. I mean, if we had been here two years ago, we would have had only question about India. Brian was saying, I'm going to sell my entire year allocation. India seems to be the only bright spot. That's where I want to be. And, I remember at the time saying, yes, if you have a long-term view, because we are very positive over the long term, India is definitely one of the best stories.

It's big body population, and a young population. It's a poor country. I mean, low level of development is really where was China 20 years ago. And we are the implementation of a lot of good reforms over the past few years. But two years ago, the valuation was really, really, really extreme. And actually, on your next slide, you can show that we really reach at the end of 20 for a really, really high level in absolute and in relative terms in India is always one of the most expensive countries in emerging market, which makes sense because of all the positive I explain.

But there was a time when even compared to recent history, it was the most expensive it ever been. So, we thought India was going to take a breather, especially as we had the start of the said mandate from, Prime Minister Modi. It doesn't have a strong as strong as a mandate that he had the first two times.

And, you know, I'm not a big fan of someone doing three mandates. I think he you losing individual perspective sometimes. So, so it's been a little bit trickier for India. Clearly, we were talking about the Middle East conflict recently. India is clearly one of the most exposed. So, India has been underperforming, for some time.

Clearly, valuation is a little bit more attractive. I would say, but, you know, it's still a long way before it becomes a very attractive market again. You mentioned at the beginning, we like it, I think, for an investor that as a long-term horizon great to be invested. And obviously we've got some exposure in portfolios.

But it's not an easy time at the moment with India, with a higher oil price. But over the long term, we have a couple of slides here on urbanization and one of the best things to play in India, you know, a large portion of the population, the majority of the population is still, living in, in the countryside.

And our farmers, it's actually one of the challenges, actually, to create jobs for these populations in the countryside. But over the medium long term, there will be really a lot of opportunities, in India.

Alissa

Yeah, yeah, that sounds great. And kind of going on the other side of the coin, I think Latin America has actually been a period. There's a long period of underperformance. A lot of it is very macro driven, top down the politics that are going on there. But over the past year or so, Latin America has actually become a bit of a bright spot as well.

And an area in which I think we've been able to find a lot of opportunities. So, I know that in Latin America and all of the, you can't ignore the macro, but seems like macro and politics really play a much bigger hand in Latin America. So just talk a little bit about what's going on and, you know, the past few months.

But what we see going forward and kind of the Latin America opportunity at this point.

Laurence

Yeah, you're right. I mean, Latin America is really interesting is a little bit the opposite of Asia. We tend to have a lot of really high-quality corporate, there's a lot of exposure to commodities. All those countries have own export. So actually, the benefits during the conflict, but it’s really the top down that's been more an issue, especially the geopolitical environment.

And we've seen over the past years a lot of Asian often, move towards more populism. And, and the lack of, of reform, in those countries. But more recently, we've seen, a bit of an improvement with, more orthodoxy as well as I mentioned, even from the government that are more on the left.

We are in the third the administration of, of President Lula in Brazil. And there've been a lot more, I would say, reasonable when it comes to finances of the country. And some countries are moving really to more pro-business, governments, something that was sometimes not expected anymore. For instance, Argentina, where we see now, obviously, the president, being really, really pro-business and pro-reform that has been working really well so far in Argentina.

We just saw them move in Chile, a few weeks ago. So, we think that Latin America looks like it is in a good shape, when it comes to the top down, a lot more than it used to be. And in that environment, we are in where you have a weaker dollar, stronger commodity prices is quite positive, for Latin America.

So now the big one that is coming is the election in Brazil. You know, it's a big country that is still, on the, on the red here. Very difficult to, to get, it's very, very tight at the moment. I would say about 50%. There's a lot of rejection, on both candidates, Latin and North countries in terms of political environment at the moment.

So, we'll have to see. But I would say even if, Lula, still stays here for Sunday, you know, as I mentioned, over the past two years, he's been, a lot better than we may have expected to that maybe, maybe a little bit of sell off around the news. But we will remain positive on the, on the country and the region of all.

Alissa

Yeah, absolutely. And kind of going back a little bit, you were talking about we're seeing in China in corporate governance improvements, but another area that we've seen that going on has been Korea. And Korea has obviously been benefiting from a lot of the AI driven demand. But maybe briefly, could you touch on Korea, what we're seeing in terms of improvements in corporate governance in sort of value up program.

