The Emerging Markets Everyone Else Is Missing

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1:17That's a lot of muscle. And behind it all, thousands of experts answering your call at 2 a.m. like it's 2 p.m. One partner powering how business gets done for companies around the globe. When you add it all up, no one does business like Comcast Business. Bloomberg Audio Studios. Podcasts. Radio. News. We have at the moment one of the most anti-AI portfolios that you can find in the market. Not by accident, but out of process. because what is very crowded at the moment, those three companies in those two countries, in that specific sector that has driven all of the capital, most of the capital this year, has left behind 23 other countries where you can find all sorts of companies across all sectors and types of value trading at great valuations with good balance sheets and some of them are of high quality.

2:23Welcome to Merrin Talks Money, the podcast in which people who know the markets explain the markets. I'm Merrin Somerset-Webb, and this week I am speaking with Vera German and Juan Torres, portfolio managers for the Neuberger Emerging Market Equity Team. Now, we have spoken a lot about AI in the last few months and about the investment opportunities surrounding the technology and its infrastructure. But today, we want to go beyond that a bit. We're going to talk about emerging markets. Now, of course, AI is a big part of that too. But Virach and One, who we're going to call JT some of the time, have taken a contrarian valuation-driven approach to emerging markets.

2:59They've looked for opportunities outside the companies everyone else has been looking at. So no TSMC, no SK Hynix. They're more interested in deep value opportunities. So we've talked about where they're finding those opportunities. And we've talked about a lot of different markets. We've talked about Brazil, talked about Mexico, talked about the Philippines, China, India, and a few places you might not even have thought of. Vera, Juan, welcome to Merin Talks Money. Thank you. It's great being here. Thank you very much for having us. Why don't you explain to us what it is that you do, how your team works, what it's all about?

3:36Vera, why don't you go? Sure. So, Juan and I run an emerging markets value strategy at Neuberger. So we run a fund which is concentrated, contrarian, very valuation focused, which invests in companies with underlying assets in emerging markets. And we do that because we love EM. We both are EM natives and because we think it's a fascinating asset class to do active investing in. OK, so let's look at emerging markets as a whole. I mean, we've talked about on this podcast, we quite often talk about how ridiculous it is to talk about emerging markets as one great big blob and how ridiculous it is to try and buy emerging markets via an index when it's so focused on a few countries and a few companies.

4:20However, if you had bought an emerging market index, you would have in the beginning, middle of this year, you would have thought you were doing really well, right? You'd have been up 20 percent plus or so. And things have gone a little pear-shaped since. But even so, an emerging markets index will be up 10, 11 percent year to date, right? So let's talk a little bit, and maybe this is for you, JT, what's happened so far this year? Up a lot, down a bit, looks kind of fine from an index level. There's this perception that the asset class has done very well, but actually it's not the asset class.

4:52It's not people buying EM in general. is basically the asset class very concentrated in a few company names in two countries, in one specific sector, in one theme. And those companies are the ones that have been largely driving the performance of the index so far this year. But when you look at the asset class and the benchmark more widely, you will see that the vast majority of countries on US dollars are actually either flat or down. And so what you are seeing is a very narrow, very concentrated, thematic-led performance of the benchmark. And we would say, we would argue that it's very crowded or it has been very crowded so far.

5:42And given the nature of those businesses, it could potentially be quite risky. Can we just talk about the companies that you're talking about? You're talking about three companies in particular, right? Samsung, TSMC, SK Hynix. And these are the three companies that are connected to the AI theme, all of which have had phenomenal performance. SK Hynix in particular has had extraordinary performance. And they're all off a bit now. But nonetheless, these have been amazing things to be invested in. And if you had been invested in the index over the last five years or so, you would have done extremely well out of that concentration.

6:23Yeah. Yeah. I mean, the thing to remember about those companies is that all of those businesses are very cyclical in nature. Every single business in a cyclical nature industry will have their spotlight at some point in their business cycle. And there is an open question, of course, is this time different? Are these businesses, have these businesses conquered the cycle? Are these businesses now, have these businesses gone from being very cyclical and actually not high quality businesses? One needs to remember that SK Hynix has never been deemed to be a high quality company compounder that everyone loves.

