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James Donald Discusses the Sensitivity of Emerging Markets · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
0:10
Speaker 1: This week on the podcast, I have an extra special
0:13
Speaker 1: guest and his name is James Donald and he is
0:16
Speaker 1: Managing Director and Head of Emerging Markets at Lazard Asset Management,
0:21
Speaker 1: where he runs a team of seventy people and analysts
0:24
Speaker 1: focused on the emerging markets across equities and fixed income.
0:29
Speaker 1: He has been investing in the emerging market space for
0:32
Speaker 1: over three decades. If you find the world of emerging
0:36
Speaker 1: markets remotely interesting, well then strap yourself in for a
0:41
Speaker 1: master class in emerging markets investing. We discussed everything from
0:47
Speaker 1: valuation issues to constructing a portfolio, to risk factors that
0:53
Speaker 1: exist in a M that may not exist in in
0:56
Speaker 1: developed countries. How countries go from runtier to EM and
1:01
Speaker 1: from e M two developed and some of those developed
1:04
Speaker 1: countries have gone back uh, falling back into e M uh.
1:08
Speaker 1: This is an area I am personally fascinated in because
1:13
Speaker 1: I'm aware of the fact that U S stocks are
1:15
Speaker 1: let's just say, richly valued, European and Japanese stocks a
1:20
Speaker 1: little less richly valued. But EM is where the valuation exists.
1:25
Speaker 1: And when we look at the track record of EM
1:28
Speaker 1: and US stocks over long periods of time. It seems
1:33
Speaker 1: like the leadership goes back and forth its cycles over
1:37
Speaker 1: longer periods of time, five seven, nine years at a time.
1:41
Speaker 1: We just finished a nearly decade long period of time
1:44
Speaker 1: where e M not just underperformed the US, but significantly
1:49
Speaker 1: underperformed the US. The gap was about as wide as
1:52
Speaker 1: it ever gets. Last year seemed to be the beginning
1:56
Speaker 1: of a change of leadership, and we could see e
1:59
Speaker 1: M stocks outperforming the United States and other developed nations
2:04
Speaker 1: UH for quite a number of years, perhaps even a
2:08
Speaker 1: full cycle. So if you are all interested in places
2:12
Speaker 1: like China, India, Russia, Brazil, Mexico, Turkey, Greece, I keep
2:17
Speaker 1: saying Vietnam even though it's a frontier country, but I'm
2:20
Speaker 1: I'm intrigued by that part of the world, South Korea
2:24
Speaker 1: and Taiwan as em countries when really they're almost developed countries.
2:29
Speaker 1: You will find this conversation absolutely fascinating. So, with no
2:34
Speaker 1: further ado, my conversation with Lazard Asset Managements James Donald.
2:44
Speaker 1: My special guest today is James Donald. He is the
2:46
Speaker 1: head of Emerging Markets at Lazard Asset Management, where he
2:51
Speaker 1: is also a portfolio manager and runs a variety of
2:54
Speaker 1: equity strategies in the emerging markets space. James Donald well
3:00
Speaker 1: into Bloomberg. Thank you, Barry. So you began your career
3:04
Speaker 1: back in Nree, which was a pretty good time to
3:07
Speaker 1: get into finance, the start of a long bullmarket. What
3:12
Speaker 1: was your first job on Wall Street? Well? Um, I
3:16
Speaker 1: was born in Toronto and I actually began my first
3:22
Speaker 1: career in Toronto at a brokerage firm called Wood Gundy,
3:26
Speaker 1: where I did a training course around the firm. So
3:30
Speaker 1: you participated or helped build the trading course? Um, I
3:35
Speaker 1: participated in the trading corps in the training course, and
3:38
Speaker 1: I was involved in a whole lot of different functions
3:41
Speaker 1: in the firm, anything from operations all the way to
3:44
Speaker 1: government finance. So what what drew you to the emerging
3:47
Speaker 1: market side? Well? I I then got a position at
3:54
Speaker 1: s G Warburg in London and UH. I went into
3:59
Speaker 1: the investment management area there and was involved in global investments.
4:04
Speaker 1: This is really pre emerging markets. Emerging markets only really developed,
4:08
Speaker 1: I would say in UM and UM So I was
4:14
Speaker 1: involved in managing global portfolios a lot of us UH
4:19
Speaker 1: holdings at that time and really learned about portfolio management
4:24
Speaker 1: at SG Warburg and the firm ultimately became Mercury Asset Management.
4:29
Speaker 1: And in the early nineteen nineties, when Mercury was establishing
4:34
Speaker 1: it's Emerging market team, I was very interested in joining
4:38
Speaker 1: that team, and so I was one of the first
4:40
Speaker 1: members that that joined that team and was involved in
4:44
Speaker 1: managing portfolios at Mercury. What was the motivation that led
4:48
Speaker 1: you to say, So, you're in London the center, especially
4:51
Speaker 1: in the nineties of a of a fairly booming developed nation,
4:56
Speaker 1: developed metropolis. Europe was really star to come into its
5:00
Speaker 1: own What made you say, Hey, all these developed market
5:04
Speaker 1: things are kind of interesting, but let's venture into something
5:07
Speaker 1: a little more adventuresome. Yeah. I had done a lot
5:12
Speaker 1: of work analyzing smaller stocks in the US and looking
5:17
Speaker 1: at stock markets in Asia and back then essentially the
5:21
Speaker 1: equivalent of emerging markets places like Hong Kong and Singapore
5:25
Speaker 1: and UM Malaysia and areas like that, and so uh,
5:31
Speaker 1: I thought these markets were ones that I had had
5:35
Speaker 1: experience or not two different experiences with. And I also
5:40
Speaker 1: was very attracted by the cultures um the variety of
5:45
Speaker 1: cultures in emerging markets. And at the end of the day,
5:49
Speaker 1: I felt that people around the world want to see
5:54
Speaker 1: their economies develop, and the capital markets are very very
5:57
Speaker 1: critical part of that. So this was long before for
6:00
Speaker 1: the era of index funds or country funds, where you
6:04
Speaker 1: could just push a button and one transaction gives you
6:07
Speaker 1: exposure to fill in the blank. Asia, Vietnam, emerging markets
6:13
Speaker 1: very different era. How was it like in those those
6:16
Speaker 1: days compared to today. It was before index funds, but
6:21
Speaker 1: it wasn't necessarily before country funds. A lot of country
6:25
Speaker 1: funds actually developed during this time because a lot of
6:30
Speaker 1: these markets were very, very small and they don't didn't
6:34
Speaker 1: want to be overwhelmed by foreign capital flowing in and
6:38
Speaker 1: flowing out. So actually country funds were very very big
6:42
Speaker 1: part of the development of those markets. In general, the
6:47
Speaker 1: markets were very small. A lot of the big big
6:51
Speaker 1: countries today, for instance, China, which is close to being
6:55
Speaker 1: thirty percent of the Emerging Market Index today was around
7:00
Speaker 1: one percent. And back then, places like I mean, Malaysia
7:04
Speaker 1: was a huge market. Mexico was a very big market,
7:07
Speaker 1: whereas say Brazil was relatively small or um you know,
7:13
Speaker 1: for instance, India was relatively small as well. Were there
7:16
Speaker 1: any restrictions on we know, everybody wants capital coming into
7:20
Speaker 1: their countries. Were there any restrictions on how that money
7:23
Speaker 1: could be removed? That were they gated or any of
7:26
Speaker 1: these country funds? And I was thinking of country ETFs
7:29
Speaker 1: and indexes, but these specific country funds, if you needed
7:33
Speaker 1: to get your money out in a hurry, was that
7:35
Speaker 1: was that feasible? Well, if you go back more than
7:39
Speaker 1: twenty years, a great deal of these markets, we're not
7:42
Speaker 1: markets you could directly invest in. You had to go
7:46
Speaker 1: through those country funds. So they were fixed pools of capital.
7:49
Speaker 1: And as a result of that, you know, the country
7:53
Speaker 1: funds values could be very different from their net asset values,
7:59
Speaker 1: and so essentially that could distort the picture very heavily.
8:03
Speaker 1: And no, no computerized arbitrage opportunities, none, none of that.
8:08
Speaker 1: Slowly these markets have opened up and UH and investors
8:14
Speaker 1: like ourselves have been able to directly invest in them.
8:16
Speaker 1: Let's get into some of the details and specifics. How
8:20
Speaker 1: do you define what is or is not an emerging market?
8:24
Speaker 1: Is it an economic definition? Is it a political definition?
8:28
Speaker 1: Where where are the lines drawn? It's something that's changed
8:31
Speaker 1: over time. I think originally the index was based or
8:34
Speaker 1: the indices were based on economic development and and political development.
