Juan Torres on emerging market value investing, China, Indonesia and Taiwan | S08 E06
Summary
Emerging Markets: Guest emphasizes wide valuation dispersion and a rich cheapest quintile, arguing EM remains attractive on a relative basis with numerous country-specific opportunities.
Indonesia: MSCI downgrade threat and political uncertainty created a broad selloff, which he views as fertile ground across coal miners, banks, gas distributors, and telcos at compelling valuations.
China: Despite the “uninvestable” narrative, China was a top performer in 2025 and still offers attractive names in the cheapest quintile; competition is fierce but opportunities persist in select consumer/tech platforms.
Brazil: Past market stress (currency, sovereign yields, equities) led to deep-dive opportunities, exemplified by finding large-cap value at very low CAPE, supporting a constructive value stance on Brazil.
Financials/Banks: EM banks remain broadly cheap and operate plain-vanilla models, with analysis focused on capital strength, L/D ratios, and NPLs; indiscriminate selling creates mispricing.
Taiwan Tech Valuations: He cautions that AI-linked Taiwan tech, including index-heavyweights, looks “punchy,” highlighting concentration risk rather than a buy case.
Crisis Investing: Best time to buy EM is during crises originating outside EM; in such episodes he’d “buy EM across the board,” citing historical recovery patterns.
Process & Risk: Screens by CAPE to target the cheapest quintile, dives deep when countries face uncertainty, avoids currency hedging over 5-year horizons, and stays macro-aware but not macro-driven.
Transcript
This is Value After Hours. I'm Tobias Carlile joined as always by my co-host Jake Taylor. Our special guest today, he's an old favorite of the program, Juan Torres. He's the co-pm of emerging market equities at Newberger Burman. How are you, Juan? Good to see you again. >> Thank you very much for having me again as always. It's a pleasure to be here. >> Welcome back, my friend. >> Thank you very much. Tell us what is happening in emerging equities >> strong to quite strong. >> Yeah. Well, everyone uh seems to be getting excited about the fact that the asset class has got off to a pretty good start of the year. MSEM is up something like 10% in dollar terms year to date. And and then >> max seven. [laughter] >> Yeah, it's it's off. It's up from a very good year. So 2025 it was up something like I think 35% was was the the the benchmark. Uh and and but I I am a little bit cautious just because well number one since 2010 uh EM has not outperformed I guess DM or the US I can't remember for two years in a row. So, so that's just a stat uh meaningless probably but it is a stat >> and then and then it's being I mean it's interesting because the last time that we spoke uh EM as an asset class from a valuation perspective was cheap both in absolute terms and in relative terms. Now you could make the case that it's cheap in relative terms still it's at around 19 times adjusted P. So I would guess I would say my personal opinion would be that's uh kind of for value >> but when you look at the dispersion you see some pockets of the market which are really expensive and then you see the cheapest quintile which is where I prefer to do most of our research and invest investing that one is still very cheap very attractive it's full of opportunities across the board it's very rich but the the ones that are expensive are I I think they're that are really expensive. >> So the spread then has gotten feels like more blown out than last time. >> Yeah, I think so. So and >> what kind of stuff falls into the cheap cheapest desile these days? >> So it's very rich. It's across all markets. I mean you you are able to find you should be able to build a well diversified portfolio different iteration of different portfolios um from that opportunity set just because you're finding companies across all countries and all sectors and I think that the cape on that cheapest quintile is something very close to 9 or 9.5 something like that and when we last spoke it was eight or 8.5 so that's that's very attractive and and the fact that the opportunity set is rich is is really compelling and then you will find some countries which are way more interesting than others. But for me, >> does it does it feel like the in the US perhaps where one of the knocks against the value stocks has been that like quality was sort of pretty well sacrificed as you worked your way down? Lots of cyclicality. Um does that feel the same in in uh the EM world? like as as it's gotten a little bit more like it's still relatively cheap uh but has like the quality that's in down fallen into that you know where you would look does it feel higher quality or lower quality than let's say like a year ago >> is the thing in emer markets is that what counts is the countries because when the market gets fear or there's uncertainty around the country the market won't care about the the quality of whatever you're holding is going to throw everything out of the window and so the bad and the good will go And so I we don't tend to think about sectors that much. We tend to think about countries. And then in the context of countries like things like look Indonesia, MSEM threatens Indonesia to downgrade the country from an emerging market into a frontier and then the market just sells off and it's just a threat. It's just saying if you don't correct XY Z, I'm going to do this next time around. uh and then the market goes down a lot and then I mean for for us for my co-manager and myself I mean we we go into the office with a smile on our face and we understand that there's a risk but there is a lot of opportunities in a market with 170 billion of market cap around and so that's attractive and then you have something like Brazil which is still quite attractive and Colombia and China because it's such a big market and that's another thing like I don't know if you remember but I think that last time that I was on the pod We were discussing the fact that China had become very uninvestable in the narrative of many investors. >> And it's it's funny because I've been telling clients over the course of the last few months uh many of those people I haven't heard them recognizing that China was one of the best performing markets in the world in 2025. >> And the opportunity set in the cheapest quintile is still quite attractive in that specific country. But then you go to the other side uh you look at the one that the one is looking very punchy and so you have a country which on a cycllically adjusted PE is trading at something like 32 times or 30 times cape and then you have India and India has always been recognized to be like as being one of the most expensive markets in the world. Then India is like 35 36. So you have India sorry Taiwan now very close or closing that gap towards India. And then in Tai in Taiwan then you have this one amazing company. It's a very good company. TSMC is making 13% of the benchmark nowadays. It went from 4.5% a couple of years ago to 13% today. >> And it's trading at 65 times cape. That's >> I think that's punchy. Um, and so I don't know. So is that is that then skewing the results a little bit because they've got such one one gigantic company that's twice as expensive as the index and then is everything else underneath that like not quite as expensive or is it it all run up in sympathy? >> You mean in in in Taiwan? >> In Taiwan. Yeah. Yeah. >> So I think I think it's not only TSMC. I think that a lot of the tech because if you you think about what plays in emerging markets plugs into the whole AI theme that's Taiwan and that's Taiwan tech across the board and so I'm not an expert but I think that uh in the eyes of many people TSMC is a pretty solid company. There's no doubt about that whether it's worth 65 times and who knows. I don't think but that's just me. But there are other companies with very punchy valuations in the tech sector in Taiwan that some people might actually say well actually those businesses look a little bit more fragile or there are less uh I hate the word modes but I guess less mode they're less multi I guess. Do you so you say that it's it's [snorts] countries that drive returns rather than sectors. So you don't see you know I think energy's oil's been pretty beaten up for an extended period of time. Energy looks pretty cheap to me. So I think that in the context of EM I mean we think about it in terms of countries but the I mean like take financials for instance financials is quite representative in the in the index and just as financials historically over the last or at least over the last 15 or 16 years the sector as a whole has been relatively cheap in EM that's still the case people just hit the banks regardless where they are >> and then in in EM you will find more cyclicals metals and mining represent the index And those were relatively cheap in the past and now they have been rerating quite powerfully because materials are rerating everywhere else and M is not um won't stay away from that specific trend. Um but I we tend to look more at countries. I think that countries are more it's more interesting to think about it in terms of countries. I mean, if you think about it, if one bank uh hiccups in the US or in Europe, then all the entire financial system goes down or the stocks fall and and there's a little bit more of uh you feel more uh that there's going to be an impact. It's going to spread around. If one bank goes down in Kazakhstan, it doesn't have really an impact on bank contagion of that. >> Yeah, exactly. It doesn't it doesn't really works like that. >> And so they are less connected, I guess. Do the I imagine that the among the banks it's the regulatory regime the local regulatory regime drives a lot of the risk and return I guess. Is that is that fair? Well, they