And I think that'll segue well into our views on, on sectors. What we've been seeing in the tech sector as well.

Laurence

Yeah, Korea has been incredible. I mean, Korea has always been one of the cheapest countries in emerging markets, a good economy. Again, quite innovative, with, you know, corporates operating into areas of quite high tech. But overall, no, really. No, not thinking about, minority shareholders. So, no focus on shareholder returns, whether it's share buyback obviously, or even dividend paying or even just the bottom line, often focusing more on top line, creating those huge conglomerates, the Chaebols.

And that was really the main focus, from those, the founders and the owners of those companies. And I think what we've seen last year. So, the move has that's been changing a little bit over the year. There's been a lot of pressure from fund managers, local pension funds, to activist to push Koreafor better corporate governance because it's, it's a, quite a developed country that should be doing better.

So, there was slow progress, I would say, but there was a progress. You can see on the right-hand side on the job. Dividends had been growing under that pressure. But really the game changer has been the elections last year with a pro-business, government coming in and with a very strong focus on, on the stock market.

The idea was really to, to have a stronger stock market to, to increase investment, to increase that. Right in the stock market. And I worked amazingly when I'm in Korea has been the best performing market, since last year. The government hasn't been there for a year. And still the stock market is, you know, up 150% on the period.

So, you can see, when you start to focus on shareholder returns, the market really rewards you amazingly well. So,  we've seen a lot of changes in terms of regulation. So, it's not only not just talking there's been some change in the regulation forcing really corporates to just do better for minority shareholders.

So, we remain quite positive because despite that, Korea remains one of the cheapest countries in EM, even after the huge performance and home of some of the best. Yeah. Plays you can find. And these stocks are still relatively, I mean, they're actually extremely cheap, especially compared to the US one. So still a lot of, you know, positive into the Korean market that we should continue to see over the coming years.

Alissa

Yeah. Yeah, absolutely. And that does kind of segue well into the sector conversation. We definitely saw globally tech was a huge driver of returns last year. And then to have a little bit of volatility so far this year. But clearly there's still a lot of room to go, particularly when it comes to EMF exposure into the tech sector.

We have seen some of or industrials materials doing well, but maybe talk a little bit more about the tech sector. Where we still think it's attractive, where we see maybe things are getting a little rich, and then where if we are going to start moving away from tech, you see the opportunities where maybe they haven't kept up, quite as well as as it's more AI related sectors.

Laurence

Yeah, it's a good point. I mean, you can see over the past 12 months on the chart on the right, huge performance of it, technology in emerging markets, mainly driven by stocks in Korea and Taiwan. And at the same time, we the market has been really up on these three sectors. You can see how that performed.

And in a way or more or less linked to AI to a certain way. But if you look at a lot of sectors are doing really poorly. So, I prefer the ones where we think there's a lot of potential with consumer. You can see some of the worst performing have been consumer staples, consumer discretionary and also related.

That's where we see, the most potential. But if we look at technology, look, when everyone was talking to us about India, two years ago, we were saying, go and look at Taiwan and Korea and you're going to find incredible name linked to the AI chain. The entire manufacturing chain of AI is in emerging market and mainly in Korea and Taiwan.

And that if we move to the next slide, those names trade at a fraction of the valuation of us. So, you've seen what happened. We've seen a little bit of a close down of that gap, even though the gap remains huge. But you can see the huge rerating that we've seen in, especially over the past few months, where those names have continued to do well when some of the US1, which were obviously less on the hardware.

I've started to be a little bit weaker. So, we expect again, really high earnings growth. And they've been revised constantly. So, we still like the sector I would say I think some areas of the market are more expensive, especially in Taiwan. So we will have to see really they seem to continue to do well for quite a few years to justify the current valuation.

But it seems to us that IPOs okay, let's continue to increase, CapEx. You know, every time they give an update, the CapEx seems to grow. So that's pretty positive for for this asset class, for the sector and where the valuation is still a lot more attractive. So, we continue to be exposed to that theme.

Absolutely. Yeah.

Alissa

I think that's really highlighting the evolution of the asset class. You know, we talked about in the 2000, it was China WTO, the commodity supercycle. But right now, we're talking about very high-tech companies that are global leaders and incredibly, integrated into kind of what we maybe consider these kind of higher end US companies that really can't survive without a lot of these companies.