8:42
Speaker 1: They've moved over time more towards what's easily accessible and
8:48
Speaker 1: M s c I is the biggest index provider in
8:50
Speaker 1: this area, and they're very focused on accessibility, meaning define
8:54
Speaker 1: accessibility the ability to get capital in and the ability
8:58
Speaker 1: to get capital in capital the ability to to get
9:02
Speaker 1: information on these markets without any major restrictions. So now
9:09
Speaker 1: as good a time as any to ask what is
9:12
Speaker 1: the distinction between the so called frontier markets and emerging markets? Well,
9:18
Speaker 1: those have even less accessibility on the whole. They are
9:23
Speaker 1: much more rudimentary economies and rudimentary markets, um, and they
9:28
Speaker 1: have less liquidity in them. So uh, there are is
9:33
Speaker 1: an ongoing process by which countries have moved between frontier
9:38
Speaker 1: markets and emerging markets and even back into frontier market.
9:42
Speaker 1: It's a fuzzy line, it's not a very bright line there.
9:45
Speaker 1: There's certainly some gray in in that whole discussion. And
9:50
Speaker 1: you mentioned earlier China is about of emerging markets. It's
9:55
Speaker 1: arguable that they're not that far off from being a
9:59
Speaker 1: developed nation. When when might that occur where China is
10:03
Speaker 1: no longer considered an em country. Yes, I I understand
10:08
Speaker 1: that I get asked that question a great deal I
10:10
Speaker 1: would say there are there are other countries that would
10:13
Speaker 1: be probably contenders, at least based on economic development before China.
10:19
Speaker 1: Give us some examples, well, the most obvious or South
10:21
Speaker 1: Korea and Taiwan, which are actually quite developed economies, relatively
10:27
Speaker 1: wealthy economies. There are some restrictions with changing money and
10:32
Speaker 1: with investor identification that has caused them to stay in
10:35
Speaker 1: emerging markets, but in terms of overall capital market development
10:40
Speaker 1: and economic development, they're probably the leading contenders. You would
10:43
Speaker 1: think South Korea is much closer to a Japan like
10:46
Speaker 1: economy than a China like economy. Well, China has come
10:51
Speaker 1: a long way. China has industrialized very successfully, and China
10:57
Speaker 1: is no longer a low wage country. It's actually a
11:01
Speaker 1: medium wage country. So it's not nearly as wealthy as
11:04
Speaker 1: South Korea or Taiwan on a per capita basis, but
11:07
Speaker 1: it's moved up quickly. One of the appeals of emerging
11:10
Speaker 1: markets are that within this equity half of your portfolio,
11:16
Speaker 1: they're not completely correlated with either developed markets or the
11:21
Speaker 1: US as a particular example. But that raises the question
11:25
Speaker 1: how correlated or uncorrelated are emerging markets with the U
11:31
Speaker 1: S stock market? Well, the correlations have increased. There's no
11:34
Speaker 1: question that when the US market has big movements, we
11:39
Speaker 1: have a lot of interlinked risks around the world that
11:42
Speaker 1: cause these markets to be much more correlated than they
11:45
Speaker 1: used to be. Over time, there are big differences between
11:48
Speaker 1: the performance of the emerging markets and the US market,
11:53
Speaker 1: But on a short term basis, the correlations are pretty high.
11:56
Speaker 1: So let's talk about those performance um metri. You look
12:00
Speaker 1: at the trailing ten years, uh, and now we're so
12:04
Speaker 1: it takes us back still through the financial crisis, US
12:08
Speaker 1: markets have done very well, emerging markets not so much.
12:13
Speaker 1: There seem to be signs that that's changing. Now, tell
12:16
Speaker 1: us your thoughts on on the performance issue and how
12:20
Speaker 1: long these cycles last. They seem to alternate a little bit,
12:23
Speaker 1: don't they. It's hard to tell how long they last.
12:27
Speaker 1: I mean, they seem to be often seven to ten
12:31
Speaker 1: year periods that we see this. Your absolutely right, emerging
12:35
Speaker 1: markets has underperformed the US over the last ten years. UM.
12:41
Speaker 1: I think the biggest reason for that is that we've
12:45
Speaker 1: been through a strong period where deflationary pressure has dominated markets,
12:51
Speaker 1: and the emerging markets are just more economically sensitive than
12:56
Speaker 1: the US. You know, if you think about the technology
12:59
Speaker 1: sector French, big big area. In the US, there is
13:03
Speaker 1: actually quite a big technology sector in emerging markets as well,
13:06
Speaker 1: But you have a lot of industries that are very
13:09
Speaker 1: economy sensitive. So in that in that last decade period,
13:14
Speaker 1: that economic sensitivity has worked against the returns in emerging markets.
13:20
Speaker 1: What about the dollar I I used to think, and
13:23
Speaker 1: I'm changing my view someone on this. I used to
13:25
Speaker 1: think of emerging markets as heavily commodity dependent and therefore
13:30
Speaker 1: heavily dollar dependent. Is that still the case? And how
13:34
Speaker 1: significant is the dollar to emerging markets performance? Well, the
13:39
Speaker 1: commodity areas like energy materials are today relatively small parts
13:44
Speaker 1: of emerging markets, around fifteen percent of our universe. How
13:48
Speaker 1: does that compare to say, years ago, well even ten
13:53
Speaker 1: years ago it was over Really that's a big change.
13:56
Speaker 1: So it's a big change. It tends to fluctuate over
14:00
Speaker 1: periods of time. Um, But I what what I would
14:03
Speaker 1: say is that emerging markets as a whole are just
14:07
Speaker 1: more dependent on economic growth than the developed world, and
14:12
Speaker 1: so when when the world has difficulties with economic growth,
14:17
Speaker 1: emerging markets tend to be negatively affected by it. So
14:21
Speaker 1: that's an interesting contrast because I usually think of everybody
14:24
Speaker 1: dependent on economic growth. When we have a recession, people
14:28
Speaker 1: tend to spend less, less employments, profits are affected, It
14:32
Speaker 1: affects markets. But what you're really saying is more nuanced
14:36
Speaker 1: emerging markets are much more sensitive to the state of
14:39
Speaker 1: the economy than Europe, of the US, or even Japan
14:43
Speaker 1: for that matter. Is that is that a fair assessment?
14:45
Speaker 1: I think that's fair. I think the the clear enemies
14:48
Speaker 1: of emerging market equities are negative real economic growth and
14:52
Speaker 1: or crises. So we've seen over the past year or
14:56
Speaker 1: two the US dollar we can fairly dramatically after a
14:59
Speaker 1: huge seven or nine you run and when we look
15:03
Speaker 1: at performance of emerging markets versus Europe versus US, they
15:07
Speaker 1: seem to have just edged out uh those areas on
15:12
Speaker 1: a nominal basis. But for a US investor in dollars,
15:16
Speaker 1: they had a booming year last year because of the
15:19
Speaker 1: weakness of the dollar. How significant is the currency not
15:23
Speaker 1: to the exports of commodities, but to the net performance
15:27
Speaker 1: of e M two investors in the US well, emerging
15:31
Speaker 1: market equities tend to have a natural negative correlation to
15:35
Speaker 1: the dollar and week dollar strong EM week dollars strong
15:40
Speaker 1: EM strong dollar week E MUH. That is, that is
15:44
Speaker 1: a strong correlation, and indeed emerging markets tend to have
15:48
Speaker 1: quite a strong correlation with commodity prices. Let's talk a
15:51
Speaker 1: little bit about some of these varied UH differences between
15:57
Speaker 1: emerging market countries in different parts of the world. When
16:01
Speaker 1: I think about e M, I tend to think about
16:04
Speaker 1: Asia and South America, and to a lesser degree UH
16:10
Speaker 1: Southern Europe places like Turkey. Um, how different are all
16:14
Speaker 1: these regions. One would imagine those three places are very,
16:18
Speaker 1: very different economically and in terms of their markets. There
16:22
Speaker 1: is tremendous variety across emerging markets. In Asia you have
16:26
Speaker 1: large technology sectors, for instance, whereas you have a lot
16:30
Speaker 1: more of a focus on commodities in parts of Latin
16:34
Speaker 1: America and in parts of Eastern Europe like Russia or
16:40
Speaker 1: South Africa. So very different countries, very different political systems,
16:45
Speaker 1: tremendous variety. So when I think about different parts of
16:48
Speaker 1: the world, I think of the US as fully or
16:52
Speaker 1: even richly valued, Europe a little less richly valued. Emerging
16:56
Speaker 1: markets relatively cheap compared to the other two. How do
17:01
Speaker 1: you come up with valuation metrics for different parts of
17:04
Speaker 1: the world when there's such different economies. If you're if
17:07
Speaker 1: you're looking at China or Russia, or you're looking at
17:10
Speaker 1: Brazil or Argentina. Can you apply the same sort of metrics.