they're all they're all sort of traded as a as a monolith. >> The the bank or the asset class? >> Yeah. Well, I I mean the asset banks as an asset class. >> I mean in the context of M I I don't think so. I mean the beauty of banks in the context of EM is that they are still very old plain B money the business model is still what banks were in the late 19th century most banks just >> capture deposit the extent alone and they capture the spread and you don't find investment banking or the insurance line is very small or fish or the like other lines of businesses don't tend to be as developed as as somewhere else and so you are still dealing with your traditional analysis on is the balance sheet uh strong in terms of the capital base and what does that mean in terms of their core equity core equity 31 how the loan to deposit ratio looks like and then a big question about whether or not you can believe the non-performing loans that are going through the P&L on the buildup of provisions on the balance sheet if that if you can believe that and then well that's people will debate on whether they they actually trust that >> one thing that Yeah, >> I was going to say the um a common uh you know old Wall Street saw is that uh EM is kind of the tail of the whip. So you know if if the US let's say the S&P 500 were down 20% tomorrow. Do you feel like EM would also bear the brunt of that and maybe even be worse? I mean obviously you're starting at a much different valuation point but does that protect you at all in valuation or do you think EM you know you're just as likely to be down 30% if the S&P was down 20 because when panics in EM is sort of like first on the chopping block that of in people's minds >> I mean it depends on what's driving that draw down if the draw down is at the rating of many AI related stocks then those very I would expect those very pricey components the index to actually do rate. Well, the uh Dan Rasmosson from Bdad uh he wrote a paper a few years back which was all about investing in crisis and and and he applied that to emer markets and his conclusion was the best time to invest in emer markets as an asset class is when there's a crisis that is not being originated in emer markets. So EFC and COVID and so and actually you can see that because then people panics and EM as an asset class is a risky asset class then it goes off but the crisis is not being generated by >> so if that happens I think you just sell everything else and just close your eyes and buy EM across [laughter] the board and and actually I think that there's there's there's the data that he put out and it's quite compelling and and you have seen it in the past and that's very different from a crisis that is originated in the EM base like a crisis in China because >> in Japan or you know >> the political yeah regime or whatever. Um which when that happens I think that his research showed that it just takes much longer for the market to recover from those specific uh periods of crisis. Do you find that there are a lot of uh sovereign government shareholders in emerging markets and and how do you deal with them when you when you do? >> So I think that depends very much on the on the on the country by country. Um look I think that uh SOE in general had a have a bad reputation just because the quality of management might not be there. Uh people think that they're always always going to mistreat minorities uh and they are just going to be poor capital allocators. And in our experience, it's all it all it all comes down to the price that you pay and whether or not you're being compensated for taking that specific risk. And you invest in China and some companies uh have SOE that are poor capital allocators, but so are the privates. And you have some S so SOE that are actually quite good capital allocators and they have done well and they look after all stakeholders >> and so I I just think that in EM EM tends to be I know that every time that you uh talk to someone that invests in the asset class they will mention something along the lines of you cannot think about it as a as a monolithic block because it isn't and it all depends on where you are and I think that it all depends to the price that you're paying and whether or not you're being compensated. for taking that risk. I I'll tell something else. Look, and I think that I mentioned this before or maybe I mentioned that to you guys in private. Um people were saying that you should not invest in sos in China. Jack man, Alibaba was not an SOE. And when he pronounced the most expensive words in finance, in the history of finance, he took down Alibaba and the entire tech sector with him. >> And the fact that it was none of those companies were SOS. That's true. >> What do you >> I mean you have the US government buying 10% of Intel. Like what's Tell me the the difference here on some of these activities. [laughter] >> You you you have the US telling some companies that they cannot distribute dividends or do buy. Uh I I that's pretty cheap and pink. >> Maybe shouldn't be throwing stones in glass houses perhaps. Juan, tell us a little bit about your investment philosophy and your strategy and how you sort of implement that. >> So, we are uh Dubai investors. We screen the market. We're only interested in the cheapest print of the market. Um and that will we run a screen and that screen you can choose whatever valuation metric you want. We have a tendency to prefer the cyclically adjusted P just because it captures inflation in EM and inflation is important and has always been around and some countries is more relevant than others but in reality you can choose whatever valuation metric you want in terms of the cape uh that cheapest quintile is as I mentioned before trading at something very close to nine times 9.5 times that should the cut should give you anywhere between 400 companies and we have a heat map and that heat map shows countries and sectors. And then there's a very good uh visual way to just spot where are the best opportunities. And there are three ways to choose what you are going to research. The cheapest if there's no crisis than the cheapest in that specific uh matrix. It would be weird to call yourself a value investor. And if you have 400 companies, go for company 399 when you have 398 cheaper options. Um what does happen very often is that there's a crisis or there's a country under a lot of pressure or where there's a lot of uncertainty. So take for instance China in the 2022 2025 period or Indonesia today for whatever reason. If that's happening then we deep that specific country just because we believe that there is an increase in probabilities that you will find uh something that is quite mispriced. Um we did that with Chile with a lot of success when the political election uh of the country was turning left and there was a lot of noise about the rewriting of the constitution and uh the water rights and this and that and the market sold off um and then like when the uncertainty was removed and the market just reerated and absent those two we also see that when it comes to value investing in context of em people tend to associate value while investing with stateowned enterprises in metals and mining and oil and gas. And yes, those do exist in EM. And yes, if you buy them at the right price, you should do well over time. But the asset class is so inefficient that you find value in many different situations. You have fallen angels, the cyclicals, you have a lot of corporate action, special situations where the management of a company is announcing that they're going to take an action and the market just doesn't do anything about it. um you have businesses under structural challenge and then our favorite bucket which is hidden growth is the fact that as with any asset class there's always a narrative at play and there's always a story playing out so five years ago it was Chinese tech today is anything that has to do with AI which mean that in an asset class that has 25 different countries people are not paying attention to 22 or 21 and there are great opportunities to find good companies growing maybe not at the 30% of the market get super excited but they are growing with a very good balance sheet and at a very attractive valuation. >> When you say use cape, are you using that at a country level or are you using that at a company level? >> So both so the matrix will show you the aggregate for the country in in as a whole and then in that specific quintile. So I think that the cut would be anything below 14 times or 13 times and it will show you the different countries. So Turkey will be at five times and then Brazil will be at 10 and then it will show you across the different sectors and if you hover on top of the cell say for instance Turkish banks then it will expand it will show you every single bank or financial institution within that specific quintile that is making the cut and it will tell you which companies are in that. So a very good example of that is in the at the end of 2024 Brazil was under a lot of pressure across the entire asset like all asset classes were selling like the currency the sovereign yields the equities the high yields and so we did a deep dive and the cheapest company in Brazil was valley which was a a very large cap company back then >> and it was trading at something like 4.5 times cape >> so we did the work and and we found out that was pretty attractive to >> when it comes to uh sometimes you try to bring those returns home and there's not as much left by the time you do the currency conversion. How do you think about hedging for currencies? >> So we don't and the reason for that is the following. We go into an situation with the mindset that we're going to own whatever business we buy for at least five years. And the reason for that is whatever is happening there's uncertainty. Whatever