Podcast: Rethinking emerging markets

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Podcast intro

Welcome to Think Again, a podcast by Macquarie Asset Management, providing financial advisors with a fresh perspective and innovative insights designed to keep you and your clients a step ahead. 

00:00:19 - 00:00:34

Denise St. Ivany 

Thanks for tuning in to Think Again. I’m Denise St. Ivany. Today I'm joined by Jeffrey Wang, Senior Equity Analyst at Macquarie Asset Management. Jeffrey is based in Boston and is responsible for covering Asia for Macquarie’s Emerging Markets Equity strategy.

Jeffrey, thanks for joining us today. 

00:00:35

Jeffrey Wang 

Thanks for having me, Denise.

00:00:36 - 00:00:53

Denise St. Ivany

Let's jump right in. 

Today we are talking about emerging markets, which can offer investors a unique exposure to a range of industries and countries, with the benefits of diversifying their portfolio.

So, Jeffrey, can you tell us about the team's background and what the strategy looks for in emerging market companies? 

00:00:53 - 00:05:49

Jeffrey Wang 

I'll start with our team. The first thing I'd say about our team is that we're a very seasoned group of investors. I think the range of experience we have is between 19 and 28 years. I think that's something which is really important for our approach to investing in emerging markets, which is very grounded in bottom-up fundamental research and depth of experience and knowledge and understanding of these companies. I think the experience that we have amongst our team is really helpful as far as providing that context and living through the ups and downs and all the changes

that have happened over the past 20+ years or so in emerging markets. And hopefully that will provide that context that helps us to hopefully make better decisions. So, I think that's one thing I'd like to emphasize about our team. 

The second point I'd emphasize is that we're a very diverse group of individuals. So I think we have very interesting and varied backgrounds. Our portfolio manager was a medical doctor, for example. We have another analyst who was a software engineer.

The last point I would say about our team is just the incentive structure is all very much geared around the strategy’s performance. I think we're all very much aligned as far as what matters, and that is the strategy’s performance. There's no real sense of what's yours, what’s mine. Your idea, your contribution. Everyone is really looking to promote the best outcome for the strategy as a whole. And that's something which, again, we feel really helps to promote honest and robust discussion and hopefully good outcomes for our investor base. 

With respect to the strategy, our approach to investing in emerging markets really revolves around three key pillars.

I think that the first one I'd highlight is structural growth opportunities. This is something that we feel is very essential for companies to be able to command full valuations. I think markets ultimately run on optimism. Markets really have to see something exciting in order to be willing to ascribe fair valuations to the stocks. And in the absence of those compelling growth opportunities, in our experience, the market can really ascribe arbitrarily large and persistent discounts. So, I think the idea that companies we invest in should have structural growth opportunities is something that we feel is very important in terms of what we look for in companies. 

But the second point I'd say is that growth is not enough. We have to obviously understand that in the context of competition, the best growth opportunities in the world may not ultimately result in much profitability if there's too much competition. So the second pillar that we emphasize is competition, as well as the ability for individual companies to capture value. I think within the context of those growth opportunities we really try to understand the value chain, where the companies fit along there, and who's best positioned to participate and benefit from that, and keep competition at bay or at least gain market share. And over time, perhaps even capture more value from that.

Competition is something that we focus a lot on. And we feel that probably the most important determinant of getting an investment right is really understanding that competitive landscape. 

The third pillar is valuation. So, again, there are great growth opportunities in companies which have very strong competitive advantages. But truthfully, the good companies are often times very well appreciated by the market, and the market can be willing to ascribe valuations that don't necessarily make sense in the context of what's possible. I would say that, for us, valuation is important so that we can construct a portfolio that has favorable risk-reward characteristics. We want to ensure that we're investing in companies that have good upside potential but also good protection on the downside. And in addition to that, it's also important from the perspective of trying to minimize and reduce the risk of permanent capital loss. So for us, the valuation mindset is one that is oriented toward absolute value – really thinking about the assets, the business, what do we think the company is worth, as opposed to just looking at relative valuations or comparing valuation history. That's something which is really how we approach valuation.

I'll just conclude by emphasizing that all of the above – growth opportunities, competition, valuation – for us, we really look at these with a medium-term time horizon. Really looking ahead to the next 5-7 years and thinking about what might change in terms of the industry, in terms of the growth. And that's something which we feel is important as far as being well placed for the future, as opposed to just looking solely at what's happened in the past or the present or even the next year or so, which is typically what the market focuses on. 

00:05:50 - 00:06:02

Denise St. Ivany 

Certainly a multitude of factors, but you did identify the long-term growth opportunities and trends as being one of those pillars that you're focused on.

Where are you seeing those opportunities and trends right now? 

00:06:03 - 00:09:14

Jeffrey Wang 

Great question, Denise. I think that from a historical perspective, the long-standing arguments in favor of investing in emerging markets have relied on demographics and urbanization, improving productivity, rising incomes, and improving lifestyles. Among those, we would really highlight productivity improvement as probably the area of most promise, if we look ahead to the future and what might drive growth opportunities.

I came across a book recently published by the World Bank in 2021. It was called “Global Productivity Trends, Drivers and Policies,” I believe, and a really interesting observation that came from that was that productivity levels in emerging markets are still only less than 20% of those of advanced economies. And that's something which, I think, still leaves a lot of room for potential improvement. Now, I'm not saying that this is going to go from 20% to 100%, but certainly that 20% level does seem like a fairly low base to still drive a lot of growth going forward. When we think about sort of what areas might help drive that productivity improvement, it could be from a number of areas. From our perspective, we do believe that technology, digitalization, all the advancements which are happening in technology and computing, from a long-term perspective, can be very impactful as far as how they could improve productivity in emerging markets. Even if we're thinking about agriculture, for example, there are a lot of economies which are still quite heavily dependent on agriculture, and thinking about how technology might help to improve the productivity of that part of the economy, that's something which could be impactful from a longer-term perspective. 