7:05Samsung is actually one of the most innovative companies that you can find not only in MRA markets, but the world. And you can actually argue there's a lot of quality in that. TSMC is deemed to be a very good, well-managed company with a pristine balance sheet. I don't think that there's any doubt about that. But when it comes to SK Hynix, SK Hynix is having an amazing year. I don't think that there is any way to argue otherwise, but it operates in what humankind has seen to be one of the most cyclical, if not the most cyclical, business that you can find in the world. And then people like us would argue you need to be very much aware of the prices that you're paying and what sort of expectations are embedded in the valuations that you are getting today.

7:49I suppose the argument is that not that these companies have conquered the cycle, but that they're in a super cycle, which would last longer than most people would expect. Yeah, that's correct. And I think that that's where the market, that's what the market is debating about. When, how long is the cycle going to last and when it's going to turn? I have to say that, I mean, we don't really play that game, but from the conversation that we hear from any market participants, a lot of people agree that at some point the cycle will come to an end. They are trying to time when that's going to happen.

8:22And we know that timing the market is extremely difficult, if not impossible, to do. Very dangerous. Very dangerous. And look at what has happened. I mean, AI is an amazing technology. It has already changed the world. But in July, when there was an unwind of the AI trade, were people able to spot that and act before prices were coming down? I don't think that they were. And now something very similar happened in October and they didn't see it coming. So those are things to be aware of. So when we look at the way that the index has performed this year, as Juan was talking about, so at the peak, the index was up 24, 25 percent, of which 70 percent of that performance came from three or four or maybe five stock stops.

9:09That sort of concentration is unprecedented in EM and anywhere around the world. So we looked at previous instances where that has happened. And, you know, every now and then there is a narrative at play. There is a particular exposure that everybody really likes, feels that it's got a lot of promise. And so valuations get bid up. And so those companies become big index components. Let's look at 2011, for example. We are at peak commodity super cycle. The top 10 index components in EM were about 16 % of the benchmark. It's Gazprom and Vale and Petrobras, it's the resource companies that are feeding China's boom.

9:47We have a similar episode not that long ago in 2020, where it's the Chinese tech companies that were, I believe, 29 or 28 % the top 10 components. What also unites these episodes is there is a subsequent period of index drawdown, which is quite severe. And with every one of those episodes, those drawdowns become larger and larger and large. But we think that from a behavioral standpoint, this is perfectly rational. People get carried away on the way up, and then they get carried away on the way down. So as we look at the year today, we think, you know, those, despite the interesting theme and all the opportunities that AI, I'm sure, will bring to lots of companies, those swings in sentiment are so extreme that we don't believe they are particularly sustainable.

10:40Yeah, it's fascinating, isn't it? And that ordinary investors, if they buy into an emerging market fund that tracks relatively close to the index, may think that by buying emerging markets, they're buying access to, I don't know, commodities in Latin America, urbanization in China, whatever it is. And in fact, what they're really getting is momentum technology investing, as they would with any other index. It's going to be disappointing for quite a lot of people. Well, that's exactly right. And I think most people buy emerging markets assets as a way to diversify exposure away from whatever developed markets offer them.

11:16TSMC and Hynix and Samsung are much more closely correlated in performance to Micron and Broadcom and all the big US semiconductor names than they are to their own domestic banks or to any other EM assets. So not only do you not actually get that diversification from the same risks as you already probably have in your portfolio elsewhere, it is also arguably not EM exposure per se. So it's a bit of a weird situation. And ultimately, I think for us, a benchmark was never supposed to be a high conviction bet. A benchmark is supposed to be a diversified index, which gives you different countries, different sectors, and exposure to the underlying EM drivers.

12:04That is not at all what you get today with MSCI EM. No, and there's also the vague feeling that there are the countries that dominate the index probably shouldn't be in it at all. Korea, Taiwan, etc. It's an ongoing conversation in terms of GDP per capita and etc, etc. I would argue that from a risk metric standpoint, both Korea and Taiwan very much are still emerging. Korea had some political instability not that long ago, a few years back. It all ended well, but the precedent remains. Taiwan is a somewhat tricky geopolitical situation. I think those risks justify them remaining emerging. But ultimately, emerging markets is a universe of 25 countries and those leaders always change.

12:50You know, China was 40%, almost 40 % of the index not that long ago. And it's now about half of that. So that's why it's so much fun to invest in emerging markets, because things are always changing and fairly quickly sometimes. Yeah. Although if political instability is the mark of being an emerging nation, I think there might be quite a lot of movement in the embassies. That is a fair point. Right. Okay, so your contention then will be that by investing in an active deep value strategy such as yours, when the inevitable correction comes as a side effect of this concentration, investors in your strategy might be protected to a degree, right?