the problem is, it will take some time to get sort out. And so if you are going to hedge the currency, it's going to be extremely expensive to do it. If you're going to hold that security for the next five years. The other thing is and it's not perfect but the the the aspiration is that when you are entering a country where there's a lot of uncertainty that uncertainty is already priced in across the board. It's already showing up in the sovereign yields in the corporate bonds in the equities and in the currency. So it's not perfect. You might still find yourself in a situation where the currency could uh keep falling. But we have found over the past that once we get into a country where there's a little bit of panic, the the sell off has already sort of happened or that's at least the hope >> and we tend we tend to think in terms of dollar we we understand and we think in terms of dollar returns which is what matters. So it doesn't really matter if you buy I pitched Telecom Egypt when I was joining Ches back in 2017. That was my pitch to them and the in local currency did amazingly well like 100%. But in dollar terms it was flat or five or seven whatever [laughter] that is. >> Yeah. >> And so yeah I mean you didn't lose money but it wasn't great. >> Well and then theoretically a lot of times there's an export driven component to these businesses I would imagine and therefore a little bit of currency devaluation actually kind of helps you be more competitive on an export basis. >> Yeah 100%. Especially if you are investing in businesses that are cyclical in nature uh your commodities or businesses that have uh a footprint that is more global than than local. Um yeah >> another question on is there anything that any countries that are no goes for you and like what what would be required for you to put uh you know on the on the do not invest list for you? So, no, we I think that there is no such thing as an an investable asset. It's all about the price that you're paying for the asset and whether or not you're being compensated for taking that risk. >> How about Mars though? Are you ready to >> But >> is that EM enough or is that Frontier? >> Yeah. Yeah. Exactly. I But having said that, I mean, it would have to be from a a regulatory perspective mandated that you cannot actually invest in those specific countries. Now having said that, look when you every time that you read about finance theory and markets and investing, the textbook example is always like you need to buy something like super cheap that's going to grow with a very good balance sheet and all of that. And and you know where you find a lot of that in frontier markets, >> but frontier markets are very risky for a reason. and they are less liquid and they are more prone to changes in the macro and political environment where you might get stuck in a way that well actually that's what the price is telling that's why it's at two times P or whatever >> so and so it's not an investable you just just need to be very careful we I always we always tell clients when people are pitching EM as an asset class it's an amazing asset class it has from macro perspective all the growth going forward the demographics in some places the youth u the the younger uh populations the GDP per capita but the one thing that they never say that em as an asset class is a risky asset class and you need to be compensated for taking that risk and so just don't get carried away you know like when um you know Joel Greenblat's book on special situations in the 1990s when he was talking about bankruptcies he said approach them with approach them with an open mind not a hole in your head >> I think that that applies to emerget all the time >> do you travel to the markets to you know what does that achieve how important do you think it is >> so I I've done it in the past and my manager bureau German she has done it as well over the course of the last five years since we launched the strategy we have not really done any visiting I believe that it's it's it's important to travel to many of these countries just because just by being being there you understand what that culture is and how it operates and the different brands and the shopping mall and the stores and all of that. But doing the the the visits to the companies, number one, many of those companies will come to London at some point. And number two, all the information that they can give you, it's already publicly disclosed somewhere else, >> right? And so what you don't want is or what we try to avoid is is being biased by the narrative that management might bring to the table and we try to allow as much as possible for the numbers to do the the talking. >> Well, that brings up another point though. How do you feel about the quality of the accounting in frontier and emerging? >> I again I think that you need to be super careful. So we actually in our process we build models that go back 10 years in time because we want to actually cross check the accounting over time and to be pick up um red flags along the way. But I would say that accounting in many of these places has meaningfully improved over the course of the last 25 years. Um and I you look at the disclosures of the companies that are listed in Hong Kong. Hong Kong exchange is pretty punchy in terms of what they require in for many companies to to disclose. But then like you have MSI and what MSI is telling Indonesia is that their disclosure and transparency is not very good. Hence why they are threatening the country to actually be downgraded to Fier. So I mean there's a point about that. I find it a little bit funny that they do have an issue with Indonesia but they don't have an issue with all of the sholles in Korea but that's I guess another another topic >> right? I mean Buffett's observed that he he thinks the accounting now is tells a worse uh version than it did 30 years ago in the US. So >> because because the capital gains flow through the earnings statement on a >> basis. No, that's even more broad than that. More like oh we we put it in a footnote but like to actually help you understand the business. The accounting is much more obscure than it used to be. >> Yeah. I mean I mean yeah the accounting is where it is. I mean you need to make a call on whether or not you're going to believe what the numbers are telling you. That's some of the issues that people feared with the accounts in EM. But that was the case when when the when when UK investors were allowed to invest in European companies in the 1970s. They had that same fear like I I can I cannot trust the accounts. I cannot trust the account of the European companies. And then with time people actually grow into it and they understood a little bit better what the accounts meant. Yeah. I mean, could you have you were buying a uh a company in Deadwood uh in the 1870s? Did you trust the accounting of [laughter] the I mean these things are all just works in progress, right? >> Yeah. Exactly. I mean there are things like when we are checking the accounts we always look at has the auditor changed in the last 10 years and why and I mean that is is super is a very simple check but it's so powerful because many times when the when the auditor auditor is changing is because there was something happening before um and then you make a judgment call whether or not the the new accounts or the council the last five years uh after the change in the auditor are a good reflection of what the business is actually doing. >> It's mostly big four or I don't know whether big seven or whatever the the slightly bigger group than big four is the local office of some big four accounting firm. >> Um no I think still the big four. There are some in some countries you will still find your local auditors that you might not recognize but then you can just cross check whether or not they are real. You can ask the sell side. You can do a little bit of digging. There are some countries where the big four have acquired a local and and they keep still the local name but it's the big four four behind that that doesn't really I I think that I don't know which of the big four has been involved in like 80% of the frauds in China over the course of the last 10 years. Uh the fact that the big four is there might give you a little bit of comfort but but like like >> yeah whenever you big five before that [laughter] that's a good point. >> Yeah. [snorts] Uh that's the top of the hour. Uh let me just give a quick shout out in JT. I want to do some uh vegetables. Uh got a good spread today. Tallahassee, Yorkshire, Pedatik for Israel, what's up? Serbbertton London suburbia. Thank you. Oregon City, Oregon. Jupiter, Florida, Kennaur, Georgia. Boyisey, what's up? Breenidge. Limmerick City Island. What's up, comble Texas Philly Charlotte? NCR Delhi, Transylvania, Romania. That's uh that's a good one. Goththingberg, Sweden. Good to see you again. Uh JT, take it away. >> Sure thing. Uh I thought that Juan might get a kick out of this this week's veggies. So, I've been saving it for a little bit, but uh so I want to look at a behavior that's that's really feels like it's been trained into markets over the last decade and a half, which is is buying the dip. And you know, at first, you know, BTFD was a was a thesis. You'd see weakness. Maybe you'd assess the policy, balance sheets, valuations, you know, recession risk, and you decide whether the expected payoff justified that risk and and maybe even, you know, try to price uh the Fed put, you know, what was that worth? And but when a behavior gets rewarded repeatedly, it stops being a thesis and starts becoming just a natural reflex. And this isn't because people are necessarily lazy. It's because our learning systems compress what works into something fast and and quite literally calorically cheap to execute. So here's the question that really