17:14
Speaker 1: What do you have to develop different tools for different economies? Well,
17:18
Speaker 1: I would, I would agree with you. I actually come
17:21
Speaker 1: at this from the perspective of thinking there are no
17:24
Speaker 1: cheap asset classes today relative to their own history, but
17:28
Speaker 1: emerging markets are relatively cheap to develop markets and to
17:32
Speaker 1: the US market. From where I stand and uh, we
17:38
Speaker 1: approach our analysis by focusing on stocks stocks that look
17:45
Speaker 1: inexpensively valued and relatively profitable. We do a lot of
17:51
Speaker 1: accounting analysis because we have around seventy analysts at Lazard
17:59
Speaker 1: who are involved at looking at all types of different strategies,
18:04
Speaker 1: and we make adjustments for accounting distortions where relevant, and
18:10
Speaker 1: then we look forward towards the fundamentals for their businesses
18:14
Speaker 1: and we then see according to the valuations if we
18:19
Speaker 1: think the stocks are inexpensively priced or not. And then
18:24
Speaker 1: at the end of our process will discount for certain
18:29
Speaker 1: risks that include things like political risk and macroeconomic risk
18:35
Speaker 1: and even governance risk. So so last year in the
18:39
Speaker 1: United States, I think we could fairly safely say we
18:43
Speaker 1: had one of the most politically unstable or certainly politically
18:48
Speaker 1: volatile years we've seen, and yet the stock market was
18:52
Speaker 1: utterly placid. It was very confounding to a lot of people.
18:56
Speaker 1: Although history tells us politics and investing don't don't matter
19:00
Speaker 1: that much in the United States. Can you apply that
19:03
Speaker 1: same rule abroad or do you have genuine risk that
19:07
Speaker 1: a government gets destabilized there are capital controls that come
19:11
Speaker 1: in and suddenly the investment thesis for that country is
19:14
Speaker 1: much more challenging than it was earlier. It's a very
19:17
Speaker 1: good question, because I also was surprised last year in
19:21
Speaker 1: the US that the market did not seem to be
19:24
Speaker 1: affected by the noise, the political noise and the economic
19:30
Speaker 1: noise out there in the world as a whole and
19:33
Speaker 1: in the US. UM. I think it varies on situations,
19:38
Speaker 1: but certainly there are political effects that we see in
19:41
Speaker 1: emerging markets. A very good example right now is in
19:45
Speaker 1: South Africa, where um a new leader of the African
19:52
Speaker 1: National Congress, so Ramiphos, has come into power and where
19:57
Speaker 1: there seemed to be sizeable changes of what politically that
20:02
Speaker 1: are causing some quite big changes with the currency and
20:05
Speaker 1: with the market in that country. What about um some
20:08
Speaker 1: of the other countries where we've seen some either diplomatic
20:12
Speaker 1: or geopolitical issues. You mentioned Russia is Russia and investible country.
20:19
Speaker 1: We believe it is. It certainly is a place where
20:22
Speaker 1: you have to take into account political risk because it
20:27
Speaker 1: can have big, big effects on certain corporations, and there's
20:31
Speaker 1: some degree of judgment in how we look at that. UM.
20:35
Speaker 1: It's also a place where we tend to see risks
20:39
Speaker 1: associated with governance in some companies. So those are big,
20:43
Speaker 1: big factors in Russia, but we do think that there's
20:48
Speaker 1: reasonable protection in most companies in Russia. What about India?
20:52
Speaker 1: We talked about China earlier, and you mentioned Indian passing
20:57
Speaker 1: a giant country by population, a big technology center. What
21:01
Speaker 1: are we to make of India's perennial sense of being
21:06
Speaker 1: on the verge of of great things happening and then
21:10
Speaker 1: nothing seems to really gain any traction. Well, I think
21:14
Speaker 1: India is very exciting right now. You've got a prime
21:17
Speaker 1: minister in Mr Modi who doesn't really have to answer
21:21
Speaker 1: to anyone. Even the leaders of his own party were
21:24
Speaker 1: not in favor of him being prime minister. He appears
21:29
Speaker 1: to be very, very courageous. Ah, he's willing to do
21:33
Speaker 1: things like um, removing the largest denominations of currencies and
21:41
Speaker 1: making big, big changes in the civil service. So um,
21:46
Speaker 1: what what is exciting is he's he's tackling the bureaucracy
21:51
Speaker 1: of that country, knowing that there's a huge young population
21:56
Speaker 1: with I think about a million people going into the
21:58
Speaker 1: workforce every month, and he needs to prepare that country
22:05
Speaker 1: for UM a much more developed type of economic system.
22:11
Speaker 1: What are the country is sort of underappreciated or overlooked
22:15
Speaker 1: in the world of m Well, of course, I mean
22:18
Speaker 1: every country has its own issues. I mean India, for instance,
22:21
Speaker 1: is actually I wouldn't say a terribly inexpensive market. We
22:25
Speaker 1: do find opportunities there, but it in general is not
22:28
Speaker 1: an inexpensive market. Um. The areas that that we think
22:33
Speaker 1: are are relatively underappreciated include Russia, include some stocks in Brazil, Turkey,
22:40
Speaker 1: Indonesia for instance, UM and and to some degree South
22:45
Speaker 1: Africa right now, but again we find opportunities in many
22:50
Speaker 1: many markets across the emerging markets. Let's let's talk a
22:53
Speaker 1: little bit about putting those seventy analysts to work in
22:56
Speaker 1: the emerging market space. How important is to have the
23:01
Speaker 1: I know it's a cliche, but how important is it
23:04
Speaker 1: to physically be located in some of these countries and
23:08
Speaker 1: see firsthand what's going on. I think it's vital two
23:13
Speaker 1: go and see activities in all of these countries. I
23:18
Speaker 1: don't think it's necessary to actually be there all the time,
23:23
Speaker 1: but I think it's very very critical to travel to
23:27
Speaker 1: get updates, to see what's changing in these markets on
23:30
Speaker 1: a very very regular basis, because if you're not seeing
23:36
Speaker 1: it fairly regularly, you're perhaps not understanding opportunities or risks
23:42
Speaker 1: that are coming up in these markets. So you're racking
23:44
Speaker 1: up a million frequent flyer miles a year or you
23:48
Speaker 1: more New York based, Uh, not a million, but a
23:52
Speaker 1: good portion of that. And pretty much all of our
23:55
Speaker 1: analysts are traveling heavily around the emerging market world to
24:00
Speaker 1: see opportunities on an ongoing basis. So let's talk a
24:04
Speaker 1: little bit about market efficiency. You know, there's only so
24:08
Speaker 1: much any of us can do to beat large cap
24:12
Speaker 1: US stocks. It seems a ton of information is known,
24:16
Speaker 1: there are no real advantages to picking this company over that,
24:19
Speaker 1: or so it seems in the US. Do you have
24:22
Speaker 1: that same level of market efficiency in emerging markets specifically,
24:29
Speaker 1: is information is freely available? Are there advantages that can
24:33
Speaker 1: be had from your own analysis, in your own data gathering.
24:37
Speaker 1: How does EM differ from you know, the SMP five
24:41
Speaker 1: hundred in terms of potentially producing market beating results. Well,
24:49
Speaker 1: I think indexing is a perfectly viable, tactical, and often
24:54
Speaker 1: short term solution. UM. But one of the interesting things
24:59
Speaker 1: is that in emerging markets, over longer periods of time,
25:04
Speaker 1: the median manager tends to beat the index. And so
25:08
Speaker 1: I think informational efficiency is less good in the emerging markets,
25:14
Speaker 1: and there aren't necessarily a huge amount of analysts in
25:18
Speaker 1: emerging markets. Overall, it's nothing like the US, and so
25:22
Speaker 1: actually going and understanding these companies and utilizing certain strategies
25:30
Speaker 1: for investing UM, I think can produce good results in
25:35
Speaker 1: comparison with the index over longer term periods of time. So, um,
25:40
Speaker 1: it's a bit more work. I think one has to
25:43
Speaker 1: be creative, but I think one can construct portfolios using
25:47
Speaker 1: perhaps different investing methodologies and emerging markets that can provide
25:55
Speaker 1: a very strong performance in the long term. So, so
25:59
Speaker 1: let's talk about constructing those portfolios and discuss a little
26:03
Speaker 1: bit of of process. Um, you manage a team that's
26:08
Speaker 1: a lot of analysts, I assume a bunch of traders,
26:12
Speaker 1: a number of other support process and I'm guessing this
26:15
Speaker 1: investment committee on the top of that whole pyramid. What
26:20
Speaker 1: is the process like thinking about creating a new portfolio
26:25
Speaker 1: making changes to existing portfolios? Tell us how you you
26:29
Speaker 1: think about these things? Well, the way we're uh organized
26:35
Speaker 1: at Lazard is that we actually have twelve different emerging
26:40
Speaker 1: market teams, anywhere from fixed income to currencies, to fund
26:44
Speaker 1: of funds to equities. We're almost like a collection of boutiques,
26:49
Speaker 1: and all the strategies are different. So in equities, for example,
26:54
Speaker 1: we have four different equity strategies. We have a quantitative one,
27:00
Speaker 1: we have a relative value one, which is where I
27:01
Speaker 1: spend most of my time. We have a growth at
27:04
Speaker 1: a reasonable price one, and we have a core one.
