Emerging and Frontier Markets: Cyclical Bounce or the Beginning of a Secular Advance? A discussion with Peter Elam Håkansson, CEO and Founder of East Capital.

0:00If you really want to be part of new technology, you have to be in Asia. And most of the time you have to be in China. That's the harsh reality. And we saw it so much when it comes to wind and solar. It doesn't really pay to look anywhere else. And we see the same now with batteries. We see the same thing with chips manufacturing. Not maybe in China, but then it's rather Korea and Taiwan instead. So you have to, I mean, this is the part of the world where it's all happening. I think the average growth of GDP for the last 25 years in Poland is 3.8%. It's not China, but it's not far from China either.

0:39And that's here in Europe. It's 40 million people. For example, if you look at one of the new countries that we have been investing in for the last 10 years maybe, is Saudi Arabia, which was not in any indices when we started to invest in it. I think it is a fantastic business to be in. It's really, I mean, you are paid to be curious. So I would just, if you're interested in what's happening in the world, this is the dream.

1:09Peter Elam Håkansson:Welcome to the Money Maze podcast. If this is your first time joining, I'm your host, Simon Brewer. Quick word before we start. 95 % of viewers aren't subscribed. So miss out on future interviews with top business, finance and industry leaders. To support the show and ensure we can keep sharing high quality content, click subscribe and please drop a like. Plus, if you have any future guest ideas, do share your suggestions in the comment section below. Otherwise, thank you for watching and listening and enjoy the show. Emerging markets, once the darling of the asset allocators world, have found themselves increasingly discarded by those same allocators.

1:51Peter Elam Håkansson:Initially, post the great financial crisis and exacerbated by COVID. Such became the reallocation away and the magnetism of the US and its platform technology companies that by the end of 2024, emerging markets were at a 50-year low relative to the S &P 500. As always happens at such potential inflection points, tomes are written about the developments often justifying the current state of affairs, equally forgetting that mean reversion, the role of cycles, and that investment returns are a function of the price you pay, which means that when the elastic band of valuation is stretched excessively, even modestly contrarian bets can pay off handsomely.

2:34Peter Elam Håkansson:A few of these forces have triggered some incipient flows of capital by allocators away from the US this year, which in turn has moved the anti-emerging market trend a touch. Is this a flicker? Or are we at the foothills of a bigger reallocation and a recognition that with the US equity market at over 65 % of global stock markets, even modest shifts in allocations can have important effects on prices? As former guest Peter Frankopan reminded us, Over two-thirds of the world's population lives east of Istanbul. 75 % of the world's hydrocarbons, 85 % of the world's rice production, rare earths, both in availability and process, and much more also reside there.

3:18Peter Elam Håkansson:Therefore, it seemed appropriate to look at the opportunity set, and today we're going to do it through Scandinavian eyes and discuss the opportunity and playing field with a firm who have been investing there quietly since 1997. Peter Alam Hackensen, CEO of East Capital, Välkommen till London idag och det är fantastiskt att se dig har. Thank you. Well, I'm actually happy that you understood my attempt at Swedish. I did actually very well. Peter, how young were you when you first visited what might be termed an emerging market? I guess that must have been when I was in Russia the first time And that was in 1985, so I'm born 62, so 23 years old.

4:03Peter Elam Håkansson:Right. I went to a wedding of a good friend who married a Russian lady. And before we move away from that area, you'd had, and you'd written about it in an article that I enjoyed reading, this affiliation through your family with Estonia. Just give us a little sense of that history. Well, that's about 100 years ago. So my grandfather who came from southern Sweden, the part of Sweden called Skåne, from a city called Kristianstad, he left his wife and family back in Sweden to go to Finland and then continued to Estonia for the war of independence. That was basically the turmoil of the civil war in Russia after the revolution.

4:50and he basically felt it was, he wanted to help and he survived luckily. He was in some difficult situation in one occasion he was shot upon when he was standing on the armored gun train which he was responsible for and his binocular was hit. It fell into pieces but he survived and that was good for me otherwise I wouldn't have been here. and he came back to Sweden again and had more children. One of them was my father and then unfortunately he died when I was only one years old so I didn't really get to know him well but of course there were stories about what happened to him. There was his diplomas, his medals from both the Estonian and Finnish state and also his big saber.

5:39So it was a bit intriguing and interesting and one of these countries, Estonia, didn't exist when I was growing up which made it even more fascinating. So, of course, you want to understand how come someone wants to go there and risk their life and all that. And when I was growing up in Sweden, it was really as the, I mean, we are very close to Estonia, geographically. Tallinn is the closest capital, closer than Helsinki, which is the second closest.