matters. What happens when the payoff function changes but the cues stay the same? So in markets this core payoff function for dip buying has been dominated by the price of money really like you know real rates liquidity discount rate uh all that's applied and it's all been going down right and we had a a zerp period forever nerp even uh and when the when the price of money falls duration gets rewarded and multiples expand and draw downs are shorter and shallower and when the price of money rises and stays up that kind of mechanical tailwind wind obviously weakens or maybe even disappears and that same draw down can be a completely different animal. So there's actually a clean laboratory analog for all this which was the psychologist Anthony Dickinson in the early 1980s. He had rats where he trained them in a simple box. They pressed the lever and they get a little food pellet and you know it's a very stable contingency a repeatable trials. Over time these rats learn the rule and and they pressed very efficiently. They push the button they get a treat. push the button, get a treat. But then Dickinson devalued the reward. And he did that he outside of the box. The same pellets were then paired with a nausea inducing chemical. So when they would the rats got sick from eating the pellet, they recovered and and then afterward they avoided that pellet when it was offered directly to them outside of the box. So they clearly knew that the pellet had become undesirable. Well, now here's the critical test. They put them back in the lever box after this. And you know if the if the lever pressing was goal directed like pressing in order to to obtain a specific outcome then pressing should decline once that outcome has been devalued right like we see like the outcome and we say okay we don't want that anymore don't push the button. Uh and for many rats that's exactly what happened. They they reduce their pressing. But the overtrained rats those that had pressed hundreds of times for this magic button they often did not. like in fact they just kept on pressing at the old rate even though they would refuse the pellet when it was handed to them outside of the box. So same knowledge but very different control system actually. So this is a real key distinction of what's happening gold- directed behavior versus versus habitual behavior and goal- directed behavior is is outcome sensitive. So it uses a model in your head of if I do X Y will happen and then it updates that value as Y changes in the brain. This kind of evalu evaluation leans on your cortical like neo you know your newer part of your brain uh and it's involved in planning and inference and and it helps represent like what is this outcome worth right now and that's like your system too thinking really now habitual control is different it's it's stimulus and then response the Q appears the action fires it's learned through repetition and reinforcement and it can it run with minimal minimal evaluation of the current value of the income it's it's that system one thinking so and the basil ganglia as part of your brain that is at the at the heart of this and you know these things are not just for like movement they're they're also selection machinery for action. So with training uh control can shift from more associative outcomes sensitive pathways towards more like just habitual pathways like you're just going to basically hit the bid. Uh so [clears throat] the now let's map this kind of back to the markets and for a long stretch after the GFC the environment has just repeatedly rewarded this one pattern like buy every single weakness catch the rebound uh monetary policy has been accommodated this whole time liquidity is quite abundant rates trended lower multiples expanded and the queue basically was the draw down the market you know would have a tantrum about it the the response was was you know buying and all the rats hitting the lever, the Fed would panic and then intervene the then the your reward your pellet that you got to eat was uh this recovery and it was just like kept happening over and over again, right? I mean, when was the last time we didn't see that play out? Uh so it this this is like the important thing to think about too is this. This isn't really it's not really stupidity or lack of discipline that's happening. Like these poor rats were overtrained. Like they weren't confused. They knew that the pellet was bad. It's just the part of the control in the brain that was driving the behavior didn't it had this this not the context was different. So I think that might be a a useful way to understand why regime shifts can feel sudden even when the ingredients have been changing for quite a while. So these these habits don't update just because new information exists. They update through experience usually through repeated prediction errors. And you know, one failed rebound might get shrugged off, two starts to get rationalized, and it it's it takes a series of disappointments before the system reallocates control back to the deliberate evaluation. And my hypothesis is that it's going to require a fair amount of abuse to desensitize all of the dip buyers that have been pushing the, you know, little lever for the last 15 years. Uh, [laughter] so here's a here's a quick quiz to bring, you know, Toby and Juan back into this segment and and outside of my saliloquy. So, multiple choice, no pressure. Uh, if a rat refuses the pellet when it's handed to it directly, but keeps pressing the lever in the box, what's most likely going on? Is it A, it forgets what the lever does? B, it's it's hungry and just being a drama queen. C. The behavior has become habitual and isn't updating to the new value of the reward. Or D, it's trying to keep collecting its rat management fees. [laughter] >> Ah, good one, JT. C. C. >> So, yeah, of course, everybody knows the answer is C. Uh, I just like to give jokes in once in a while. Um, so, but once you see the the structure of this, hopefully there's some practical implications. Uh, the point is not never buy the dip. The point is don't confuse a a trained response with an evaluated decision. So next time you want to smash the, you know, BTFD button. Maybe run a quick little audit like write down the mechanism that converts today's draw down into tomorrow's rebound, not just a habit. Like what what specific evidence would you look for to confirm it? What would falsify it? Like over what horizon? uh and if you can't articulate those in advance, you're likely executing a habit rather than actually thinking through a thesis. So, um I think we just have to be careful that repetition builds this efficiency which is great most of the time in our lives, but it also creates an inertia that can be dangerous and you makes you miss the turn. Uh and and unfortunately pain is probably required to update the wrong habits. Uh and so we will all find out together when this actually plays out, but uh I thought I thought Juan, you might enjoy that one. Yeah, that was extremely good. Thank you very much for that. >> What do you think that is? A flush in the markets. >> A full flush. >> I mean, I'm going to editorialize a little bit more than I normally like to do, but I would say I think it probably has to look like a 2000 to 2003 scenario where it's just day after day of like the market going lower, you buy, it goes lower again, you buy, it goes lower again. It's just an excoriation uh of the bad habit and and eventually when everybody's like I can't do this anymore. I can't take this pain anymore. That's when you bottom uh and then you start to to recover. >> And I think that I read somewhere that during that specific period of time people forget that I mean there were days or months where the the market was still going up. It's just that the trend was still downwards. >> That's right. Yeah. you got big rebound and then you gave it all back and then more and then you just do that, you know, keep doing that over and over again and then your heart gets broken. >> Yeah. >> I mean I was um it's so interesting because sometimes we meet with or we we hear from capital allocators like while investing has become this asset class that is considered to be >> untouchable. No. Well well yes >> radioactive. [laughter] It's a it has a pretty bad vibe to it. But it it is it is associated with risk. But proper value or value investing doing done the right way is supposed to be a safe way to approach the market because it's all about embedding a margin of safety on what you think anything is worth and and embedding that specific protection downward. You think about the fact that over the course of the last maybe almost 20 years, no one has seen while investing properly work. For a new generation of investors, that's not the way to go at all. >> Yeah. You buy a you know a bulletproof business for 60 times earnings and then you're you're not taking any risk because of the quality of the business, right? >> Yeah. I find it absolutely fascinating that software companies are becoming distress assets at the moment when like only 24 months ago they were right >> uh hold forever businesses it didn't matter what price you were paying for them because they were so safe that nothing was going to happen. It's some of the price charts from like 2021 peaks to today are just absolutely amazing to like what were you thinking in 21 uh and how did you be so far off from >> from what it looks like today? I mean it's and the businesses necess aren't necessarily the businesses look pretty normal throughout that entire thing. Like they're looks like they're growing at like they're what you would expect them to do. It's just the expectations got so far ahead and now maybe some of them the expectations have gone so far behind. I don't know. Markets be crazy, man. >> U two two things. I missed I missed the main streets of Jared's Cross