13:32So let's talk about what deep value means for you. What do you mean when you're talking about deep value? So we always make the case that the vast majority of people approaching the asset class will look at the asset class following a top-down macro perspective, and they will build a process based on macro variables. They will try to get the country right from their macro view, and then they will try to do the stock picking in the countries that they believe are going to do well. But Mary, we all know how difficult it is to forecast macro one variable in one specific country over a six-month window, doing that consistently on 25 different jurisdictions plus frontier markets, and then trying to understand how the U.S.

14:16policy is going to have an impact in those places. To do that consistent over time, we think it's absolutely impossible. Actually, we think that the best way of approaching EM is through a devalue approach, among other things, because EM equities is still one of the most inefficient asset classes that remain in the market. It's an asset class that has a lot of uncertainty. People perceive a lot of risks. It drives people away. You have less competition. Hence, there is more room for price discovery and alpha generation. And the best way to think about it is to follow a value approach, bottom up and building one stock at a time to build a portfolio that is quite well diversified, not only by country exposure and sector, but the type of value that you're accessing.

15:11Because one of the beauties about EM and doing value investing in EM is that when it comes to, because people associate it too much with macro, when it comes to value investing, the first thing that comes to the mind of many people is you're about investing in a cyclical oil and gas, metals and mining, a state-owned enterprise. And actually, yes, those do exist. And we believe that if you buy them at the right price, you should do well over time. But actually, value comes in many different flavors. And so if you are able to build a portfolio that actually caters to different types of value, that diversifies or creates an extra layer of diversification for your portfolio.

15:46And over time, it should do quite well. We always make the case that, look, I mean, I was born and raised in Colombia. Vera was born and raised in Russia. We understand firsthand all of the great characteristics that come with the asset class. But the one thing that people don't tend to say out loud is that this is a risky asset class. And because it is a risky asset class, you should always, always demand compensation for underwriting the risk of allocating capital to many of these places. And for us, the best way to protect that is by buying a portfolio of securities that are at low valuations.

16:27Okay. So how are we defining low valuations? What does that mean? Yeah. So 85 % of every single idea that we look at comes from the cheapest quintile of the market. We run a screen, as many investors do. What's different is that our screen is based on only one specific valuation metric. It doesn't have anything else. You can pick whatever valuation metric you want. We have in the past favored using the cyclically adjusted price to earnings ratio, the CAPE, because inflation never went away in EM and you want to compare apples to apples as much as possible. And so for us, in our strategy, we source the vast majority of our ideas from that cheapest quintile of the market.

17:09And that market is defined as MSCI EM IMI. that cheapest quintile will give you anywhere between 400 to 450 companies. But the beauty of that is there is a lot of breadth and depth in that specific opportunity set. And what I mean by that is there are opportunities coming across every single country and every single sector to the point that you could build different iteration of portfolios from that cluster and still expect to do quite well over time, given the valuations that you are, or the prices that you're paying for those businesses today.

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20:03Most people who come on and tell me about value investing follow up their talking about valuation by explaining how even though they're looking for cheap companies, they're still looking for high quality companies. And that's the point, cheap quality. Is that part of your strategy? I think we're quite proud to say that no asset is uninvestable for us. It may come at a wrong price, But ultimately, if the valuation is low enough, then it doesn't really matter if maybe we don't like the management capital allocation strategy or we feel like it doesn't have a competitive mode. If the price is cheap enough such that we feel that it compensates us for the risks that we would bear if we were to become shareholders in that security, then that's fine by us.

20:47So the problem with buying quality companies is that it is so easy to fall in love with them. And then you get the buyers, buyers, et cetera, whilst we're not buying companies, we're not befriending management. We are buying mispriced securities. That is what old school value investing used to be about. And I think in that instance, we are perfectly happy to be old school. And how are you then avoiding value traps? So most of our research process is effectively built around making sure that you don't buy into a value trap. The way that the research template works, the way that the financial model works, looks at various factors, be that financial, be that non-financial, that may mean that what you are buying is going to be obsolete or will not re-rate or even go bankrupt.

21:32So the process is very geared into that. But I think you have to be ready that you will get things wrong. As a value investor, what you're trying to get right is the proportion. You get more things right than you do wrong and the scale also works. But it's a perennial question for value investors, of course. I think that something that happens in EM that you might not see in more developed market asset classes is the fact that when there is uncertainty around a specific region or country or market, it doesn't really matter how good that company has been in the past, what sort of returns they have managed to do, if management is good or bad.