6:06Peter Elam Håkansson:But it didn't exist, really, in the mindset of people. And we had this fantastic map, which I loved, which we had in our classrooms. It was one of these old-fashioned maps that you pull down from the sea. Maybe you had the same here in the UK. You had the four countries of the Nordics, Sweden, Finland, Denmark, and Norway. You always in the map have this thing which happened, the explanation of this is the road, this is the railway track. And that covered exactly the area where the Baltic states should have been. So it was kind of, SDR didn't exist. And that made me even more interested. I started to read a lot of history.

6:50And when you start to read about Eastern European history, you can't stop because it's so fascinating, I think.

6:57Peter Elam Håkansson:So before we leave the military history, I noted and your grandfather would probably have been very intrigued to see that you found yourself as part of the Swedish army surrounding that Russian submarine that emerged in your waters. Was that just a different day at the office? That was a fascinating day in the office. And it was the 29th of October 1981. That's another date, which I remember. And we were basically doing our military service. I was in the Marines. We were in the biggest naval base of Sweden, which is in Karlskrona. And we heard about this submarine that has stranded further out.

7:39And we got, wow, fantastic. A big submarine from Soviet here. maybe they will let us see it. We were a bit naive, so rather a couple of hours later, we were woken up in the middle of the night and asked to bring our weapons, write contact details for our sort of closest if something should happen to us. And we were basically taken out in trucks. And this was dark. This time of the year, basically now, it's very dark in Sweden. And it was snowing, this wet snow, so it was not the nicest time of the year. And we came there and went to the small island and we saw this huge submarine. It's a massive submarine, and what we didn't know then, but we know now that it was also armed with nuclear weapons.

8:30So you have to be pretty big as a submarine to carry that one, those as well. So we were basically there. The Russians did a rescue attempt. The second night we were there, and it was pretty scary, actually. We were in the front line, and we got these updates every 20 minutes. Now this rescue fleet of three ships are so far away from you, and they will basically hit you in X amount of minutes. And luckily, when they were just about to cross the Swedish territorial water, which was very close to where we were, the Swedish artillery had basically this kind of radar screen that locked. Instead of surveying, they were actually locked on the target, and that can be sensed by the boats.

9:23So they stopped. But during one time of the evening, there was reports that Spästnäs had been seen on our neighboring island. And of course, I mean, when you are there, we were 10 guys, basically. And we had, it was dark. We were manning a big torchlight. There was a diesel aggregator. And it was very noisy. And we understood that the first thing they would take out if they would come for a rescue attempt is basically this torchlight. And we are there. So we knew that we were going to be the first.

9:58Peter Elam Håkansson:Oh, my gosh. It's like Tom Clancy's hunt for Red October. Yes. So before we continue this conversation, we're going to take a short break to have a note from our sponsors. I'm thrilled to share that the Money Maze podcast is sponsored by the World Gold Council. They champion the role gold plays as a strategic asset through expert research, commentary and insights. And it's not just your portfolio that may benefit from gold. Learn how gold mining is supporting female economic empowerment and small businesses via their new documentary series called gold, the journey continues. Tap the link in the show notes to start watching.

10:33Peter Elam Håkansson:IFM Investors is a global asset manager, founded and owned by pension funds with capabilities in infrastructure, equity and debt, private equity, private credit and listed equities. They believe healthy returns depend on healthy economic, environmental and social systems. And these are evolving on a scale never experienced before. To find opportunity, build value and meet the needs of future generations. You need scale, skill and expertise. That's what IFM Investors has built up over 30 years. Well, we'll come back to some of those countries and investments later on. You study at the Stockholm School of Economics and EDEC.

11:13Peter Elam Håkansson:I wonder what each of those institutions gave you? Well, that's a good question. I think when it comes to Stockholm School of Economics, that's the only private university in Sweden. It basically was set up by the Wallenberg family in 1909 to provide management for the Swedish industry. So it's a small school. I think it was only 275 people being admitted every year by that time. So it was kind of, it was tough to get in, but it was a lot of fun ones you were in. And it was also a mix of people from all parts of mostly Sweden in those days. And it gave me my wife. We met the first year in the school.

11:55So it was a really, really good school from many points of view, from my point.

12:00Peter Elam Håkansson:You've explained about Stockholm School of Economics, but what did EDEC arm you with? Well, I really wanted to learn another language. I wanted to learn about another culture. And by that time, France was an obvious choice. And it was also, I started to look at the stock markets. And it was a market which I wanted to learn more about. They had just launched the second marché in France as well, which was interesting. So, yeah, I thought it was an interesting place to be in. And I lived for four years. I studied in Ledeck and then I lived for four years as well in Paris, working at the stock exchange in Paris.