and Midflight Quantis Quantis Midflight Across Oz. Thanks for both you guys joining. Uh I'm glad I grabbed you. Um, I've >> I've had this thesis that I've been like putting up on Twitter for a little while that basically there's market capitalization weighted float adjusted spy and there's everything else in the world. So, you know, that means equal weight. Um, >> is this the meme where like the the tupa is like right in the person's face and it's just blasting? [laughter] >> I I'm I'm going to say it until I mean it's maybe it's turned around. I don't know. But um you know values cyclicals um midcaps small caps and I guess uh emerging markets >> and probably XUS like everything else has suffered as a result. So, I feel like everybody in the world should be basically watching that relationship of um market cap spy to equal weight spy because when that relationship goes the other way, it gives everything else in the world a chance, which it has been since like mid October last year or >> jinx it, Toby. >> Well, I got to I got to talk about it because it's [laughter] >> because it's the it's the longest run in like two years. But >> but but that has that that did happen in you know like post pandemic there was like a 20 21 or two it it like looked like it had returned to and by the way that's the normal over a 100red years plus of data that's the normal direction equal weight outperforms market capitalization weight because small tends to outperform large and that's because they tend to grow their earnings faster. That doesn't happen all the time and that's been one of the little anomalies over the last few years. I just wonder if um I I know that I know that emerging had a good year last year. So emerging kind kind of started the year pretty well. What why why do you think that emerging has sort of started to look a little bit better? Was it just the valuation was so dis >> Well, I I I think that it was um look in the past it has been very difficult to allocate to anything outside of the US. I mean, if you put yourself in the shoes of a capital allocator in the US, say you you're managing an endowment and you allocate 5% of your capital to Yam or the course or any other asset class outside of the US over the last 15 years, it's been very painful what that that has cost that person in terms of performance, right? And so, I mean, I think it goes a little bit back to J >> and prospects. >> Yeah, exactly. Goes a little bit to that piece. I mean, if the markets keep going up, you just keep allocating to it until something breaks. Because even if even if many of these very uh uh smart capital allocators know that they are suffering from home bias, even if they know that they need to diversify away from the US, it's been extremely painful to do it. >> Yeah. >> So I think that it requires that that big correction for them to justify and then like capital will always kind of be chasing performance, right? I mean that's that's >> think about it from their perspective like am I gonna make a career bet on Kazakhstan? Like what do we Let's be real. I mean >> Exactly. Yeah. Yeah. And that's pretty that's that's pretty punchy. Yeah. That's pretty punchy. It's very difficult. It's it feels very difficult. >> Yeah. Particularly because these companies when you buy them I mean the the the reason that you get a discount in a business is because there's something not everything's gone right in the business >> and everybody knows how bad it is, right? Like that's the >> Yeah. Like you >> everyone could give you 10 reasons why this is a stupid idea. >> Yeah. >> Yeah. But but those are the best risk adjusted returns because the the the price tends to be so low that that you're you're placing pro I think that's the key. You're placing probabilities in your favor. That doesn't mean that if you allocate capital to Kazakhstan, nothing bad is going to happen because you're buying a bank with an ROE of 40% compounding every single year trading at five times P. doesn't mean that you're not going to lose money because there's a risk attached to investing Kazakhstan. Just means that probabilistically you're the odds are more in your favor than doing other wars. >> Well, I have a question. Uh, one hypothesis I've always had about like why value studies have looked really good in back tests is that just by their mechanical nature, you're taking all the like macro call things that you normally would want to think about out of it and it's just like you're just buying cheap. You don't have any opinion about where rates are going or currencies or uh, you know, regime changes or anything. You're just buying the cheapest stuff. How do you kind of square being able to talk to people about inevitably macro things are going to come up when you're in the middle of this? How do you square it? Uh trying to maybe avoid as much macro as possible while still maybe be mindful of it. Like it seems like a really tough balancing act there. >> So that's why the screen is based on just one metric and that's evaluation metric and it doesn't have anything else. >> Yeah. And look, I mean, I'm not going to say that macro is not important in the context of EM it is important. It's a big driver. >> But the vast >> how do you know though? I mean that's the just because it's important doesn't mean it's knowable. >> Yeah. So that is the thing, right? So the vast majority of people approaching EM as an asset class, they follow some sort of process that is first top down trying to get the countries right at the macro level and then >> what's think and then >> Exactly. and then doing the stock picking in those specific countries. >> Yeah. And but but what fascinates me about that is that we know that getting the macro right in one individual country over the next six months is almost impossible. But then trying to do this exercise with 25 different countries, the interlinkages in many of these countries with one another and then the influence that the US policy will have and the waterfall of that policy into many of these countries that's almost impossible. And so what we tend to say is we are macroaware. We're not macronet. we sort of understand what's happening on the ground. We don't want but we don't want to make our stock selection based on Korea is going to grow more than Indonesia. Hence, I'm going to allocate capital to Korea because actually we believe that the lower the price you pay for any asset, the higher you expect the return should be on average over time. And when there is a lot of noise, then the opportunity set is richer, which means that you should be able to buy I mean the misconception is that you're always buying something bad. And yes, those do exist. And probably yes, if you buy them and you get them right, you are going to get some good riskadjusted returns. But again, when the country is selling is selling everything and so you should be able to find some really good companies when everything is under a lot of stress. And so to answer your question, we try to be again we are aware of what's happening, but we don't allow that to let the investment process. Does it feel like today there's more kind of hot money chasing countries and ideas around than maybe 15 years ago, 20 years ago, coming and going? >> Um, I don't know. It's a good question. I I would like to think that markets are have evolved more today and em as an asset class is is more it has made way more progress than people give them credit for >> and I don't think that you see I mean you think many of these countries are quite wellrun from a macro st point of view like many of the central banks when they saw that inflation was coming uh during the covid years they move way ahead at the way way way faster than the developed counterparts. Um their finances are sorted in many in many case not not all. >> You mean moving rates up at the central bank level? >> Yes, exactly. And so they and and and many of these places have had uh a more prudent macro behavior over the course of the last 15 years at least relative to to the past. Um I think that I mean many of the risk in many of these countries is still you have political uncertainty. Many of these countries are very young in nature. Um, and so >> older than the US a lot of >> Yeah, maybe. Um, but I think that I think that people are I honestly I I don't know if flows have changed in in in a way that you still see that hot money that you were seeing before. I mean, I think I think it still happens in some countries, right? in some sectors. I I would say that what's happening today with Taiwan might be uh uh an example of that. And maybe Chinese tech five years ago, maybe I don't know. When a country when a country gets hot, it's it's it's it's the same behavior that you'll see anywhere else. >> The cognitive dissonance between like hot on Taiwan, but China's uninvestable makes my brain hurt. Ah, no. You that I love that bias. I love the [laughter] because No, no, no. It's like it's because when it comes to many markets, you like there there are human biases regardless of where you are. But when it comes to many markets, you're compounding all of these biases. And so um you have like when people say China's uninvestable and then you ask them why is uninvestable and then they will list the macro the autoc autocratic government uh the real state and somewhere in that list there's the possibility that China might move against the one and then you ask them okay so how much are you invested in Taiwan and they are like 20% 30% in TSMC or this is actually a fact this is a 93% of all longies own TSMC in some sort of capacity and the average weight of all those longies are is very close to 10%. So they are underweighted. So I think that they recognize that maybe the valuation is a little bit stretched but also I think that many of these funds are kind of bouncing against the ceiling of how much they