27:07
Speaker 1: So a whole lot of different things. It's almost like
27:10
Speaker 1: a menu with four different um food plates, and people
27:18
Speaker 1: can decide, based upon their objectives, what they what type
27:22
Speaker 1: of journey they would like to go on. So that's GARP, quants,
27:26
Speaker 1: relative value, and core and core. Is there a much
27:29
Speaker 1: overlap between them or by design, they're all very by design,
27:33
Speaker 1: they're quite different portfolios. The overlap is relatively limited, and
27:39
Speaker 1: they will produce different types of results for investors over time.
27:44
Speaker 1: And you mentioned fixed income. I'm under the impression that
27:48
Speaker 1: fixed income overseas is a little bit of a challenge,
27:51
Speaker 1: and fixed income in emerging markets is a very very
27:54
Speaker 1: different animal than what we used to here in the
27:57
Speaker 1: United States. It is very different from the US um
28:01
Speaker 1: you really have a number of different fixed income areas
28:06
Speaker 1: in emerging markets. You have hard currency debt, which which
28:11
Speaker 1: has been a very very strong area. You have local
28:14
Speaker 1: currency that until recently has been relatively weak. Uh. And
28:19
Speaker 1: then you tend to get strategies that mix the two.
28:23
Speaker 1: And you also have quite a significant corporate debt universe
28:28
Speaker 1: as well. And you reference currencies as a group. How
28:32
Speaker 1: significant does currency hedging become when you're investing in various
28:37
Speaker 1: countries or do you not bother with currency hedging and
28:40
Speaker 1: saying eventually it all evens out in the wash? In
28:43
Speaker 1: fixed income, currency hedging happens a significant amount. I would
28:48
Speaker 1: say inequities. UM, we can hedge currencies, in practice, we
28:54
Speaker 1: don't tend to do it that much. It's it's quite
28:57
Speaker 1: expensive and it's quite easy to get the time periods wrong.
29:00
Speaker 1: We tend to embed it in our target prices UM
29:05
Speaker 1: by analyzing what risks we think the currency or macroeconomic
29:11
Speaker 1: factors in general might mean for the actual profitability of
29:16
Speaker 1: the company. So you could reduce your expected returns in
29:19
Speaker 1: a given space thinking currency is a risk factor for
29:23
Speaker 1: this area. Correct that that that's quite intriguing you. You
29:27
Speaker 1: also mentioned you have a relative valuation funds. Let's let's
29:31
Speaker 1: talk a little bit about relative valuation in the emerging
29:35
Speaker 1: market space. How do you think of EM valuations? Is
29:40
Speaker 1: it always relative between countries? Are you looking at the
29:44
Speaker 1: group relative to developed uh nations? Or you mentioned earlier
29:50
Speaker 1: you can look at different asset classes relative to their
29:52
Speaker 1: own history. What do you do a little bit of
29:54
Speaker 1: everything In the way we invest, we tend to look
29:58
Speaker 1: at the actual stocks and their valuations, and in a
30:04
Speaker 1: relative value world, we tend to look at it relative
30:07
Speaker 1: to the profitability of the companies. In a growth and
30:11
Speaker 1: a reasonable price type of strategy, we tend to look
30:14
Speaker 1: at valuations relative to earnings per share growth rates. UM
30:19
Speaker 1: As a whole, will will look at the universe and
30:22
Speaker 1: will compare the universe and emerging markets to develop markets. Today,
30:28
Speaker 1: the price earnings ratio of emerging markets as a whole
30:31
Speaker 1: is at about a thirty discount to that of developed markets.
30:35
Speaker 1: That's that's pretty substantial. Do you think those will eventually converge?
30:39
Speaker 1: I think there's a good chance with the economic scenario
30:44
Speaker 1: we're seeing now accelerating growth around the world from a
30:47
Speaker 1: very low base. That's that's usually a positive thing for
30:51
Speaker 1: emerging markets, and we're anticipating the likelihood of increasing profitability
30:58
Speaker 1: for emerging market stocks relative to develop market stocks. If
31:02
Speaker 1: those things happen, I think we could see significantly lower
31:06
Speaker 1: discounts invaluation. So take me through your process a little bit,
31:11
Speaker 1: because there are so many moving parts here. I'm trying
31:15
Speaker 1: to get a handle on what is the decision making
31:18
Speaker 1: process like when you're is it top down as it
31:22
Speaker 1: bottoms up? Is it both? Because I sort of hearing
31:26
Speaker 1: you guys are really more specifically stock pickers in each
31:29
Speaker 1: country as opposed to Hey, from a top down view,
31:34
Speaker 1: we think Asia is attractive, but maybe South America not
31:37
Speaker 1: so much, So our tilt goes that way or am
31:39
Speaker 1: I am I just getting that wrong? No, You're exactly right.
31:42
Speaker 1: And most of our strategies are more bottom up than
31:46
Speaker 1: top down, so we tend to start by identifying what
31:52
Speaker 1: looked like compellingly attractive stocks. Evaluation almost always plays some
31:58
Speaker 1: sort of role, as do fundamentals. In the relative value
32:02
Speaker 1: strategy that I'm most involved with, we are attracted to
32:07
Speaker 1: stocks that are inexpensively priced and have had pretty good
32:12
Speaker 1: profitability m We then look closely at their financial statements
32:20
Speaker 1: and footnotes to see if there are distortions that are
32:22
Speaker 1: caused by that, and adjust for any distortions that we
32:26
Speaker 1: think are material. If the stock is still compellingly attractive, well,
32:32
Speaker 1: then look into the future into the next three or
32:36
Speaker 1: four years and try and forecast the fundamentals, particularly the profitability,
32:42
Speaker 1: and derive a price target for that, and if there's
32:46
Speaker 1: enough upside then to go onto the last step. That's
32:50
Speaker 1: where we look at some of these other type of
32:54
Speaker 1: factors like macroeconomic and political risk and governance risk as well,
32:58
Speaker 1: very important for us, and discount for those and at
33:02
Speaker 1: the end of the day, see if we have upsides
33:06
Speaker 1: that are competitive with what we already have in our portfolio. So,
33:09
Speaker 1: since valuation drive stock pickings to such a large degree,
33:14
Speaker 1: do you ever find yourself stepping back and looking at
33:17
Speaker 1: the overall portfolio and saying, I'm gonna make up a
33:20
Speaker 1: couple of countries. But gee, we have a lot of
33:23
Speaker 1: Turkey and Vietnam stocks and we have almost no stocks
33:27
Speaker 1: from Mexico or Thailand. I'm just making these things up.
33:31
Speaker 1: But if valuation is a key driver, can you end
33:36
Speaker 1: up with sort of a lumpy distribution of stocks by country?
33:41
Speaker 1: You can end up with quite different exposures in different countries. Um,
33:47
Speaker 1: and uh, we don't have to invest in any given country,
33:53
Speaker 1: so you have no mandate that, hey, I want to
33:56
Speaker 1: percent across the board and no more than of this country. Well,
34:00
Speaker 1: we have limits on what we can have in a
34:02
Speaker 1: given country, so we can't have. UM. You know, I
34:08
Speaker 1: think it's very unlikely we're going to have positions in
34:12
Speaker 1: five or six countries and nowhere else. That's that's really
34:16
Speaker 1: We've never had a situation like that. We've always pretty
34:19
Speaker 1: much been invested in something like fifteen countries and emerging
34:25
Speaker 1: markets sometimes but so so we haven't really had that issue. Um,
34:32
Speaker 1: but there are times when some countries are just not
34:35
Speaker 1: attractive for us and we'll have nothing there. We have
34:38
Speaker 1: been speaking with James Donald of Lazard Asset Management. If
34:42
Speaker 1: you enjoy this conversation, be showing and stick around for
34:45
Speaker 1: the podcast. As trus will we keep the tape rolling
34:48
Speaker 1: and continue discussing all things emerging market. Be shure and
34:52
Speaker 1: check out my daily column on Bloomberg View dot com.
34:55
Speaker 1: You can follow me on Twitter at Ridolts. We love
34:58
Speaker 1: your comments, feed back, end suggestions right to us at
35:03
Speaker 1: m IB podcast at Bloomberg dot net. I'm Barry Hults.
35:07
Speaker 1: You're listening to Master's in Business on Bloomberg Radio. Welcome
35:23
Speaker 1: to the podcast, James, Thank you so much for doing this.
