Dollars and Sense podcast

Mike Reed 00:05
Hello. Welcome back to the RBC BlueBay Podcast Dollars and Cents. I am Mike Reed, Head of Global Financial Institutions. Today, I'm pleased to be welcoming back Laurence Bensafi. She is both a Portfolio Manager and Deputy Head of Emerging Markets Equities. Laurence was last on the show a year ago. I recall, even though they'd already had a strong run in 2025, she remained very constructive on the outlook for EM Equities. That confidence was well founded as EM indices have risen a further 30% since. It can be very interesting to hear from Laurence to find out if she still believes there is further upside. Welcome back, Laurence. Great to have you back on the show.

Laurence Bensafi 00:45
Thank you, Mike.

Mike Reed 00:47
I guess the obvious place to start is with the outperformance of EM Equities over developed markets over the last two years. What have been the main catalysts and drivers, and where do we go from here?

Laurence Bensafi 00:58
Yes, sure, Mike. Look, we've been seeing for quite a few years now that emerging market equities were too cheap, under-owned, out of favour, and that this low valuation and this low level of ownership didn't reflect the improved fundamentals of the asset class. More recently, we had been talking especially on the very specific driver that has been AI and the fact that you could invest in the emerging market countries, especially Korea and Taiwan, into the theme for a fraction of what it was at the time in US equities.

What was missing was really a catalyst for investors to look again at this asset class. The catalyst came. It was really Liberation Day last year, April, now, about 18 months ago. That was really the game changer for emerging market equities. Investors got a little bit worried about what was going on, I guess, in the US, especially the US dollar that looked again at that level, deficit level. Because they saw that President Trump gathered quite quickly, to be honest, on this huge tariff, especially in Taiwan and Korea, they were curious of why that was the case and looked a bit more closely at those names we've been highlighting for a while and really liked what they saw.

What we saw is that a strong interest for Taiwan, and later on in Korea when we had also a change of leadership, which was a lot more stock market friendly. Those two countries did very well, but it's important to know that it was not only those two countries. Other areas did well, especially Latin America. Countries such as Colombia. Peru did well. In Eastern Europe and the Middle East, we had countries such as Hungary, Poland did well for completely different drivers. There's been several themes that have been running through EM for the past 18 months that explain really the strong performance.

Mike Reed 02:53
Oh, that's more positives there, and I see what's been driving them. I guess one concern I have around a lot of investors set around global markets is since the start of the war in the Middle East, we’ve seen a big jump in energy prices and the steep rise in core government bond yields...how are these factors impacting emerging markets, and do fundamentals remain as strong and supportive as they were 12, 18 months ago?

Laurence Bensafi 03:23
It's actually really interesting, and it's been almost like a stress test of emerging market countries. You're right, since the war started, we've seen a little bit of the reversal on some of the very good drivers we had for the asset class, which was a weaker dollar, lower inflation, lower energy prices. That's been quite good for emerging market countries. That's completely reversed.

Back in the day, maybe 10 years ago, 20 years ago, EM countries in that specific environment where we have interest rate increase, higher inflation, higher energy prices, that would have been very difficult for some of those countries, where we would have seen a really, really big sell-off. That didn't happen this time. When you think of difficult, I would say the environment is, especially with the uncertainties around geopolitics.

What we've seen over the past few months is actually more of a lack of flat market which actually some countries doing really well. Some countries suffering a little bit, but I would say what has been driving the countries recently is more the domestic fundamentals rather than this big geopolitical event, which is quite important and shows that emerging market countries have changed. That's what we've been seeing for a long time. They're a lot more resilient to the global environment. They're less dependent on the US dollar. They're less dependent on global energy prices. That's why we believe that higher valuation in general is deserved for emerging market countries.

Mike Reed 04:53
That's interesting because it's moved to dependence, interdependence within EM markets. It's been quite noted over the last…well, it's been quite longer in period now, but I think it's increasing further since Trump tried to meddle in it.

You talked briefly about tech sector and how that was very undervalued. It's been a big driver of returns, I think, within the last 18 months, especially with the buildout in America and China, whatever, and the demand for semiconductors, which then reduced in South Korea and Taiwan.