can allocate to one specific company which tends to be 10%. Um but if you think that China is uninvestable and in one of those reasons one of those reasons is that it might move against Taiwan then you cannot have 20% of your capital in Taiwan. Yes, that was that's why my brain was hurting. [laughter] >> It gives you a headache as well. >> Is emerging mostly a bet on basic materials and like local banks financials? Is there is that the like if I think about Australia which is not emerging but Australia and Canada >> might not be a real country. We're still we're still waiting to find out about that. >> You know, if you look at those two indexes, they're dominated by banks and basic materials. And so the behavior of those countries is sort of dictated by the the behavior of those sectors of you know when the commodity super cycle was a thing in the early 2000s Australia did very well but less so when it's a tech dominated market as it has been over the last 10 or 15 years. >> It's not these like impenetrable rocksolid businesses like software. >> That's [laughter] right. That's right. So >> I think that that's right. I think that I mean one of the things that makes investing in EM a little bit difficult is regardless of how many companies are listed on a country basis you still have five companies that will dominate that specific like benchmark and usually it's either a telco telos tend to be quite big in the context of y banks or materials and that's that's a reality maybe a consumer name and healthcare real estate uh tech are a little bit under represented and so that's I when you look at the benchmark it's I mean 60% of it is pretty much greater China and it's that's Taiwan uh China Hong Kong listed names um that's where there's a little breath and then in India that's that's the other place where there's a lot of breath maybe Brazil South Africa but if you go to a place like Colombia I think that 60% is the Colombian uh I might be getting this wrong but I think the 60% of the benchmark is the Colombian stateown oil and gas company campaign I was actually checking before the the we came online the Cosby today two companies in the Cosby which is South Korea account for 38 38% of that index and those are Samsung and high that's that's a pretty punch concentration for one of the most developed countries EM >> it's not quite Nortell and Canada but it's getting it's pretty punchy >> when when gold and silver were going bananas a few weeks ago there was a lot of talk that it was Korean buyers of Korean speculators in gold and silver. Do you do you have any idea? Have you heard that? Do you know what that is? What I'm talking about? >> I thought I I thought it was I heard that it had something to do with China. But um >> Okay. >> But no, I didn't heard the the Korean bank. I have no idea. >> When you look at the consumer discretionary, there's really very little consumer discretionary around the world except in the US and China. I was surprised by that. There's a there's quite a few big Korean discretionary in China. Do you guys you guys look at that stuff in in China? Like to me, if I if I was unless you have that sort of specific reason to not invest in in China. If I look around the world, like I think China's kind of there's a lot of interesting businesses in China. A lot of big interesting some of them are replications of what we've got in the States and some of them are sort of new things. Do do you I mean are they just too expensive the big stuff there for you guys to look at or >> No, not at all. I mean we've owned some consumer names in the past. Um I I don't know and and also like a company like Alibaba is that tech or is that consumer? And I think that actually it's actually it's classified as consumer discretionary. I think >> that's the sort of stuff like it tends to be we tend to call it tech but I think that I think it's more consumer discretionary. So I think of stuff like Yeah. Yeah. >> Henent Pindu do Alibaba like all those kind of things. >> Exactly. And so yeah, for sure. I mean we've owned Alibaba in the past. Um they've owned BU uh Pindoo Duo. Um Pindoo is is it's quite interesting. I mean you look at the topline growth expectations that's still a company that it's supposed to grow at anywhere between 9 to 10%. At least that's what the street is kind of expecting. Uh but somehow the market is not very happy about that type of growth. But like how many companies would love to have that kind of growth somewhere else, right? The thing I took away from our trip to to China last year was that there are even if something is big and growing very very quickly, it can be just wiped out very quickly in China. That the competition seems to be just ferocious. >> Yeah. Oh yeah, absolutely. Um yeah, I mean that did you did you read that uh some officials or some employees of Pindoo kind of had a fist fight with the regulator? or some someone from the regulator a couple of [laughter] months ago. I don't think >> very much with the story. >> Uh I think that that's a pretty bad idea. Uh but no. Yeah. I mean it's a very competitive market, the Chinese market. It's a very competitive market. >> Yeah. We had a friend there say like he thought when he was buying JD that he was buying Amazon of China, but it turned out he was probably more buying Macy's. Didn't realize it. It's just things are just moving that quickly. >> Yeah. What what do you think Juan is the the valuation you you say the valuation on a relative basis for emerging markets is still pretty interesting but on an absolute basis less so because of the 35% run over the last 12 months which makes sense >> I think that um I think that in aggregate in absolute terms the asset class as a whole looks like fairly valued that's just my opinion um again One of the one of the beauties of the asset class is that there's so much in that asset class. It's >> not it's not just one block. >> So if you are actually ignore the bits that you might think that are expensive, there's so much that you can research and invest that is actually trading at very attract attractive uh multiples and valuations. >> And so it's not so much sectors, but you think Indonesia potentially because they they've been threatened with frontier rather than emerging. I mean Indonesia was already uh as a country over the last 18 months there has been a lot of uncertainty because of their political regime. So that has created a lot of uncertainty and that happens in EM all the time. From a macro point of view I think that nothing really is happening. It's just the uncertainty with the the person that is governing the country and then MSEI didn't help because they threatened the country and then the it happened what it happened. Um, but I think that uh again like at least on on the cheapest screen tower, you can build very different portfolios from that specific cohort and still expect to do well over time just because the valuations are attractive. >> Just cheaper starting ingredients on the whole cake. >> Well, what's Indonesia look like? Is it oil and gas and gold? Is it like a that kind of >> I think it's an island, Toby. Well, [laughter] it's attached to Papa Nina at least. >> Okay. >> I mean, >> which is oil, gas, and gold. >> Well, there's a there's a there's there's a meaningful coal mining stocks in there. There's a lot of mining. >> Uh there's gas distribution, the banks, the telco. I mean, it's not a small market. I mean, there's there's like good range of opportunities that you could buy in a place like Indonesia. I mean it's not like I mean I think that out of Indonesia the the cheapest country in EM and this this is based on May favors uh you know how he aggregates valuations on a quarterly basis. So I was checking the valuations that he sent in January. Then the cheapest country is Colombia but then there's not that much that he can buy in Colombia and then again why is Colombia the cheapest country? There's a lot of political uncertainty because of what's been happening over the last four years and the elections that might happen this year. But outside of two banks and an oil and gas company, there's not that much you can buy in Colombia unless you are managing very small pots of capital. >> There's like 300 million people that live in Indonesia, isn't it? I mean, it's not like a >> Yeah, it's like a It's like two I think it's 250 or something. It's a It's a pretty It's a big country. I would be curious like what uh market cap per capita would look like around the world and if it like would track pretty closely because you're you know at the end of the day you're what you really want is to own economic activity as a as an investor. So if you're had a very cheap amount of market cap relative to the amount of people, it might be a kind of an interesting initial screen to look for look for sort of like getting access to to human productivity. >> Yeah, I have never done that exercise, but I'm pretty sure that in the context of EM, not only in Indonesia, it would look pretty attractive. Um, >> Juan, we're coming up on time. If uh folks want to get in contact with you or follow along with what you're doing, what's the best way of doing that? Um, I think that the best way would be to look me up on LinkedIn. That's where I post most of my my work, my my stuff. Um, or reach out to Newberger in London. That would be the other place where they can find me. >> And uh, one called in from his vacation. So, we [laughter] we appreciate you. >> Thanks, Juan. >> We appreciate you. >> Tell your wife we're sorry. >> Yeah. And the kids. >> Always good chatting, too. >> Yeah. Thank you very much for inviting me. >> JT, any final words? >> Uh, no. I guess if you're a developer who likes investing, uh, we're always hiring at Journalytics, so find a way to raise your hand. >> BA basically. >> Yeah. Well, yeah, eventually. And uh we'll be back.