35:26
Speaker 1: This is an area I find absolutely fascinating and in
35:30
Speaker 1: in my shop. In the beginning of Seen, we changed
35:34
Speaker 1: our tilts a little more aggressively towards e M from
35:38
Speaker 1: the US, and then we did it again. Uh. In
35:41
Speaker 1: the beginning of nothing huge, just a couple of percentage
35:45
Speaker 1: points here and there. But like you, we look at
35:48
Speaker 1: valuation and think that's a key determiner of of future returns.
35:54
Speaker 1: There's a bunch of questions on value. I didn't I
35:57
Speaker 1: didn't get to that. I want to. I want to
35:59
Speaker 1: come back to but before I do that, I have
36:03
Speaker 1: to just talk about some numbers a little bit. So
36:06
Speaker 1: when we look at at the population of the emerging
36:09
Speaker 1: market countries, it's something like half of the global people,
36:14
Speaker 1: half the global population, but in terms of market cap
36:18
Speaker 1: it's tiny, it's it's ten. Are those two eventually going
36:23
Speaker 1: to converge? Are we going to see a greater waiting
36:28
Speaker 1: of emerging markets or as these countries or as these
36:32
Speaker 1: countries mature, some of them are going to start to
36:36
Speaker 1: move into the developed nations side of the ledger. You'll
36:39
Speaker 1: probably see a combination of those things. I would I
36:43
Speaker 1: would guess I think it's some stage, probably not in
36:47
Speaker 1: the immediate term, but you're going to see some of
36:49
Speaker 1: these countries like South Korea and Taiwan move into the
36:52
Speaker 1: developed world UM and uh An all likelihood, I think
36:59
Speaker 1: that will be more and more companies in emerging markets,
37:03
Speaker 1: and you'll see the growth of those markets as a
37:06
Speaker 1: percentage of total market capitalization. So South Korea, Taiwan, UM.
37:12
Speaker 1: When I think of some of the more developed emerging
37:15
Speaker 1: market countries, Turkey, Vietnam, I always want to say Australia,
37:21
Speaker 1: but I know, I know they're not technically an emerging
37:25
Speaker 1: market country. Who is the next tier below South Korea
37:30
Speaker 1: and Taiwan. Israel is another name that comes Israel is
37:33
Speaker 1: actually it actually made the move a number of years
37:36
Speaker 1: ago into the developed world. Mexico is a possibility, UM
37:42
Speaker 1: and it's it's a reasonably well developed country and market,
37:47
Speaker 1: so that that is a possible mover. How about anyone
37:51
Speaker 1: from South America? I think it probably will take a
37:55
Speaker 1: little longer, but Chili would be definitely the contender. I
38:00
Speaker 1: think there it's been pretty successful economy and a pretty
38:03
Speaker 1: successful market. That's intriguing. UM. And we talked about valuation
38:09
Speaker 1: and e M relative to history. UM. What emerging market
38:14
Speaker 1: countries do you think are uninvestable these days? Well, that's
38:19
Speaker 1: something we look at very very regularly. We look at
38:22
Speaker 1: what sort of protection we think there is for investors.
38:27
Speaker 1: The best example of an uninvestable emerging market has really
38:31
Speaker 1: been Venezuela, which has had terrible, terrible problems, as you know, inflation,
38:36
Speaker 1: political instability to a large degree cause by politics and UM.
38:41
Speaker 1: In two thousand five, two thousand six, basically the government
38:44
Speaker 1: said it was going to buy a lot of the
38:48
Speaker 1: public relisted stocks and just give us a value they
38:52
Speaker 1: thought made sense. There was no real protection for investors
38:56
Speaker 1: there so they deprivatize companies effectively, and we'll tell you
39:02
Speaker 1: what we think it's worth effectively. I gave us an
39:04
Speaker 1: arbitrary value for that. So really we felt that is
39:09
Speaker 1: that is the best example of an uninvestable country. What's
39:13
Speaker 1: it going to take for them to rehabilitate that image
39:16
Speaker 1: other than a full regime change? I think, I think
39:19
Speaker 1: a full regime change is the only is the only
39:22
Speaker 1: thing that is going to change. I mean, I spent
39:24
Speaker 1: a lot of time in Venezuela in the early nineteen nineties,
39:28
Speaker 1: and they made a lot of progress. At one point, well,
39:31
Speaker 1: there were some there were some very very well run companies,
39:35
Speaker 1: and Pitavisa, the big oil company, was always known as
39:40
Speaker 1: a company that was that had experts and was well managed.
39:43
Speaker 1: But unfortunately quite a lot of that seems to have
39:48
Speaker 1: changed now. So now let's um let me change us
39:52
Speaker 1: up a little bit. During the European crisis, we saw
39:57
Speaker 1: accusations that a number of countries that were considered part
40:02
Speaker 1: of the EU and considered developed nations really could have
40:06
Speaker 1: been on the emerging market side of of the line.
40:10
Speaker 1: And the example that comes up time and again is Greece.
40:13
Speaker 1: Was Greece really a full developed nation and was it
40:17
Speaker 1: comparable to its other European Union colleagues. Unfortunately, the situation
40:25
Speaker 1: that has fallen Greece has been a tragedy. It was
40:28
Speaker 1: an emerging market country, then it joined the EU and
40:34
Speaker 1: essentially got a lot of EU fiscal aid and and
40:38
Speaker 1: low rates and infinite borrowing from Germany, and that has
40:41
Speaker 1: that has really compromised the economy and the indebtedness of
40:46
Speaker 1: the country has gone up dramatically. It's now back in
40:49
Speaker 1: emerging markets and I would say we're waiting to see
40:54
Speaker 1: if the plans, the economic plans for Greece can rehabilitate
41:00
Speaker 1: the country, particularly the banks which have very, very high
41:05
Speaker 1: non performing loans. But if if the economic plans can work,
41:10
Speaker 1: then perhaps Greece can come back. It's a very sad story.
41:14
Speaker 1: A lot of the companies that I've seen over years
41:17
Speaker 1: have have had terrible problems through this, and in many
41:20
Speaker 1: ways it might have been a better thing if Greece
41:23
Speaker 1: had never uh put the Euro as its kind of
41:28
Speaker 1: as its currency. I was in Greece two summers ago
41:30
Speaker 1: and I'm just struck by what a beautiful country that
41:33
Speaker 1: people are lovely, But you're getting a tourists eye view,
41:36
Speaker 1: not necessarily a economists eye view, and it feels like
41:41
Speaker 1: a European country. It feels like a developed country. You
41:44
Speaker 1: just the apparently the financial infrastructure simply isn't there compared
41:49
Speaker 1: to the rest of Europe. Well, it had excellent banks
41:52
Speaker 1: in in the period in the ninety nineties, UM, some
41:56
Speaker 1: very very well run banks. But when indebtedness increased enormously
42:04
Speaker 1: and wasn't really kept properly in the economic pitch in
42:09
Speaker 1: in the economic figures of the country, UM, it was
42:13
Speaker 1: a big negative surprise, and of course no one, no
42:16
Speaker 1: one wanted to be involved with the country at all.
42:18
Speaker 1: Now with hindsight, looking back, it seems absurd that banks
42:22
Speaker 1: in Greece and the government of Greece could borrow at
42:25
Speaker 1: the same rate as banks in France or Germany. But
42:29
Speaker 1: I guess that's the problem with too much easy money
42:32
Speaker 1: that I think is the problem. So we we always
42:34
Speaker 1: used to talk about the pigs Portugal, Italy, Greece and Spain. Um,
42:40
Speaker 1: are any of those other southern European countries really at risk?
42:46
Speaker 1: For where should they these countries be placed? Should they
42:49
Speaker 1: be developed nations or or emerging markets? From what I
42:53
Speaker 1: understand with those four countries, they have worked pretty hard
42:58
Speaker 1: on mending their their fiscal situations, in their economic condition,
43:03
Speaker 1: and so I don't think they will be emerging markets
43:07
Speaker 1: um those four. Portugal is probably the closest, but I
43:10
Speaker 1: think I think they've all done a lot of very
43:13
Speaker 1: important work in the last six or seven years. I mean,
43:15
Speaker 1: it's hard to imagine Italy as an emerging market given
43:18
Speaker 1: their history and everything else. And I was just in
43:22
Speaker 1: Spain in October and I can't say enough about how
43:26
Speaker 1: delightful everything from the food to the people. But again
43:30
Speaker 1: it's a tourist side view. You're not seeing the dark
43:32
Speaker 1: underside um. And then let's talk a little bit about China,
43:36
Speaker 1: because that is such a fascinating growth story in such
43:40
Speaker 1: a fascinating country over the past three decades. What's the
43:45
Speaker 1: line in the sand where China crosses over from e
43:49
Speaker 1: M to developed. Well, I think there's some way yet
43:53
Speaker 1: to get to that line. One of the big changes
43:57
Speaker 1: that's happening this year is that the main indices will
44:03
Speaker 1: all have China a share some mainland traded shares in China,
44:09
Speaker 1: and the capital markets in China are increasingly converging with
44:15
Speaker 1: global capital markets. We still have quite a lot of
44:17
Speaker 1: work to do on the on the debt side in China.