So, the opportunities that it's just really evolved into a much higher quality one at that. What we've historically really liked, I think, has been the consumer. I think that's playing on consumption trends, on rising incomes and the rising middle class. You know, even within financials, kind of the under penetration of financial services, it's really all connected to this rising income and this growth that we expect to continue to see in emerging markets.

But as you just highlighted, the consumer sectors have been, very out of favor. So maybe talk a bit about what's been driving that, but also why we still see a good opportunity, particularly in that asset class that actually has historically had really strong returns.

Laurence

Yes, I think the two. Yeah, absolutely. The two sectors I would highlight at that point is financials, as you mentioned in consumer. So, I think at the beginning of the year financials were probably one of our favorite sector to play. We were in a great environment in Yam because interest rates were coming down but not quick, not too quickly.

Alissa

And so, we were the situation where return equity were very good. You had non-gross rebounding nicely asset quality being at a good level. So, and low valuation for those managers and that that was a really good place to be and actually up to you know March this year they did really well I think now we slightly cautious, a little bit more cautious.

Laurence

Obviously, a lot of that has reversed. We've seen central banks in some countries, increase in rates already. We have seen definitely asset quality starting to deteriorate a little bit. So, I think on the financials we're still positive but maybe a little bit cautious over the short-term consumer. I would say a different story. We think the valuation is very attractive.

I think if you move a couple of slides down, we can see that, you know, especially if you compare, we like to compare them to do it just to see a huge the move has been, especially in terms of consumer staples, which tend to be, quite stable by definition. And really well exposed to the theme of urbanization, which has been a little you mentioned a big theme for emerging market, in which we continue to believe it's going to be a big theme in emerging market.

And we think that the discount, this, the sector trade is excessive. We've seen, an issue with confidence from consumers in quite a few countries, but we've started to start to see a rebound, especially in China. So that's particularly an area where we see it's quite interesting when all across we think consumer staples are being really ignored.

I will say, and good place also to, to invest for the medium long term.

Alissa

Yeah. Yeah, absolutely. And I think we're kind of coming up on time. But we have had a question come through that I think is a great one to address, and it's actually connected to a side that we might have had time to talk about. But that's kind of the flows that we've seen coming into the asset class.

You know, from going from this very unloved asset class to one that's gaining a little bit of traction. The questions really around active versus passive? Yeah, I think a lot of investors still see the opportunity of active in emerging markets. But maybe talk a little bit about the flow between and why we think it's important to be active in an asset class where the benchmark may have may have some flaws, if you will.

Laurence

Yes, absolutely. So that's really what we try to tell investors. I think if there's not an area where you should be active is really emerging market, on average fund managers tend to outperform the benchmark. So, you can really deliver strong alpha, for several reasons why. One, the market is less efficient, clearly it is a very big market.

Lots of different countries, new stocks coming in, new companies coming in. And that's an issue where people are kind of chasing those opportunities or less efficient, more possibility to generate alpha. The benchmark is not always great. I mentioned there's quite a lot of state-owned enterprises where they may have a short period of performance, but over the long term they tend to do very poorly.

So, if you avoid them, especially the badly managed one and there's quite a few, you tend to do better and the same in terms of the top down. Some countries are really, you know, not great places to, to invest due to a lack of reform, for instance, or poor policies. So, by being selective in emerging markets, you can generate sustainable alpha.

So, I think it's, it's a, it's a good reason to be active. So, we've seen, we've seen a lot of flows from the asset class, for quite a few years since last year, we started to see very big inflows, especially since the beginning of this year, and we started to see also more flows coming into active products, which means as opposed to ETF.

ETF tends to mean usually kind of short-term investment. When we start to see, investment into active products, it means longer term, conviction into the asset class. So, it's been nice to, to see that, recently.

Alissa

Yeah. Yeah, absolutely. Well, this has been great. You know. Thank you everyone for joining today. Thank you, Lawrence, for your insights, your expertise in a quite complicated but definitely exciting opportunities that, if anyone has any further questions or would like to learn more about the RBC Emerging Market Equity platform, please contact your RBC representative.

And thank you again, everyone, and enjoy the rest of your day.

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