Juan Torres on emerging market value investing, China, Indonesia and Taiwan | S08 E06
Summary
Transcript
This is Value After Hours. I'm Tobias Carlile joined as always by my co-host Jake Taylor. Our special guest today, he's an old favorite of the program, Juan Torres. He's the co-pm of emerging market equities at Newberger Burman. How are you, Juan? Good to see you again. >> Thank you very much for having me again as always. It's a pleasure to be here. >> Welcome back, my friend. >> Thank you very much. Tell us what is happening in emerging equities >> strong to quite strong. >> Yeah. Well, everyone uh seems to be getting excited about the fact that the asset class has got off to a pretty good start of the year. MSEM is up something like 10% in dollar terms year to date. And and then >> max seven. [laughter] >> Yeah, it's it's off. It's up from a very good year. So 2025 it was up something like I think 35% was was the the the benchmark. Uh and and but I I am a little bit cautious just because well number one since 2010 uh EM has not outperformed I guess DM or the US I can't remember for two years in a row. So, so that's just a stat uh meaningless probably but it is a stat >> and then and then it's being I mean it's interesting because the last time that we spoke uh EM as an asset class from a valuation perspective was cheap both in absolute terms and in relative terms. Now you could make the case that it's cheap in relative terms still it's at around 19 times adjusted P. So I would guess I would say my personal opinion would be that's uh kind of for value >> but when you look at the dispersion you see some pockets of the market which are really expensive and then you see the cheapest quintile which is where I prefer to do most of our research and invest investing that one is still very cheap very attractive it's full of opportunities across the board it's very rich but the the ones that are expensive are I I think they're that are really expensive. >> So the spread then has gotten feels like more blown out than last time. >> Yeah, I think so. So and >> what kind of stuff falls into the cheap cheapest desile these days? >> So it's very rich. It's across all markets. I mean you you are able to find you should be able to build a well diversified portfolio different iteration of different portfolios um from that opportunity set just because you're finding companies across all countries and all sectors and I think that the cape on that cheapest quintile is something very close to 9 or 9.5 something like that and when we last spoke it was eight or 8.5 so that's that's very attractive and and the fact that the opportunity set is rich is is really compelling and then you will find some countries which are way more interesting than others. But for me, >> does it does it feel like the in the US perhaps where one of the knocks against the value stocks has been that like quality was sort of pretty well sacrificed as you worked your way down? Lots of cyclicality. Um does that feel the same in in uh the EM world? like as as it's gotten a little bit more like it's still relatively cheap uh but has like the quality that's in down fallen into that you know where you would look does it feel higher quality or lower quality than let's say like a year ago >> is the thing in emer markets is that what counts is the countries because when the market gets fear or there's uncertainty around the country the market won't care about the the quality of whatever you're holding is going to throw everything out of the window and so the bad and the good will go And so I we don't tend to think about sectors that much. We tend to think about countries. And then in the context of countries like things like look Indonesia, MSEM threatens Indonesia to downgrade the country from an emerging market into a frontier and then the market just sells off and it's just a threat. It's just saying if you don't correct XY Z, I'm going to do this next time around. uh and then the market goes down a lot and then I mean for for us for my co-manager and myself I mean we we go into the office with a smile on our face and we understand that there's a risk but there is a lot of opportunities in a market with 170 billion of market cap around and so that's attractive and then you have something like Brazil which is still quite attractive and Colombia and China because it's such a big market and that's another thing like I don't know if you remember but I think that last time that I was on the pod We were discussing the fact that China had become very uninvestable in the narrative of many investors. >> And it's it's funny because I've been telling clients over the course of the last few months uh many of those people I haven't heard them recognizing that China was one of the best performing markets in the world in 2025. >> And the opportunity set in the cheapest quintile is still quite attractive in that specific country. But then you go to the other side uh you look at the one that the one is looking very punchy and so you have a country which on a cycllically adjusted PE is trading at something like 32 times or 30 times cape and then you have India and India has always been recognized to be like as being one of the most expensive markets in the world. Then India is like 35 36. So you have India sorry Taiwan now very close or closing that gap towards India. And then in Tai in Taiwan then you have this one amazing company. It's a very good company. TSMC is making 13% of the benchmark nowadays. It went from 4.5% a couple of years ago to 13% today. >> And it's trading at 65 times cape. That's >> I think that's punchy. Um, and so I don't know. So is that is that then skewing the results a little bit because they've got such one one gigantic company that's twice as expensive as the index and then is everything else underneath that like not quite as expensive or is it it all run up in sympathy? >> You mean in in in Taiwan? >> In Taiwan. Yeah. Yeah. >> So I think I think it's not only TSMC. I think that a lot of the tech because if you you think about what plays in emerging markets plugs into the whole AI theme that's Taiwan and that's Taiwan tech across the board and so I'm not an expert but I think that uh in the eyes of many people TSMC is a pretty solid company. There's no doubt about that whether it's worth 65 times and who knows. I don't think but that's just me. But there are other companies with very punchy valuations in the tech sector in Taiwan that some people might actually say well actually those businesses look a little bit more fragile or there are less uh I hate the word modes but I guess less mode they're less multi I guess. Do you so you say that it's it's [snorts] countries that drive returns rather than sectors. So you don't see you know I think energy's oil's been pretty beaten up for an extended period of time. Energy looks pretty cheap to me. So I think that in the context of EM I mean we think about it in terms of countries but the I mean like take financials for instance financials is quite representative in the in the index and just as financials historically over the last or at least over the last 15 or 16 years the sector as a whole has been relatively cheap in EM that's still the case people just hit the banks regardless where they are >> and then in in EM you will find more cyclicals metals and mining represent the index And those were relatively cheap in the past and now they have been rerating quite powerfully because materials are rerating everywhere else and M is not um won't stay away from that specific trend. Um but I we tend to look more at countries. I think that countries are more it's more interesting to think about it in terms of countries. I mean, if you think about it, if one bank uh hiccups in the US or in Europe, then all the entire financial system goes down or the stocks fall and and there's a little bit more of uh you feel more uh that there's going to be an impact. It's going to spread around. If one bank goes down in Kazakhstan, it doesn't have really an impact on bank contagion of that. >> Yeah, exactly. It doesn't it doesn't really works like that. >> And so they are less connected, I guess. Do the I imagine that the among the banks it's the regulatory