12:37Peter Elam Håkansson:Well, Swedes consistently rank among the top in Europe for international travel per capita. And as potent entrepreneurial forces who produce those enduring brands, IKEA, Spotify, H &M, Electrolux, not forgetting ABBA but you select finance a relatively small area what drew you for your career into finance? I started to read these business magazines that my father brought every every summer for the he brought a lot of magazines business magazine to our summer house that he wanted to read up on and I started to look in them and I was very much intrigued by the breadth of the Swedish industry and that it was so international and I was fascinated and I kind of thought maybe one should start to try and invest my own money a bit and I started.

13:29And it went very well. So from the age of 16, I've really been following the markets on a daily basis and I actually took my license to become a stockbroker even before I went to Stockholms economics. I was one of the youngest ever stockbrokers in Sweden.

13:46Peter Elam Håkansson:Okay. Well, I noted that your career involved a large stint at SEB. We all knew that sort of as one of the very respected research firms. And you spent, I think, nine years there and ended up as global head of research. But the transition from research to portfolio management isn't always easy. And I wonder what you found most difficult about that. Well, we can start in a way that when I started my career, I was actually a salesman. And then I went into research. And I think what I really, why I wanted to go into portfolio management was that if you're doing classic brokerage, I mean, you live on commission and you want basically people to trade.

14:27And I really felt that I was much more long term rather than short term in my way of thinking. So I really almost felt bad when I had to get people to trade, although I was pretty good at it. But I really thought that it's much better to find the right investment theme and stick with your holdings. And actually, if you write in your conviction, I mean, why trade away from it?

14:54Peter Elam Håkansson:Salesman with a conscience that is sometimes infrequent. We used to think, and I want to talk about emerging markets now as we get into the meat of your business. We used to think, growing up, as I have done like youth in the industry, that emerging markets typically were the beneficiaries of a weaker dollar and higher commodity prices. They went hand in hand. And we might be seeing the beginning of both of those trends, which could be multi-year trends. But is that still a relevant way of looking at emerging markets except in Latin America? well i think the reason why dollar was so important for the emerging markets was that they were all borrowing so much money and the and the kind of currency to borrow in was in dollars and as emerging markets overall are much less indebted now than they used to be i think it's less relevant now than it used to be overall which is going to leave me a question i was going to ask you later but it's it's appropriate right now is that although you are an equity firm the amazing performance of emerging market debt generally as measured by EMBI and some of these other indices has pointed to a theme that many have suggested could happen which is that actually emerging market debt behaves better than developed market debt because there's been this process of rehabilitating country balances etc do you think that the debt markets might be ahead of the equity markets i think that's quite often the case that the bond market is ahead of the equity markets i I wouldn't be surprised if it's the same thing here as well.

16:25I mean, we have seen it, for example, in the, I mean, we are doing bonds in our own home market. So we have a Nordic corporate bond fund, which is actually our largest fund nowadays. It's had a huge success, especially with the investors from continental Europe. And I think one of the things that have contributed to the very strong performance over the last few years has been the bonds for real estate companies. And if you look at the performance of the real estate company's shares, it has not been good. But looking at it objectively, definitely I think the bond market is making the right move there.

17:04So I think we will see the shares follow.

17:07Peter Elam Håkansson:You found the business in 1997. Why? I was convinced that the fall of the Berlin Wall had created the opportunity of lifetime in investments. After the fall of the Berlin Wall, that happened when I was living in London and then I later moved to Paris during this time. I started quite on a regular basis to travel to Eastern Europe as I was interested in history to see how it really looked before things were going to change. And I saw this huge potential. And as I was interested in history, I also knew that the time which I had been growing up in, which is basically during the Cold War and the Iron Curtain, was not the normal stage of Europe.

17:51That Europe had been much more, I would say, common rather than different in history. So I kind of was convinced that this must be an opportunity. So when privatization started in 1994 in most parts of Eastern Europe, we took part of it when I was part of SCBNS Gilda. And I really wanted to do more. But I also saw that this was not the right timing for my employer. And I really said, I will regret this the rest of my life. I cannot see my grandchildren in their eyes when they will ask me, Grandpa, you saw all this. You were there. Why didn't you take the opportunity? So I thought I better do it myself.

18:35Peter Elam Håkansson:Well done you, many don't. Just give us a recap of the firm today in terms of size, shape, footprint. We have about€4 billion under management. We are basically divide an equal part between emerging equities, real estate, which is really in Eastern Europe, and developed markets and inequities and bonds. And it's 18 funds. and we are about 80 people. We have our head office in Stockholm. We have our fund management company in Luxembourg and where we are registered. And then we have research in Hong Kong, Mumbai and Dubai. And we also have real estate operations with offices in Tallinn, Riga and Vilnius.