44:21
Speaker 1: But this A share inclusion in the MSc I index,
44:26
Speaker 1: I think is a major major event. So to to
44:29
Speaker 1: put to explain that a little bit. If you are
44:31
Speaker 1: a non China residents, if you're overseas, you go to
44:34
Speaker 1: Hong Kong, you're buying B shares, not A shares. There
44:38
Speaker 1: isn't the same arbitrage situation that keeps them lined up.
44:41
Speaker 1: Sometimes you're paying a premium, you're not getting the same
44:44
Speaker 1: exact thing, the same exact rights. Is that going to
44:47
Speaker 1: go away and we're all going to be able to
44:49
Speaker 1: buy A shares? Is that the expectation as long as
44:52
Speaker 1: you have an ability to do it through the connect
44:54
Speaker 1: system in Hong Kong, you could be able to buy
44:57
Speaker 1: Shanghai or Shenzen listed A shares in that market to
45:03
Speaker 1: a large degree within those indicries. And it's worth remembering
45:07
Speaker 1: the A share market is, you know, if you take
45:11
Speaker 1: the full market, is the second biggest stock market in
45:16
Speaker 1: terms of market capitalization in the world. So our B
45:19
Speaker 1: share is going to go away. I'm not sure if
45:22
Speaker 1: they're going to go away, but possibly over time they will.
45:26
Speaker 1: So China has been growing well for a while. It
45:29
Speaker 1: was ten percent, twelve percent. Now we're in the seven percent.
45:33
Speaker 1: Not that that's too chevy. We're hoping to grow at
45:36
Speaker 1: three percent. In the US, we'd kill for seven percent.
45:39
Speaker 1: What happens to China's economy as they mature and what
45:42
Speaker 1: does that mean for their share market? Well, it's easier
45:47
Speaker 1: for rudimentary economies to grow rapidly because there's a catch
45:51
Speaker 1: up process with the developed world, and so over the
45:56
Speaker 1: last thirty years or so, the growth is very impressive,
46:01
Speaker 1: but it's been naturally coming down because the catch up
46:04
Speaker 1: is less and less. You're starting from such a tiny bass,
46:07
Speaker 1: it's easy to grow. But now they're almost as larger
46:12
Speaker 1: an economy as as the US, and some measures larger. Yeah,
46:16
Speaker 1: I think it's less big than the US, but it's
46:18
Speaker 1: it's been growing much faster, and it has the potential
46:22
Speaker 1: one day to be as big as the US. Um
46:26
Speaker 1: I think. You know. The interesting thing is that last
46:29
Speaker 1: year at the Chinese Party Congress UH they didn't actually
46:34
Speaker 1: come out with the target growth rate. It had been
46:37
Speaker 1: around six and a half percent. This all has a
46:42
Speaker 1: lot to do with s Jing Ping, the president, and
46:45
Speaker 1: consolidation of his power. UM. But the fact that they
46:49
Speaker 1: haven't got a target growth rate I think is important
46:53
Speaker 1: because perhaps it takes pressure off Jing Ping and the
46:57
Speaker 1: and the leadership to some degree. I think there's also
46:59
Speaker 1: a wish in China to have better quality of growth
47:05
Speaker 1: and not just simply higher growth. Let's get into some
47:09
Speaker 1: of the details there that that's really interesting. How do
47:11
Speaker 1: you define better quality? How do they define better quality?
47:15
Speaker 1: What are they looking to see from their economy going forward?
47:19
Speaker 1: What areas do they want to see more growth in,
47:21
Speaker 1: and what are they leaving behind? I think they probably
47:24
Speaker 1: mean better diversified growth. I think they probably mean more
47:28
Speaker 1: technology and more modern industries and not just the big
47:33
Speaker 1: industrial old style industries. UM. They've also indicated that they
47:41
Speaker 1: would like to see less financial leverage in the economy,
47:46
Speaker 1: in the industrial sectors of the economy as well. Now,
47:49
Speaker 1: aren't most of the major financial centers and big banks
47:54
Speaker 1: there either somewhat or partly or fully state owned. If
47:59
Speaker 1: they want less leverage, can't they just dial back their leverage?
48:04
Speaker 1: It seems sort of odd to hear that said we
48:07
Speaker 1: want less leverage, Well, you guys are in charge of it.
48:10
Speaker 1: That is correct, But on the other hand, um China
48:15
Speaker 1: has changed a great deal in the last thirty years,
48:18
Speaker 1: but there are still old style effects from the communist period. So,
48:25
Speaker 1: for instance, state owned enterprises companies that are wholly owned
48:31
Speaker 1: or are still majority controlled by the state or different
48:35
Speaker 1: government bodies in some cases, they have a constitutional right
48:41
Speaker 1: to bank capital. H and so one of the issues
48:46
Speaker 1: in China that has been concerning investors has been, particularly
48:51
Speaker 1: in the last six or seven years, when the economy
48:54
Speaker 1: has been slowing down, quite a lot of state owned
48:58
Speaker 1: enterprises have been in demanding capital from the bank. So
49:02
Speaker 1: they have a right to access bank capital. But what
49:07
Speaker 1: about leverage ratio? Is what about interest rates? There are
49:10
Speaker 1: lots of dials and levers that the state can pull
49:13
Speaker 1: to say if you want capital, okay, but it's going
49:16
Speaker 1: to cost you fourteen or whatever. Well, the the state
49:21
Speaker 1: owned enterprises have actual rights to have the capital, often
49:25
Speaker 1: at lower rates, and so the the amount of control
49:29
Speaker 1: the banks have or even the politicians who are in
49:32
Speaker 1: charge of the banks is limited. That's fascinating. And so
49:36
Speaker 1: this is a process which presumably will get deregulated over time,
49:41
Speaker 1: but it's just not there at this stage. So a
49:44
Speaker 1: couple of years ago. A giant story out of China
49:48
Speaker 1: was the ghost cities, that that China seemed to be
49:51
Speaker 1: anticipating the need for big urban centers, be it for
49:55
Speaker 1: manufacturing or service jobs, and they would put up these
49:58
Speaker 1: cities of ten, twenty thirty million people seemingly overnight, and
50:03
Speaker 1: there was a bit of a frenzy to buy into
50:05
Speaker 1: those units. And then that story kind of faded from
50:08
Speaker 1: from the headlines. What's happening with those cities, what economic
50:13
Speaker 1: purpose do they serve? And is that a good or
50:16
Speaker 1: a bad thing for China's future. Urbanization is still at
50:21
Speaker 1: the core of Chinese political thinking. This is a ten
50:25
Speaker 1: year plan, This isn't just a short term may even
50:28
Speaker 1: be longer than ten years. Yes, there's still a massive
50:31
Speaker 1: movement of people from rural areas to the cities. There
50:36
Speaker 1: over a hundred cities apparently in China that have a
50:39
Speaker 1: million people or more. You know, a midsized city in
50:41
Speaker 1: China is probably eight million people, like New York York City, right,
50:46
Speaker 1: it's been a big city is like Shanghaire bridging at
50:48
Speaker 1: twenty million people. And but but I think urbanization is
50:53
Speaker 1: a long term process, and half the country is in
50:57
Speaker 1: farms or is it. Is it more or less than that? UM,
51:00
Speaker 1: it's it's probably a little bit more than half the
51:03
Speaker 1: country that still is in a rural setting, but opportunities
51:10
Speaker 1: UM economic opportunities are generally far greater in urban settings.
51:16
Speaker 1: That your opportunity to go to university, be educated much
51:20
Speaker 1: greater if you're in an urban UH location. And UM.
51:25
Speaker 1: I think the government is definitely continuing to think of
51:29
Speaker 1: urbanization UM as an ongoing primary policy, so that it
51:35
Speaker 1: seems like it accomplishes a few things. That gets people
51:37
Speaker 1: out of the rural areas, off the farms, It leads
51:41
Speaker 1: to greater education of the population, and creates a fairly
51:45
Speaker 1: sophisticated workforce that can do some of these more modern
51:51
Speaker 1: industries that that the Chinese government is pushing people for.
51:55
Speaker 1: Is that Is that a fair I think that's fair.
51:58
Speaker 1: I think it's all part of the economic development program
52:01
Speaker 1: that the Chinese government would like to see. So we
52:04
Speaker 1: barely think beyond a quarter or two. In the United States,
52:08
Speaker 1: they're making plans ten and twenty years out. That's a
52:11
Speaker 1: real challenge to compete with that, isn't it. I think
52:16
Speaker 1: emerging countries have to think in terms of decades for
52:21
Speaker 1: their economic development. That's that is really the best way
52:25
Speaker 1: of of of looking at things, because again, they have
52:28
Speaker 1: the visibility because they can look at a country like
52:31
Speaker 1: the US and say, maybe we don't want to be
52:34
Speaker 1: exactly like what the US is, but we we can
52:37
Speaker 1: catch up in these various areas over the course of
52:40
Speaker 1: the next ten or fifteen years. So the infrastructure spend
52:45
Speaker 1: we've seen in China right now, we're recording this in
52:47
Speaker 1: the midst of an infrastructure debate in the United States.