You still got quite a strong cycle of CapEx there, but if the sector was to slow down, what are the sectors and trends do you think of finding that present attractive investment opportunities that you could diversify into if this wasn't the main lead anymore?

Laurence Bensafi 05:44
First thing, on the AI theme, quickly, we remain relatively positive, as in we don't believe that it would be a big collapse in the CapEx cycle as you said, maybe slow down. We're not even sure there's going to be a big slowdown because there's so much to build. Every country tries to be independent. Every country, every company tries to be ahead of its competitor. Everyone is building massively. Korea, Taiwan in particular, remain really the centre.

You talked about semiconductors, but there's more in that sector. It's really the entire manufacturing chain for AI is in those countries. Valuation remains relatively attractive. We don't expect a collapse or anything. Maybe a more muted performance over the next year or so could be expected. As you said, the good news is that in EM, it's not all about AI. Yes, it's important, but we have other opportunities we like.

One we like is Latin America. I mentioned already some of the countries that have done well recently. Really, that's where we see probably the best opportunity. Very cheap. All those countries are very cheap. We've seen leadership change in most of the country, which is really the game changer for Latin America. For many years, Latin America's issue is more on the leadership side, where they had, I would say, quite poor-quality government, quite populist, not implementing reforms, not business-friendly. This is starting to change. You've seen a big jump in the stock market in those countries when you've seen changes in Peru or Colombia. We're going to see. We have an election on Sunday in Brazil. That's going to be watched very, very closely. If we go back to a more business-friendly government, that would be very positive for the stock market.

Finally, this region benefits also from high commodity prices, especially copper, which is really one of the biggest producers of copper in the world in the region. Other areas are interesting. Consumer staples and discretionary have been extremely weak. Trade at some of the lowest valuations we've ever seen. We've seen that's not right compared to, say, the quality and the outlook for those stocks.

India at some point will come back. An interesting financial sector, which is a big sector in EM. It's been all okay, but because it's been positive in countries like Taiwan and Korea where they benefited from the environment in the country. In a lot of countries, financials have been very weak. Again, we don't think they're reflected from them. Also, I can continue the list. I was going to say Vietnam, other places. That's the beauty of emerging markets. We're talking about 25 countries plus with frontier markets, a lot of idiosyncratic stories that are not only dependent on geopolitical or AI.

Mike Reed 08:30
I guess that's one of the big things you have with your markets. There's so many different places to go. It's not just a commodity. One area I'd like to talk about is, and I really enjoy reading the Notes from the Road research pieces that you and the team write following your visits to these various countries. I've observed that you often discuss how retail malls across the globe are thriving. Restaurants and cafes are full. Consumption is alive and well. Some really strong middle-class emerging environments there. Are there any countries in your universe where you don't think that's the case and where you see a more pessimistic macro backdrop? Where do you see the risk right now?

Laurence Bensafi 09:13
I think for us the big question mark, and that's been the case for a while, is really China. It's a very interesting country. For a long time, it was the biggest country in EM Equities. This market was thriving with the performance. That has now stopped. Two countries are now a lot bigger than China. It's especially Taiwan, a lot bigger, and Korea just a bit bigger than China. China has been a little bit less, I would say, commented on, but it's still a very relevant country. That's where, really, you have some of the best things in EM and some of the worst things, I would say, clearly in terms of innovation, in AI.

They are the world's largest exporter. For most countries, they became the biggest trading partner. Really, where we have an issue, to your point, is on the consumer, really. We've seen a very, very depressed consumer in China for a variety of reasons. Mainly, the property sector has been really weak. They are really affected, the kind of Wealth Effect. We often talk about the Wealth Effect in the US where people own a lot of stocks.

In China, it's the property market that is creating the Wealth Effect, and you have that for years now, a downturn in that market. People are feeling poorer and poorer every day. That's been really, really hard in China. We haven't seen the government doing much really about it. They're focusing right now on exports, on AI, which we think is great, but you cannot just focus on that and not focusing on the domestic consumption.

You have to have a better outlook for domestic consumption. Our view is that yes, it's not good. The numbers we're seeing in terms of retail sale are poor. The optimism of consumer in China is very poor. We see it more as an opportunity for business right now because we think at some point, something will have to change. At the moment, quite a tricky environment for consumers in China.