19:25Peter Elam Håkansson:Okay, so let's talk about the investment philosophy As I read through your materials, I quote, we favor investments in companies that show long-term sustainable growth and have responsible owners. Most fund managers would say that that's an aspiration as well. I guess, what do you think that you do specifically or at least very well that distinguishes you in this space? I think what we have been trying to find, I mean, we've always been looking for growth. I think that's kind of in our DNA that we want to find companies. We are stock pickers, and we want to find companies that show growth. So we tried to pick areas which we think are interesting, and then we tried to find the best companies in those areas.

20:06And when it comes to responsible owners, which I think was mentioned, that was a very early lesson from our days in Eastern Europe, when it was very difficult to understand who were the owners, and we understood that this was key. And I mean, I still think that it's so important to understand the owners of a company, no matter where they are, because it's the owner who set the tone for the governance in the company. If there's not the right governance, shareholders will not have a part of the wealth creation of the company anyhow. So you need to know the owners.

20:38Peter Elam Håkansson:And we're going to talk about this research process. But one of the articles that I've been through in researching you was that you said when in the early days you went to visit companies in Russia, a telltale sign of bad cash flows or absent cash flows was going in winter when the rooms were really really cold i.e there was no heating and it reminded me we'd interviewed carson block the famous short seller and he said he went to see a paper company in china but there was moisture everywhere and the consultant he'd taken with them said they're not making much paper with this level of moisture in it so what have you learned about those um road trip site visits that have become baked into your DNA?

21:20I think that still is so important just to go and see companies. I have done thousands of company visits and I really think it's amazing this gut feeling you have when you enter into the reception of a company. I get a feeling for how it's run. It's kind of... And of course you want to go and see and speak to people. You want to see the production facilities but it tells you a lot. And now it's been fantastic times. And you mentioned about this in the wintertime, and maybe I should add as well, because one of the reasons why it was so difficult to analyze companies in that time, it was barter trades.

22:01So it meant that even all the companies were producing annual reports, but it didn't really mean anything. So this was the best research criteria. I mean, it never failed. If it was cold, it was a sell. If it was warm, it was a buy, to put it very short. I mean, we have refined the research methods over the years, but that was the earliest start.

22:23Peter Elam Håkansson:But let me just stay with that idea that the site visits are so important. There is something that you are ready to observe. If you were taking a young portfolio manager or analyst with you, what would you advise him or her to develop as a skill that helps you sense something that isn't in the numbers? I mean, it's all things about how things are organized in an office. and just to see how you're welcomed, what type of atmosphere you have. There's always this type of atmosphere in the company, how you're welcomed, how people speak to each other and all these kind of small, which are very important things but that you cannot see in the numbers.

23:05Peter Elam Håkansson:And the approach to research varies by institution. Some want boots on the ground and people in all those places. You mentioned the centres that you have, but how do you organise, having been head of research at an institution before, you know, East Capital. How do you organize your research analysts? Are they sectorally focused? Are they multidisciplined? They are multidisciplined, and they are them following different markets, really. And, I mean, for example, we are, I mean, in our emerging markets space, Asia is the most important part of the world by far, and five of the eight people who work with our emerging market fund, our global emerging market fund, are based in Asia.

23:42So they are pretty close to where the action is, basically.

24:12Peter Elam Håkansson:and opportunity. Tap the link in the show notes to learn more. Schroeder's Capital is the private markets division of Schroeder's, combining the experience of specialized local teams with the scale, rigor, and resources of a global institutional platform. Schroeder's Capital provide its clients with global access to differentiated and specialized strategies encompassing all private markets asset classes, from private equity to real estate, infrastructure, and the broad universe of private debt and credit alternatives. This approach enables Schroder's Capital to access opportunities and investments that are often difficult to find elsewhere, while also having the broad capabilities and perspectives needed to build holistic solutions and deliver tailored outcomes across private markets for both institutional and wealth clients.

25:03Peter Elam Håkansson:Discover more at schroderscapital.com. Remember, capital is at risk with investing. And again, going back to your philosophy, you write, we focus on companies with strong, predictable cash flows. And you say, at the end of this piece, fundamentals matter over time. And I wonder which for you fundamentals matter most. I think what we try to assess is to find really good quality companies that have this ability to show sustainable growth over time and also have a good corporate governance. So we have kind of this kind of quality measurement model that we look after. So that's the long term. But of course, in the short term, if you have these type of companies, it's the valuation which really matters mostly.