22:13the market will just absolutely sell off everything in that market. And not only the equities, the sovereigns, the currency, the corporate, the corporates, everything will go out. And our process is built in a way that it takes us away from places that are very crowded to places where the opportunity set is better just because you're facing less competition and there's a lot of uncertainty, which is already hopefully reflected in the prices. And so we have built a process and we have been trained in the past to actually be contrarian and moving to those places where people, when people are exiting.

22:49And funnily enough, yeah, sure, you can buy the traditional very deep value, low quality business. But in those specific situations, you are able to also buy the very good quality businesses that could potentially grow over time that are just trading at very depressed valuations just because of the uncertainty. The behavioral aspect of the market is very much compounded when it comes to EM. We have at the moment one of the most anti-AI portfolios that you can find in the market, not by accident, but out of process. because what is very crowded at the moment, those three companies in those two countries in that specific sector that has driven all of the capital, most of the capital this year, has left behind 23 other countries where you can find all sorts of companies across all sectors on types of value, trading at great valuations with good balance sheets and some of them are of high quality.

23:45Yeah, and this must make your portfolio look very, very different to those of your competitors because everyone has been holding AI-related names in a desperate effort not to fall behind the index, right? That is not relevant to you. And hopefully it'll come good for you over the next few years. Your portfolio must look very different. So where has your process been leading you? How has the portfolio invested? If you want to look at the glass half full for this year, yeah, sure. AI has been working very well and the index is up, whatever, 11%. But when capital follows a very crowded trade, It means that something else needs to be sold so that you can buy that new thing, which means that our opportunity set over the last six months has been extremely rich.

24:30And it's coming across the board almost everywhere. Consumer discretionary in Mexico, distress mining in Brazil, fashion retailers in South Africa, everything in ASEAN, everything in Indonesia, Brazil, everything across the market cap in China, special situations in Korea. Pretty much everything that is not AI related has been selling off. And so we've been spoiled over the last six months in that we as a team are very busy. And the challenge has been one of focus of where to spend most of our time so that we can actually allocate time to those ideas that look very promising. But for the first time in six years, we've been asking the question, what do we need to kick out of the portfolio today to make room for this new idea that just looks super interesting?

25:17Could you limit the portfolio to how many ideas? So we, our mandate allow us to hold anything between 30 and 70 stocks, but we like to be concentrated around 40, anywhere between 40 and 45. And so we think that good capital allocation will mean that every single idea should be competing for that capital. And you want to make the most out of that and you want to be allocated to those opportunities where you believe you're getting the most compensation for the risk that you're about to take. Okay, interesting. Well, let's pick up on some of those interesting areas that you've mentioned. What is interesting and exciting about consumer discretionary in Mexico, for example?

25:59Mexico is a great example. So for a very long time as a value investor, you really didn't have a lot of opportunity to buy Mexico. The stock market was doing very well. There was a near-shoring narrative. The currency was strong. So we just, every time we would look at the screen, Mexico would screen relatively expensive in comparison to the rest of the universe. The beginning of the sort of trade war and all the tariff uncertainty has definitely hurt Mexico, hurt sentiment. The GDP numbers coming out of there are starting to look worse and that all of that has hit consumer confidence. So the companies that we were looking at are effectively, all of them have an underlying exposure to consumer sentiment that we hope and assume will at some point mean revert.

26:49And at the same time, they all have some more specific issues which add to that valuation discount. So we always try to make sure that we understand the catalysts and the drivers. We are happy to be patient. We hold stocks for three to five years, but at the time of purchase, we imagine some very clear scenarios of how those stocks would re-rate. Okay. So when you've bought, I don't know which stocks we're talking about in Mexico, but when you've bought them, you're not buying them thinking GDP growth is going to soar from here because of reshoring and because of frenchoring and re-industrialization from the US, et cetera, et cetera.

27:26You're not looking at GDP numbers. You're just thinking each one of these companies individually is far too cheap. Indeed. So we don't, you know, for example, Brazil had elections recently and we had loads of questions about, you know, how were you positioned? What did you think was going to happen? And we never trade on macro or on elections. We try to have a portfolio that is sufficiently diversified that whatever the outcome from a macro or political standpoint, the portfolio is not too hurt. So ultimately, of course, you can't ignore macro completely if you're an EM investor, that would be foolish and very expensive in the long term.