52:50
Speaker 1: They have been spending tens of billions, maybe even hundreds
52:54
Speaker 1: of billions of dollars on infrastructure build out. How important
53:00
Speaker 1: is that to the country. How much longer is that
53:02
Speaker 1: going to go on? Are they going to basically create
53:06
Speaker 1: the equivalent of what the US did post war for
53:10
Speaker 1: their own country? And why aren't we doing it? Which
53:12
Speaker 1: is the rhetorical question. Afterwards, I would probably say they've
53:16
Speaker 1: already done that, because if you go to even midsize
53:21
Speaker 1: cities in China, you'll find a beautiful new airport, you'll
53:24
Speaker 1: find expressways and highways, You'll find in many places, very
53:30
Speaker 1: very good infrastructure. And they they believe that is necessary
53:35
Speaker 1: to attract companies to to set up factories or to
53:39
Speaker 1: set up potential for employment and uh and they've they've
53:44
Speaker 1: done that, and I think they are continuing to do
53:47
Speaker 1: that as we look ahead. Maybe maybe we're not going
53:50
Speaker 1: to see big increases, but I think we're going to
53:53
Speaker 1: see ongoing spending. And they think that gives them an
53:56
Speaker 1: competitive advantage for both building attracting capital, building factories, building
54:04
Speaker 1: companies that become world class global competitors. And I think
54:09
Speaker 1: the evidence is there. I mean, China is today in
54:12
Speaker 1: many areas, the factory of the world. And and so
54:17
Speaker 1: that that build building of infrastructure has has attracted a
54:21
Speaker 1: lot of big companies. Someone here should take a look
54:24
Speaker 1: at what they're doing, and perhaps we can have paved roads. Also.
54:29
Speaker 1: I remember when I could drive my far on the
54:31
Speaker 1: road and not worry about losing attire um anything we
54:35
Speaker 1: skipped anything. We I didn't mention that. You want to
54:38
Speaker 1: refer what any parts of the world or any countries
54:41
Speaker 1: as well. I think I think India is worth mentioning
54:43
Speaker 1: at this point because according to I think the the
54:48
Speaker 1: leading plans in India, something like two thirds of all
54:52
Speaker 1: infrastructure spending is planned to be built in the next
54:57
Speaker 1: fourteen years in India. In India. Now, if you've been
55:00
Speaker 1: to India, I have not. Okay, India is is. Uh
55:05
Speaker 1: is quite a different situation to China. The infrastructure is
55:08
Speaker 1: generally um relatively old, although there's been quite a lot
55:12
Speaker 1: of infrastructure building in the last fifteen years. I've seen
55:15
Speaker 1: photos of telephone poles with thousands of wires coming off
55:19
Speaker 1: of them, summer phones, sumer Internet. It looks like it's
55:22
Speaker 1: utterly jury rigged and cobbled together. Well, I am. The
55:26
Speaker 1: plan is to change that. The plan is to build
55:30
Speaker 1: something like two thirds of the total infrastructure of the
55:32
Speaker 1: country in the next fourteen or fifteen years. And uh
55:37
Speaker 1: that is that is with the Modi government. So it's
55:40
Speaker 1: it's a very exciting time in India, and I think
55:44
Speaker 1: it's important to highlight it because it may have a
55:48
Speaker 1: significant effect on worldwide growth. Quite interesting. Let me jump
55:54
Speaker 1: to some of my favorite questions I ask all of
55:57
Speaker 1: my guests. Let's start with what is the most important
56:01
Speaker 1: thing that people who know you don't know about your background? Well,
56:05
Speaker 1: I when I was a student, I had quite a
56:10
Speaker 1: lot of pretty basic jobs. I was a street cleaner
56:15
Speaker 1: in London for a summer, literally pushing the room, yes,
56:20
Speaker 1: which gave me a different perspective on the world. I think, Um,
56:24
Speaker 1: and uh, it was certainly quite an interesting I worked
56:28
Speaker 1: at a pulpam paper mill in northern British Columbia one summer,
56:32
Speaker 1: which was quite a tough job, to say the least.
56:34
Speaker 1: And I worked also in a in a warehouse for
56:39
Speaker 1: a supermarket company, unpacking box cars. UM. I would say,
56:45
Speaker 1: these these things motivated me to want to have an
56:47
Speaker 1: office job and ultimately motivated me to move into the
56:52
Speaker 1: investment world where I could be mentally stimulated. Tell us
56:56
Speaker 1: about some of your mentors who helped push your career
56:59
Speaker 1: on long and affected your philosophy. Well, I've been fortunate.
57:03
Speaker 1: My father was an asset manager. It was a portfolio manager, um,
57:08
Speaker 1: and I never had pressure to go into this area,
57:12
Speaker 1: but he was. He was certainly someone who understood the
57:18
Speaker 1: industry and was very helpful from that point of view.
57:21
Speaker 1: And I was fortunate later to get an opportunity to
57:25
Speaker 1: to work a little bit in the industry and and
57:29
Speaker 1: then I took various exams to see if I enjoyed
57:33
Speaker 1: it more so, that was one mentor I would say.
57:36
Speaker 1: When I was at SG Warburg and Mercury asset Management, Uh,
57:40
Speaker 1: several of my senior colleagues were truly investment people and
57:47
Speaker 1: were tremendously good mentors to me. And this is an
57:51
Speaker 1: industry that always has its challenges and you have to
57:54
Speaker 1: know how to deal with those challenges. And they were
57:57
Speaker 1: they were they were very, very important to me. How
58:01
Speaker 1: about your philosophy, What investors affected the way you look
58:05
Speaker 1: at the world of investing or in general or emerging
58:09
Speaker 1: markets in particular. Well, this probably sounds a little bit textbook,
58:13
Speaker 1: but I would say I very clearly understand the way
58:17
Speaker 1: Warren Buffett invests um by the way people people don't
58:22
Speaker 1: realize it's an actual legal obligation of the show for
58:25
Speaker 1: that to be the answer. It's it's you could do
58:29
Speaker 1: much worse. So well, I think he's probably one of
58:32
Speaker 1: the absolute best investors of all time. I also think
58:36
Speaker 1: John Templeton was one of again one of the greatest
58:40
Speaker 1: investors of all time. Very much a global investor and
58:44
Speaker 1: UH and very fundamental in nature. And I think I
58:48
Speaker 1: really think they were probably the two names that I
58:51
Speaker 1: would put at the top of the list. Buffet for valuation,
58:54
Speaker 1: Templeton for global and and Templeton for evaluation as well.
58:58
Speaker 1: Really interesting Let's talk a little bit about some of
59:02
Speaker 1: your favorite books. This is everybody's favorite question. Tell us
59:05
Speaker 1: what you like to read. Give us some of your
59:09
Speaker 1: favorite books, be the finance related or not, fiction or nonfiction. Well,
59:14
Speaker 1: I m I very much enjoyed recently reading a book
59:18
Speaker 1: on the Right Brothers by David McCulloch. I thought it
59:20
Speaker 1: was a very interesting book. I enjoyed um reading The
59:27
Speaker 1: Last Spike, which is a Canadian book all about the
59:29
Speaker 1: building of the Canadian Pacific Railroad and the Last Spike,
59:33
Speaker 1: the Last Spikes. It was the last spike in the
59:35
Speaker 1: railroad when they finished that off in the Rockies. And
59:40
Speaker 1: uh so that's that's that's a bit of my Canadian background. Um.
59:44
Speaker 1: I still think The Prince by Machiavelli is a brilliant
59:49
Speaker 1: book and and tells you a lot about interacting in
59:54
Speaker 1: difficult situations and in a very very useful book. From
59:59
Speaker 1: that point of you, those are those are three winners.
1:00:03
Speaker 1: What has changed since you've entered the world of emerging markets?
1:00:06
Speaker 1: How is it different today than it was in the
1:00:09
Speaker 1: early nineties. Our universe has changed dramatically. So again, back
1:00:15
Speaker 1: in the places like Malaysia and Mexico were huge parts
1:00:20
Speaker 1: of our universe. Portugal and Greece were part of our
1:00:23
Speaker 1: universe back then. Very big parts has come back in
1:00:26
Speaker 1: but it left for a while. Today China has become
1:00:30
Speaker 1: the really big weighted country, but Brazil and India are
1:00:36
Speaker 1: also very substantial. So the universe has changed, um and
1:00:40
Speaker 1: there's been quite a lot of sectoral change in it.