I think a second area that we would highlight is just the competitiveness. We have seen some real improvement on a selective basis in terms of companies’ competitiveness. Emerging market competitiveness, I should say. Examples like in the semiconductor space or in the consumer space. And I think if we can sort of see more of this broadening out to other parts of emerging markets then certainly there's an argument to be made that we would believe there are opportunities here to capture more value, capture more market share. And that in turn, we feel, could also be a driver of productivity growth.

A third potential area would be shifts in cultural norms. I think historically one of the reasons why productivity improvement has been held back in some emerging markets is just simply because of some cultural considerations. Whether it's attitudes toward corporate governance or incentive structures, or even female participation in the labor force. And I think it's easy to think of these as being very entrenched and intractable, but selectively I think we are starting to see some areas of improvement. From our perspective, it's really thinking about that longer-term stamp perspective and thinking about how these opportunities might actually help to revive growth in emerging markets after a very, very challenging decade from a growth perspective. 

00:09:15 - 00:09:29

Denise St. Ivany 

And then you've also got a whole other different area there, with emerging markets being impacted by some major macroeconomic factors in recent years.

Can you explain what you're seeing and what you and your team pay attention to right now in that area? 

00:09:30 - 00:11:07

Jeffrey Wang 

Macro has always been a part of investing in emerging markets. You can't escape it, and you can't ignore it. You have to really pay attention to it and try your best to understand what's going on. But I think we ultimately try to focus on what's happening at an individual country and company level and what are you doing to try to endure through these challenges? How are you positioning yourself for the future? And how are you looking to protect your growth opportunities, your competitiveness? How are you looking to enhance your competitiveness? That's really, when we think about these macro issues, where I'd say the tough times have highlighted or accentuated some key differences at a country and company level, ones that have struggled a bit more. And I think the same is true at an individual company level. When times are tough, it's the good companies that find a way to come through that. Whether it's through strength of balance sheet, reinvesting in their core competencies, or just finding ways to take advantage of weak competitors to gain market share. That's really how we think about these macro headwinds, where we look for it, certainly from a risk perspective, to ensure that, or feel comfortable that, whatever is happening at a macro level doesn't ultimately destroy the business or undermine their ability to survive or stay relevant. But also just looking for those opportunities where perhaps there's just too much negativity or too much focus around the risk or the volatility and underappreciating what companies are actually doing about it, or how they're standing out in a positive way.

00:11:08 - 00:11:13

Denise St. Ivany

What about, to be more specific, growth challenges in China? Would you have anything to add there? 

00:11:14 - 00:12:58

Jeffrey Wang 

Our perspective on China historically has always been one of, let's focus on the companies. Let's focus on which ones are actually positioned to capture growth opportunities, because even during the high growth years for China, I think we've always held the concern that this is not sustainable. A lot of it is driven by excessive investment in unproductive capacity or government spending that was really more for national service. So, even during that time, we were a bit skeptical of the sustainability of the growth. But I think there are also still reasons to be optimistic about trends in terms of technology adoption and efficiency, and improving living standards. Through the years, that's really always been a focus of ours in terms of investing in China.

I'd say more recently, the growth challenges have become much more apparent to everyone who's observing, and I think a little bit difficult to see how that's going to change going forward. There are no easy fixes in this, in that sense. We all know about the challenges with respect to the property market, and I think the consumer confidence at this point continues to suffer as a result of all the policies which happened over the years, in terms of COVID restrictions but also the crackdowns on some of these higher-profile companies in the internet sector. So I’d say, from that perspective, the growth outlook in China does appear more uncertain. I don't think this is necessarily going to get worse, but as far as seeing how China can revive its growth opportunities, I'd say that a lot of it does come down to shifts in policy. 

00:12:59 - 00:13:09

Denise St. Ivany 

The emerging markets strategy is getting ready to launch an active ETF at Macquarie. Can you highlight some of the similarities and differences in how you will manage these vehicles?

00:13:10 - 00:14:08

Jeffrey Wang

We're very excited about this ETF launch that’s upcoming, and I think from a philosophical perspective, management will be very similar. There will be no change or no difference in terms of the ethos of what we're looking for, and I think even when it comes to the higher-conviction stocks in the portfolio, those should be represented in fairly similar fashion. I think the key differences would be, first, number of holdings. For the ETF, we're looking at fewer holdings, in more of the 35-60 stock range, as opposed to through the 90+ range. So, in that sense, I think we're looking to be a little bit more selective in terms of what we're investing in in the ETF. With respect to asset size, the mutual fund is quite sizable in terms of its asset base. Whereas for the ETF, as a newer strategy, there may be more opportunities to get some more exposure to some of these stocks that may not have the best liquidity profiles. 

00:14:09 - 00:14:15

Denise St. Ivany 

Jeffrey, thank you for joining us. I really appreciate you taking the time to share your insight and your expertise with us today.

00:14:16

Jeffrey Wang

Great. Appreciate the opportunity. 

00:14:17 - 00:14:30

Denise St. Ivany 

Don't forget, you can find more insights from our investment teams on our website. You can find more information in the episode show notes as well.

Don't forget to join us next time on Think Again, when we will discuss another topic for investors to consider. 

00:14:33 - 00:14:43

Podcast outro 

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