28:05So we need to make sure that our models, the numbers that are in the models are coherent with the reality on the ground. At the same time, it is never the main driver for our cases or alpha generation. It's a part of the puzzle, but we are bottom up investors. So the company fundamentals and specifics will always trump. So you must have found something delightfully cheap to buy in Brazil immediately after the election. it's a brazil is a fascinating market um for quite some time with the real rates where they are uh the locals have fled brazil um the equity on the equity side you know why would you bother picking stocks monitoring stocks worrying about stocks if you can just get 15 if you're sitting owning sovereign debt and you can sleep at night so that rotation is is fairly regular if you look at the history of brazilian stock markets because the local participation makes a big difference I think international investors had concerns about fiscal sustainability, about the currency.

29:02And so all of those things together meant that valuations in Brazil have been fairly depressed. I think after the first round, we've seen an extraordinary reaction to that election result. And, you know, people were saying, well, look at the polymarket odds, or it's definitely going to be this. And we were just so uncomfortable with the narrative of, oh, everybody knows what's going to happen. Because it feels like, as natural contrarians, we look at that sentiment and we go, oh, we want to hedge just in case it does not in fact happen. So the two positions that were the most election sensitive in our portfolio, we have cut them after the first round and so went into the second round with a fairly neutral, with a fairly election neutral portfolio.

29:45But we have a significant portion of the fund in Brazil. It's fairly diversified between companies that are domestically exposed or expert oriented. but it has always it's a it's a very wide market with a lot of choice which is in aggregate today quite cheap so there is there's plenty to look at what did you buy most recently in brazil i'll actually give you what is one of our favorite positions in the tar portfolio because it's a distress mining asset um the company is called csn minero sao is like a a small version of Vale, which we also own. But what makes CSN Mineralis very interesting is that the Holco company is a steel manufacturing company called CSN SAE, which is family control, and it has a lot of leverage.

30:32And the group as a whole, they have businesses not only in steel manufacturing, but the iron ore mining company. They also have power generation, cement, logistics, infrastructure. and the small iron ore company, CSN Mineral Sao, is the crown jewel of the group. It contributes 50 % of the EBITDA to the group. It has almost no leverage, is well managed and we believe that the reason why it's trading at these stress levels is because there's a lot of leverage on the Holco company and the capital markets have been putting a lot of pressure on the family and the management of the Holco company to actually unlever the balance sheet and restructure the balance sheet.

31:14And that's what's been happening. The company has been in the process of renegotiating their debt, issuing new bonds with a longer maturity, and selling some of those businesses. And actually, last week, it was announced that the cement business got a bid, and so that will help or contribute to alleviate some of the pressure on the balance sheet at the Holco company. But we believe strongly that the reason why the IronR company that has nothing to do with that is trading at the stress valuation levels just because of what's happening with the parent company. And so for us, yeah, sure, it's an iron ore company.

31:46It will be exposed to the price of iron ore. Iron ore prices are going through a little bit of a down cycle or they are softer nowadays relative to where they were before. But for us, that's a special situation in an asset that people don't tend to be that familiar with. And if the whole company, which we think that's what they're going to do, is able to renegotiate and alleviate some of the pressure on the balance sheet, then you are paying distress prices for an asset that has nothing to do with that situation directly at least. And then you should get a re-rating. And so that has nothing to do with Brazilian elections, with which candidate was supposed to win, with the fiscal situation in Brazil.

32:23It's a very unique opportunity that came about from doing a lot of research and talking to a lot of people about the Brazilian market. Interesting. And are you finding that quite a few opportunities are appearing in the resources sector at the moment? Or is this just a Brazil thing? So it's quite interesting because for a long time, there were two things you could count on in EM value sort of subsector of the universe. And those two things were cyclicals and in particular materials were cheap across the board. So you always had lots of choice of various commodity companies, regardless of the country.

33:01And the second thing that you could be sure of is staples companies were very expensive because that was everyone's favorite way of playing the EM consumer, the growing middle classes. They will buy more tissues and more chocolate bars. And therefore, those companies were trading on, I don't know, 35 times plus. In 2025, and that trend has continued in 26, that relationship has reversed. So lots of cyclical commodity plays have all re-rated because people are predicting the next commodity super cycle or trade is not as secure. So everyone stockpiles, whatever is the narrative. But they have re-rated and it's becoming much more difficult to find cyclical and materials companies that are trading at attractive valuations.