1:00:43
Speaker 1: There's been a lot more constituents of our universe, which
1:00:47
Speaker 1: I think is very different from the US, where I
1:00:50
Speaker 1: think the number of stocks has actually fallen over the
1:00:53
Speaker 1: last say fifteen years. The joke is the Wilshire five
1:00:57
Speaker 1: thousand is about thirty, right. I mean. The other thing
1:01:01
Speaker 1: that's really changed is that information has ballooned. So years ago,
1:01:10
Speaker 1: going being being based in these markets was I think
1:01:15
Speaker 1: much more important, whereas today I don't think you have
1:01:21
Speaker 1: to be based in the markets. I think you can
1:01:24
Speaker 1: go and travel regularly to the markets because the information
1:01:29
Speaker 1: is instant. Is that a competitive disadvantage? UM At one
1:01:35
Speaker 1: point in time where there wasn't a lot of information
1:01:37
Speaker 1: and now anyone can google it and come up with
1:01:40
Speaker 1: some some data. I think twenty or twenty five years ago,
1:01:44
Speaker 1: it it could have been seen as a disadvantage so
1:01:49
Speaker 1: you've told us about the recent shifts over the past
1:01:52
Speaker 1: three decades. What do you expect the shifts to be
1:01:55
Speaker 1: in the emerging market space over the next three decades?
1:01:59
Speaker 1: Um it, Well, it's very hard to tell. I would
1:02:01
Speaker 1: imagine emerging markets will develop further and and we'll see
1:02:06
Speaker 1: some of the frontier countries joining the emerging markets. Vietnam,
1:02:09
Speaker 1: for inces, is a frontier country. Perhaps it will develop
1:02:14
Speaker 1: its capital markets to become an emerging market. We'll see.
1:02:19
Speaker 1: So that that's one thing. Um you know, some perhaps
1:02:23
Speaker 1: shorter term changes. We've seen a market than the last
1:02:27
Speaker 1: seven years where growth has been the most successful style
1:02:33
Speaker 1: by a long way, and at some stage I would
1:02:37
Speaker 1: anticipate a change of leadership more towards value. True in
1:02:42
Speaker 1: the US as well, that it would probably be a
1:02:45
Speaker 1: global effect if it happened. I think there's a high
1:02:49
Speaker 1: probability of that. I also think in the emerging markets
1:02:52
Speaker 1: in the last five or six years, markets have been
1:02:55
Speaker 1: quite affected in some way, in some cases dominated by
1:03:00
Speaker 1: macroeconomic factors, and I would guess that they'll become more idiosyncratic,
1:03:07
Speaker 1: more stock focused at some point in time. Tell us
1:03:11
Speaker 1: about a time you failed and what you learned from
1:03:15
Speaker 1: it well. When I was at University UM many many
1:03:19
Speaker 1: years ago, I was very involved in student politics, and
1:03:24
Speaker 1: I was the speaker of the University Student Council, which
1:03:29
Speaker 1: was actually quite a serious operation. And uh, there was
1:03:33
Speaker 1: an election for president of the student Council, and I
1:03:39
Speaker 1: think I could have been a contender, and I could
1:03:43
Speaker 1: have even wanted and I I decided not to go
1:03:47
Speaker 1: into that race. And I and I've I've lived to
1:03:51
Speaker 1: regret it. We always seem to regret the things we
1:03:54
Speaker 1: don't do as opposed to those that we do. Tell
1:03:58
Speaker 1: us what you do outside of the office to either
1:04:00
Speaker 1: relax or stay mentally or physically fit. What do you
1:04:04
Speaker 1: do for fun when you're not in a suit and tie? Well,
1:04:07
Speaker 1: when I can, I try and do a bit of exercise. Um,
1:04:10
Speaker 1: not not as much as I'd like to, but I
1:04:12
Speaker 1: do try and do some. I read quite a lot, Um,
1:04:16
Speaker 1: I quite enjoy some movies. I have a cottage up
1:04:22
Speaker 1: in Canada, so I uh go up there and and
1:04:26
Speaker 1: traveling boats and and see friends in those places. And I,
1:04:31
Speaker 1: even though I travel a lot for work, I do
1:04:34
Speaker 1: travel for pleasure as well, and go and see historical
1:04:38
Speaker 1: sites and and you know, place like Rome, for instance,
1:04:41
Speaker 1: is a wonderful place to go with incredible, incredible history,
1:04:46
Speaker 1: no doubt about that. Where in Canada do you have
1:04:48
Speaker 1: at a cottage? And what lakes are you voting? It's
1:04:53
Speaker 1: um in Lake Huron. It's a part of Lake Huron
1:04:57
Speaker 1: called Georgian Bay in the eastern part of Kuran. And
1:05:01
Speaker 1: it's of course a very very big lake, and it's
1:05:04
Speaker 1: it's remote, very difficult to get to, and but but
1:05:09
Speaker 1: it's very calming place. I go fishing every summer in Maine,
1:05:13
Speaker 1: and we're so far north that we start to get
1:05:16
Speaker 1: Bell Canada showing up on there. But it's a flight
1:05:19
Speaker 1: in and then a floatplane and really it's just a
1:05:23
Speaker 1: d It's not just a hundred miles away from anywhere,
1:05:27
Speaker 1: it's it's a hundred years away from anyway. Yeah. Yeah,
1:05:29
Speaker 1: it's very remote where I go, and and actually quite
1:05:32
Speaker 1: hard to get to. What sort of advice would you
1:05:34
Speaker 1: give to a millennial or someone just beginning their career,
1:05:38
Speaker 1: who were who was interested uh in getting into emerging
1:05:43
Speaker 1: markets or asset management or or finance. Well, this is
1:05:47
Speaker 1: something we have to be concerned about because there are
1:05:49
Speaker 1: lots of millennials now working with us and UH. Sometimes
1:05:53
Speaker 1: they have different priorities from from from the way we are.
1:05:58
Speaker 1: But I I would say, first of all, you can
1:06:01
Speaker 1: combine your business interests and and other interests, your personal
1:06:07
Speaker 1: interests in what we do. Obviously, the type of work
1:06:10
Speaker 1: we do can become challenging, but you can do other things.
1:06:15
Speaker 1: For instance, I'm involved heavily in a charity which is
1:06:23
Speaker 1: makes grants to about seventy grantees around the emerging market world.
1:06:30
Speaker 1: I'm involved in an educational foundation UM, and those are
1:06:35
Speaker 1: those are things that are very very important to me. UM.
1:06:39
Speaker 1: I would also encourage millennials to think long term. The
1:06:44
Speaker 1: asset managiment business is a long term business, particularly the
1:06:48
Speaker 1: long only part of it, and you can't really be
1:06:51
Speaker 1: evaluated properly if you're not going to be long term
1:06:55
Speaker 1: in in your focus. UM. Finally, I would say, learn
1:07:00
Speaker 1: how to evaluate yourself, learn how to two criticize yourself
1:07:06
Speaker 1: in a positive framework constructive criticism UM, and UM. Understand
1:07:14
Speaker 1: what you do well and what you do badly. And
1:07:16
Speaker 1: our final question, what is it that you know about
1:07:19
Speaker 1: investing in emerging markets today that you wish you knew
1:07:23
Speaker 1: thirty years ago? Well, I I would say the great
1:07:30
Speaker 1: thing about investing in general, but certainly in emerging markets.
1:07:33
Speaker 1: It's very stimulating, it's always challenging, it's not easy. You
1:07:39
Speaker 1: are always learning. Very important. You have a plan, you
1:07:43
Speaker 1: have a process, and I think to be in this
1:07:47
Speaker 1: business you have to know how to take pain, how
1:07:53
Speaker 1: to take pain because anyone doing what we do active
1:07:58
Speaker 1: investment management is going to go through challenging periods of
1:08:02
Speaker 1: time and you have to be mentally strong to go
1:08:06
Speaker 1: through that. Quite fascinating. We have been speaking with James
1:08:10
Speaker 1: Donald of Lizard Asset Management. If you enjoyed this conversation,
1:08:16
Speaker 1: be sure and look up an Inch or down an
1:08:17
Speaker 1: Inch on Apple iTunes, Overcast, Bloomberg dot com, or wherever
1:08:23
Speaker 1: finer podcasts are sold. We love your comments, feedback and
1:08:27
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
1:08:31
Speaker 1: dot net. I would be remiss if I did not
1:08:34
Speaker 1: thank the crack staff that helps us put together this
1:08:37
Speaker 1: conversation each week. Medina Parwana is my producer and audio engineer.
1:08:43
Speaker 1: Taylor Riggs is our booker producer. Mike Batnick is our
1:08:47
Speaker 1: head of research. Attica val Bronn is our business manager.
1:08:52
Speaker 1: I'm Barry Reholts. You're listening to Masters in Business on
1:08:56
Speaker 1: Bloomberg Radio. You take take out INT