Mike Reed 11:18
One to watch out for there. On the back of that, are you seeing many clients now looking to do EM ex-China, or is that a bit of a trend? I've heard a few people talk about that as well.

Laurence Bensafi 11:33
Yes. It's a good point. It makes sense, I think, because China is such a big story on its own. I mean, China is really a country that is driven primarily by what the government is doing rather than really the geopolitical environment. For instance, the driver in the coming years for China doing better will be clearly either the property market recovers, the kind of initiative the government set up. So, some clients prefer separating China from the rest of EM and being able to allocate between the two as they see fit. Sometimes they won't let China, so they’re mainly in ex-China. Sometimes they keep that ex-China exposure, then would add up on China funds. That could be a good way of getting more flexible into your allocation in what is, and will remain, a big country in the asset class.

Mike Reed 12:28
Our note is often dominated by thoughts in EM, positive and negative.

Laurence Bensafi 12:33
Yes, exactly.

Mike Reed 12:34
China used to be the most populous country in the world, but it's now India. We can turn to India. You mentioned it briefly. I think it's the sixth-largest economy in the world. It has a large and vibrant stock market that is not always completely accessible to a non-resident. I recall that last time we spoke, you were very positive on the long-term outlook for the country. What are the structural themes that you see that support this view, if it still remains?

Laurence Bensafi 13:02
Look, I think when we spoke last time, we were positive about the long term. We see really India, as you said, a big economy, young population. We have had a reformist government for more than 10 years, where they've done some good changes, especially on the infrastructure side, a really badly needed investment, and really trying to make India more attractive in terms of manufacturing, attracting investment in the country.

All that is still positive, but for the past, I would say, two years and a half, we've been quite cautious on the country due to elevated valuations. The growth level that was decent but was not at a level that would justify the valuation you were paying for. India, you were paying a lot of "it will come." We were not 100% sure if it would come. That was the right call. India has been really weak.

Again, this year, India is in negative territory, double digits, when the rest of the market, as you mentioned, is a positive territory. We were right to be cautious on India. Foreign investors have been selling, selling, selling for a long time, partly because they'd rather be in Korea and Taiwan. You have fund those purchases, but partly also because, as I said, the short-term outlook is maybe not super exciting, and a lot of people look more short-term rather than long-term.

The other thing that's been happening in the country is that local have been buying, which has been good, but there's a huge illusion happening in the market right now. We've seen a lot of people over the past two years cashing in off the interest in India because it was such a good place to come. We've seen a lot of funds from those private equity or just companies going into the market's IPOs. That's a lot of money that needs to be absorbed by local investors. That would explain.

Finally, really, what has been dear for India is obviously there's no AI. If anything, they have, it's the only country in EM that has a decent IT services sector because obviously, a couple of companies are some of the largest IT services companies in the world. They really, really suffered. I would say nothing has changed. We're just back, actually, from a big trip to India, where we came back quite enthusiastic, and think corporates are actually looking more recently, a lot more enthusiastic about what they see in the country.

We think that we are close to a point where India will become attractive, and there's definitely already some pockets in the market that are attractive, in part through their banks, which we find have been really sold off and not at a very attractive valuation. Some of the valuations they never add in the past. A good place to start building a position, I would say.

Mike Reed 15:58
Oh, that's interesting. I guess that's slightly ironic that for India that has got such a nice IT sector, but is actually suffering from the AI boom. These things happen. Well, thank you. There's so much to discuss when talking about emerging markets. It makes it such an interesting and compelling asset class. I really appreciate you coming back on the podcast, Laurence. It's been fascinating hearing your thoughts and understanding how you and your team intend to generate returns for clients who, what sounds, as always, like a market full of alpha-generating opportunities.

Laurence Bensafi 16:29
Thank you so much, Mike, for having me back on the show. Always a pleasure.

Mike Reed 16:34
Many thanks for listening to the show. If you've enjoyed it, please like and subscribe on your podcast platform of choice. We will be back soon with our next episode, where we will bring you more thoughts and insights from our portfolio management team.

If you wish to listen to any of the previous editions of the podcast or read the insight pieces that runs in the team publish, they can be found on our website www.rbcbluebay.com or on Apple, Spotify, or Google. Thank you once again for joining us today. Good luck and goodbye.