33:46At the same time, the staple stocks for the first time in a really long time have come down. Some of those stocks are trading on sort of 10 times earnings. And they did not deteriorate by two thirds in the meantime. It's just a reassessment of sentiment and the multiple that people are willing to put on a certain earning stream. So we today find ourselves in a situation where cyclicals are expensive and staples are cheap, which if you told me that five years ago, I probably wouldn't believe it. Yeah, a lot of that about at the moment.

34:27With ChatGPT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask Chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and ChatGPT can help you do it with confidence. Get started at ChatGPT.com.

35:04The world of business is constantly evolving. Every day, new challenges, new opportunities, new ways of working. Comcast Business keeps you totally in step with secure AI-backed networking built to power the way modern business gets things done today in more than 100 countries around the world. That's some serious muscle. And get this, Comcast business powers over 90 % of the Fortune 500 and millions of small businesses. Behind it all, network engineers, cybersecurity specialists, support teams, thousands of experts answering your call at 2 a.m. like it's 2 p.m. Always on, always ready. That's a lot of coffee.

35:46One partner powering how business gets done for companies of every size all around the globe. When you add it all up, no one does business like Comcast business.

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36:35Let's talk about China, a market that we were saying earlier used to be 40 percent of the EM index now is significantly less and for a lot of people is still considered to be uninvestable. Are there opportunities there at the moment? For sure. Given that for you, nothing is uninvestable, which is great for purposes of an interesting conversation. Absolutely. I think I'll point out two things. We frequently have conversations about whether China is uninvestable with other investors. And I think people talk about slowing economy. Doesn't mean it's uninvestable, just means you have to adjust your numbers in your models.

37:15Or, OK, the politics is a bit hairy. Again, it has been hairy for quite some time, not particularly new. If you thought it was investable 10 years ago, then it should still be today because the change hasn't been that dramatic. And then people bring up the potential conflict with Taiwan and say, well, I can't invest in China because what if something happens with Taiwan? And then you ask, okay, so what's the biggest stock allocation in your portfolio? And everyone replies, well, that would be TSMC. And nobody seems to see how incoherent this view is, because if you are keeping away from a very large market because you worry that China and Taiwan will have an altercation of some kind, at the same time, your biggest stock position is in Taiwan.

37:59It just doesn't make sense. So for us, China is a super interesting market where there's so much inefficiency and people do really make personal ethical assumptions about certain things and then trade on the back of them. We have a significant portion of the portfolio in China. And I think in particular, the area that we have found interesting this year is Chinese tech. So, and partly here's a little bit more commentary on sort of how the fundamentals of a market work, if you are a benchmark-aware investor and you have to buy more Samsung and Hynyx and TSMC every day as their weight goes up in the benchmark and you don't want to run a big tracking error, then you have to fund those purchases from somewhere.

38:50And most managers will not fund those purchases from their favorite niche special situation that they spent four weeks researching. They're going to fund it out of big liquid index components. So there are days when some of the big Chinese tech stocks or big Indian banks, HDFC and ICICI are down 7%, 8%, 9 % on no news whatsoever. There are no earnings releases, there are no speeches, there's nothing important going on in the world through sheer liquidity pressure as all the active and the passive are selling the shares in order to sort of reallocate that money into the semi-stocks. So China is a primary sort of sufferer right now of that liquidity pressure, But we have seen on the days when the AI trade is weaker, that trend reverses.

39:37So we think that Chinese tech, you know, is a very interesting space today. And we are fairly heavily exposed to it. We tend to be very boring investors in that Vira always makes the point that the answer to most of the questions that we're asked are valuation driven. And so the fact that we have a significant allocation to China today is just a function of the fact that as a market, it's an interesting market from a valuation point of view. But when we were launching the strategy six years ago, China was one of the most expensive markets in EM and one of the most expensive markets in the world.

40:13And we were carrying a significant underweight relative to the benchmark back then. And so, I mean, I would just add that today, China, because of some of the things that Avira was listing before, is at the top of mind of people. I think that more than anything else, they just see a very weak macro cycle. They are staying away from it. They are seeing the consumer being quite weak and people don't like that, of course. But again, I think that a lot of the breakup in terms of conversations with investors, it comes down a lot to time horizons. So for us, the time horizon is anywhere between three and five years.

