You know, emerging market investing
better than most. Give us your sense of where that is
right now, because all we hear about is it's all about the United States
investing in states, the strength of the US dollar.
Great to be with you, David. And of course, as our letter said
recently, that US exceptionalism or US, the dynamic investment theme is still
going very, very strong. And that's really for no reason, except
we have great innovation in the U.S. We have great technology.
And then, of course, rule of law when it comes to financial markets, emerging
markets where I have been investing for a long time, but I have worked in also
during my days at the World Bank, I think are going through a phase where
maybe we shouldn't even be using the term emerging markets because they
diverged from each other so much. Obviously, the big elephant in the room
is always China, and that used to account for 40% of the equity indices.
Today it is accounting for only 25%. But what you're seeing through the same
themes of American growth in our economy and growth in our
equity markets and this sort of term exceptionalism, if you want to call it
that, is also impactful in emerging markets.
If you go to Korea and Taiwan, which now account for 30% of emerging markets,
they have done very well. If you look at Taiwan, whether you look
at one year, three year, five years, ten years, 20 years, it's always been very
competitive with the U.S. But why?
Because the goods that Taiwan has been producing, mainly microchips, have been
something that has been very much part of this theme of innovation.
If you go to India in the last five years, ten years, similarly, the economy
has done relatively well. Obviously, we have elections there
recently, but the markets continue to do very, very well and sort of run between
9 to 11%, depending on which periods you are thinking about.
And now with French shoring, which is definitely impacting India positively
and other countries like Mexico positively, where our terms of trade
with Mexico have changed. And Mexico, of course, is also
benefiting from FDI for this century, as well as remittances from from abroad.
You see very different kinds of markets in the last few years in Mexico.
So I think when you put emerging markets as one term and generalize, it hides the
good, the ugly and the in-between. And I think where things have not gone
so well in emerging markets is where, for example, the continent of Africa,
where we hoped for much bigger growth, parts of Latin America that are not
necessarily commodity rich or or very close to the U.S.
in terms of French flooring that have not benefited from this, from these
kinds of things. And those countries have been left
behind, especially since COVID and dragged down the markets together with
China and dragged down dragged down growth in these countries and and the
potential for their populations. So so that was a terrific laying out of
the alternatives. So I can sort of simplify it a little
bit. If this were a horse race, we've got
some steady ones that have been investment destinations for some time,
such as South Korea, such as Japan, such as Taiwan.
You have India, which it sounds like is sort of an up and comer, as it were, and
and perhaps Mexico as well. Where would you rate this in the horse
race in terms of the change in position? Which ones are coming up the fastest?
Well, I think I think definitely India is coming up the fastest.
But also, let's not forget, if you looked at India the last ten years, the
returns were really, really strong as well.
Taiwan is the big question mark given the geopolitics.
And it's very, very rough location in the world being right next to China and
if and when that could be a military threat there.
And what is going on despite that is, is the fact that their companies are doing
well by by producing in Taiwan, but also now investing in the U.S.
and other locations to produce microchips.
Obviously, they have not been as fast and as as efficient as they would have
liked outside of Taiwan. But I think that's a trend where we
might see these Taiwanese companies continue to do well, but maybe not in
Taiwan. As I talk about the role of currency in
all of this, because obviously those are investments in different currencies.
As I understand it right now, the Fed has been pretty dominant in terms of
their setting rate policy, and that sort of determines the strength of the
dollar. But when you talk about other
currencies, when you invest in a place like India, for example, or in Mexico,
how do you account for currency volatility?
Do you hedge against that and how? Pensive is that?
So two or three things. Obviously, with the really strong
policies that Chairman Powell has had in the U.S., our economy has done well, but
also our currency has stayed very strong.
The interesting thing, as you said, is our currency has stayed quite strong
relative to other currencies. We saw with the devaluation of yen and
what the interventions in the recent weeks in Japan are still dealing with
weaker yen than than the Japanese government would like.
Europe obviously is is also going through its own relatively rough patches
because growth has not taken up, has not gone up as much as they would have liked
to. The emerging markets have been a really
interesting spot. I think one thing that has happened in
the last few years is the quality of your central bankers has increased, has
improved a lot in emerging markets. So you do have really good people
running them. And you may remember before, you know,
in the beginning of the rate increases, they were maybe earlier than us in the
US to increase rates when they're more used to having these terrible
inflationary periods. So when they saw inflation come, they
increased rates earlier. And and so when we look at their
currencies, it is also a tale of two cities where you see, for example,
relatively, relatively, I should say, stronger currencies again in places like
India, places like Mexico, places like even China has had, you know, again,
depending on which side of the of the ocean you are looking at.
But but then you have other countries that have have not benefited except for
maybe some commodity rich countries around emerging markets despite that.
Now, two things about the currency factor.
Currencies are stronger. That impacts more the bond market.
So you have seen bond markets in emerging markets over the last ten
years. The size has increased hugely, both
local bond markets where local, local people invest as well as foreign
markets. The emerging markets
indices are close to not 3 trillion or thereabouts.
So so the size of these markets have increased.
And people do look at currency very much when they look at them.
You look at the bond markets and the equity markets.
Currency has not necessarily moved the needle too much except you could argue
with outflows for emerging markets. Sometimes when their own currency is
stronger relative to the dollar is you see more of an outflow.
And last point I want to make on that is on in China, where there has been very
big outflows and people have maxed out to the amount they could to bring
savings outside of China. So do you spend the money to hedge when
you invest in emerging markets? Oh, sorry, I did not answer the hedging.
Hedging is extremely expensive in emerging markets.
Yes. Except for the much larger, much larger
countries. Even there, the relative cost of hedging
generally means that you don't hedge too much.
So the cost, yes, generally makes it prohibitive to go into these currencies.
And if the market returns had been so much higher than what has actually
transpired, maybe you would have you would have been okay with the cost of
hedging. But given given that their markets in
general have been if you look at emerging markets as a totality and you
look at the returns, let's say over the last ten years and you are just up a few
percent, that definitely does not cover costs of currency hedging.