40:49We don't know how those are going to play out. What we can see is that those valuations relative to what those companies have done in the past look attractive. And so we think that at those prices, you're tilting the probabilities in your favor that you will get a good outcome. I suppose the worry about Chinese tech is that if there is a general tech bust, the AI bubble drifts away, then Chinese tech, regardless of the valuations, will drift with it. I think the concerns are quite similar to the hyperscalers in the US. So, you know, those businesses, when you think about Alibaba or Tencent, have spent probably five or seven years in a bit of a retrenchment mode when they were exiting non-core business segments.

41:34They were refocusing on the most important business lines. And I think free cash flow generation as a result has improved and they have instituted shareholder friendly policies in terms of dividends and buybacks. So I think the worry is here's a massive CapEx hole that's just opened on the balance sheet of those companies because they have to invest in AI and they have to buy those chips at such exorbitant prices. So how does this impact the fundamentals and the free cash flow? So those concerns are valid. But I think if we do see a retrenchment in the AI cycle, then that CapEx bill does come down and hopefully the market worries recede with it.

42:15Let's talk a little bit about India, the other giant market that when people think about EM, they think about India. But that has long been a very expensive market, hasn't it? It had its great phase of everyone getting very excited about investing in India and talking about urbanization and the growing middle class. And, you know, I must have written that column a million times. And that result being that it became very expensive. So that didn't feature very highly in your portfolio. Maren, this is going to be a very short answer to your question because we have never owned an Indian business in the time that we have run the strategy.

42:50on the fact that it has always been perceived to be, and I think that that's undebatable, one of the most expensive markets, not only in the end, but on a global basis. Having said that, if you think about India, where India stands today, India from a trade perspective is very much on the wrong side of AI as a country and on the equity side, because they don't really have any big tech companies pushing the AI. Actually, AI is disrupting everything that has made India great or some of the industries that have made India great before. And so I think that when AI is very much at the top of mind of investors, India has been coming down, but it's coming down from such a high level valuation that those valuations have not been attractive in the way that we look at the market today they still need to come down more for us to be interested in in indian businesses i'm just to reiterate there are some businesses that are starting or have started to look interesting the it consulting names in general and we've done a lot of work um on them and getting ready so that if they keep drifting down then we are ready to pull the trigger and uh we have been very good in the past at doing a lot of work on companies and we pass on eight or nine um cases out of 10.

44:13But every time that we pass on the company, we set a price on a system where we become buyers of that specific company. And so we are ready if those securities come down in price to a level that we believe we're being compensated for underwriting that risk, we're still ready to buy them. We have talked about a lot of very big markets. We've talked about China, we've talked about India, we've talked about Brazil, Mexico. Well, Mexico is not a huge market, obviously. Are there any smaller markets in the EM world that you think are not getting the attention they deserve? For sure, there would be plenty.

44:45I will kick off with Frontier. So Frontier may technically not be part of the mainstream EM benchmark, but we see it as an extension of emerging markets. All those biases, all these inefficiencies, there are present in Frontier, but at a bigger scale than in EM. So we think it's a continuum effectively. We think that Frontier is super interesting today because of a couple of things. First of all, as Juan has alluded to, the valuation. Sorry, can I interrupt you briefly to ask you which markets are in Frontier? What are we talking about? Sure. So Frontier, the largest component of Frontier is Vietnam.

45:27And then you have a few African countries. So Nigeria is important. Kenya, you have some Central Asian countries. So Kazakhstan, Uzbekistan, etc. It's a collection of sort of smaller geographies, which are a little bit earlier in their development curve. And so we like Frontier because it's cheap. And we like it because it's starting to get some really interesting momentum. So the first time I was on an emerging markets desk was in 2014. And Frontier was all the rage. And it was, again, the growing middle classes narrative. And the valuations were very high. And in the 10 years or so since then, everyone seems to have completely forgotten about Frontier.

46:13It trades on index level at about 23 or 24 % discount to headline EM, which is almost the widest discount it has been on for those 10 years. So it briefly touched 25 % discount in 2020, but I think we can agree those were exceptional circumstances. So the discount is large, people don't like it, people are not buying it. An average exposure of an EM manager to Frontier today is I think 1.2 or 1.3 percent of their portfolio versus about 1.7 on average. So again, another metric that shows you that people are probably under-owning it if there is such a thing. But on the underlying, what you have is companies that actually operationally and financially are doing very well, but they carry half the price tag that they would carry in a different EM, be that a bank in Kenya, be that a staples in Vietnam.

47:07And so you have good fundamentals, you have cheap valuations, and you're finally starting to get a bit of momentum as well, as Vietnam is gearing up to be reclassified into EM. That is possibly probably going to happen in 2027. And Nigeria, which is another big frontier market, is finally becoming investable for equity investors as they have sorted out their capital control issues, etc. So Frontier is, today the portfolio has almost 10 % in Frontier. It's the highest allocation we have ever had. We think it's a really interesting part of the market. Can you give us an example of a Frontier stock that you hold?

47:44Sure. So we have recently bought Uzbekistan National Investment Fund, for example. So that is a London listed security. It's a fascinating security because it's 13 state-owned enterprises in Uzbekistan, which are packaged into a fund, which is run by Franklin Templeton. So Franklin Templeton are responsible for improving the underlying companies. So they help out with corporate governance. They make sure that the boards have independent directors on them. They help out with the commercial sort of running of the businesses. So making sure that, for example, for utilities companies, certain regulation is passed through to make sure that they operate on a commercial basis.

48:24And as time goes by, those companies will be listed, they have high dividend payouts. So you as an owner of USNIF, you get hopefully nav appreciation and you get an income stream and you get some value realization. It's exactly the same model that Franklin Templeton has followed in Romania with Fondul Proprietatea in the early 2000s. So they know what they're doing. They've done it before. They've learned some lessons. It's a new, interesting geography. And the best thing about USNIF to me is equity investors typically only get exposure to those frontier geographies much later on in their development.

49:00So a lot of really exciting early growth has happened. And maybe the country has had a sovereign bond, which the fixed income investors could buy, maybe some corporate bonds. But equities come much, much later because the markets need more liquidity. With USNIF, we as equity investors are getting in at a very early stage in the development of that country. And we think it's a fascinating stock. I can give you one of our favorite stocks in frontier markets as well. We own and we have owned for a few years now, Equity Holding Group in Kenya, which is one of the largest banks in Kenya. We love it because it's a very good bank, very well managed with very good returns on equity.

49:41trading at very interesting prices. And if you want a market on the smaller scale, Philippines has been looking very attractive, especially this year, especially after the start of the conflict in the Middle East. You can find a lot of interesting valuation-driven stories there. And then I think that the most hairy situation that you might find today is Indonesia. And if you are having a conversation with two deep value investors, I think that the natural question would be, are you looking into Indonesia? Which, of course, we have. And we think it's very interesting. And we are following the situation very closely.

50:21And we think that even where the valuations are, that's a very interesting market to allocate capital to at the moment. Okay, interesting. I've had you for far too long. I'm going to have to let you go. But let's look forward briefly. If you were to look out, say, five years, where do you think the value would be? Do you think you'll all be buying hyperscalers on incredibly low long-term valuations? Oh, my goodness. Picking up AI companies from the bottom. What a great question. Where do you think we'll be in five years? I think the only thing that I would commit to, the only opinion I would commit to, is the things that are cheap today probably will not be the same things that will be cheap in five years' time.

51:02to kind of go back to the concentration question that we started with. Five years ago, Chinese tech was unstoppable and Alibaba was going to grow and consume the entire Chinese economy. Prior to that, the resource companies were going to do the same. There are always trends and narratives in place. But in EM, things are very fast moving, to some degree, even more fast moving than in DM. So that leadership of the market changes all the time. And as such, maybe we will be buying TSMC and SK Hynix in five years' time. Who knows? I would not be surprised. We always tell our clients, look, we have nothing against any of these companies.

51:46It's just that we are unwilling to underwrite those risks at those prices. But we have a price in the system at which we become buyers of any of that. And we always disclaim. But if those companies are trading at those prices, then there is something really wrong happening with either those companies or those countries. And so that's just part of the process. I think that one of the, I'm sure that you've heard what I'm about to say many times from other people talking to you about the money markets. But one of the biggest misconceptions about EM is that people do think about EM in a monolithic way.

52:18They think about an asset class that is just very similar in nature. But the reality is you have 25 different countries in different continents, culturally very different. I can tell you there is nothing in common between China and Colombia. I'm Colombian. There's nothing. You can actually ask AI. Yeah, no, it's a ridiculous asset class. We do talk about that quite a lot on this podcast, that treating EM as an asset class is absurd. Ridiculous. Yeah, and so things will even flow and new opportunities will come. Okay, so five years out, maybe hyperscalers, maybe not. Thank you both of you so much for joining us today.

52:55I really enjoyed that conversation. Thank you very much for having us. Thank you very much.

53:22by Blake Maples. You can also follow me and John on X. I'm Mary Ness W. And John is John underscore Stepak.

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