regime the local regulatory regime drives a lot of the risk and return I guess. Is that is that fair? Well, they they're all they're all sort of traded as a as a monolith. >> The the bank or the asset class? >> Yeah. Well, I I mean the asset banks as an asset class. >> I mean in the context of M I I don't think so. I mean the beauty of banks in the context of EM is that they are still very old plain B money the business model is still what banks were in the late 19th century most banks just >> capture deposit the extent alone and they capture the spread and you don't find investment banking or the insurance line is very small or fish or the like other lines of businesses don't tend to be as developed as as somewhere else and so you are still dealing with your traditional analysis on is the balance sheet uh strong in terms of the capital base and what does that mean in terms of their core equity core equity 31 how the loan to deposit ratio looks like and then a big question about whether or not you can believe the non-performing loans that are going through the P&L on the buildup of provisions on the balance sheet if that if you can believe that and then well that's people will debate on whether they they actually trust that >> one thing that Yeah, >> I was going to say the um a common uh you know old Wall Street saw is that uh EM is kind of the tail of the whip. So you know if if the US let's say the S&P 500 were down 20% tomorrow. Do you feel like EM would also bear the brunt of that and maybe even be worse? I mean obviously you're starting at a much different valuation point but does that protect you at all in valuation or do you think EM you know you're just as likely to be down 30% if the S&P was down 20 because when panics in EM is sort of like first on the chopping block that of in people's minds >> I mean it depends on what's driving that draw down if the draw down is at the rating of many AI related stocks then those very I would expect those very pricey components the index to actually do rate. Well, the uh Dan Rasmosson from Bdad uh he wrote a paper a few years back which was all about investing in crisis and and and he applied that to emer markets and his conclusion was the best time to invest in emer markets as an asset class is when there's a crisis that is not being originated in emer markets. So EFC and COVID and so and actually you can see that because then people panics and EM as an asset class is a risky asset class then it goes off but the crisis is not being generated by >> so if that happens I think you just sell everything else and just close your eyes and buy EM across [laughter] the board and and actually I think that there's there's there's the data that he put out and it's quite compelling and and you have seen it in the past and that's very different from a crisis that is originated in the EM base like a crisis in China because >> in Japan or you know >> the political yeah regime or whatever. Um which when that happens I think that his research showed that it just takes much longer for the market to recover from those specific uh periods of crisis. Do you find that there are a lot of uh sovereign government shareholders in emerging markets and and how do you deal with them when you when you do? >> So I think that depends very much on the on the on the country by country. Um look I think that uh SOE in general had a have a bad reputation just because the quality of management might not be there. Uh people think that they're always always going to mistreat minorities uh and they are just going to be poor capital allocators. And in our experience, it's all it all it all comes down to the price that you pay and whether or not you're being compensated for taking that specific risk. And you invest in China and some companies uh have SOE that are poor capital allocators, but so are the privates. And you have some S so SOE that are actually quite good capital allocators and they have done well and they look after all stakeholders >> and so I I just think that in EM EM tends to be I know that every time that you uh talk to someone that invests in the asset class they will mention something along the lines of you cannot think about it as a as a monolithic block because it isn't and it all depends on where you are and I think that it all depends to the price that you're paying and whether or not you're being compensated. for taking that risk. I I'll tell something else. Look, and I think that I mentioned this before or maybe I mentioned that to you guys in private. Um people were saying that you should not invest in sos in China. Jack man, Alibaba was not an SOE. And when he pronounced the most expensive words in finance, in the history of finance, he took down Alibaba and the entire tech sector with him. >> And the fact that it was none of those companies were SOS. That's true. >> What do you >> I mean you have the US government buying 10% of Intel. Like what's Tell me the the difference here on some of these activities. [laughter] >> You you you have the US telling some companies that they cannot distribute dividends or do buy. Uh I I that's pretty cheap and pink. >> Maybe shouldn't be throwing stones in glass houses perhaps. Juan, tell us a little bit about your investment philosophy and your strategy and how you sort of implement that. >> So, we are uh Dubai investors. We screen the market. We're only interested in the cheapest print of the market. Um and that will we run a screen and that screen you can choose whatever valuation metric you want. We have a tendency to prefer the cyclically adjusted P just because it captures inflation in EM and inflation is important and has always been around and some countries is more relevant than others but in reality you can choose whatever valuation metric you want in terms of the cape uh that cheapest quintile is as I mentioned before trading at something very close to nine times 9.5 times that should the cut should give you anywhere between 400 companies and we have a heat map and that heat map shows countries and sectors. And then there's a very good uh visual way to just spot where are the best opportunities. And there are three ways to choose what you are going to research. The cheapest if there's no crisis than the cheapest in that specific uh matrix. It would be weird to call yourself a value investor. And if you have 400 companies, go for company 399 when you have 398 cheaper options. Um what does happen very often is that there's a crisis or there's a country under a lot of pressure or where there's a lot of uncertainty. So take for instance China in the 2022 2025 period or Indonesia today for whatever reason. If that's happening then we deep that specific country just because we believe that there is an increase in probabilities that you will find uh something that is quite mispriced. Um we did that with Chile with a lot of success when the political election uh of the country was turning left and there was a lot of noise about the rewriting of the constitution and uh the water rights and this and that and the market sold off um and then like when the uncertainty was removed and the market just reerated and absent those two we also see that when it comes to value investing in context of em people tend to associate value while investing with stateowned enterprises in metals and mining and oil and gas. And yes, those do exist in EM. And yes, if you buy them at the right price, you should do well over time. But the asset class is so inefficient that you find value in many different situations. You have fallen angels, the cyclicals, you have a lot of corporate action, special situations where the management of a company is announcing that they're going to take an action and the market just doesn't do anything about it. um you have businesses under structural challenge and then our favorite bucket which is hidden growth is the fact that as with any asset class there's always a narrative at play and there's always a story playing out so five years ago it was Chinese tech today is anything that has to do with AI which mean that in an asset class that has 25 different countries people are not paying attention to 22 or 21 and there are great opportunities to find good companies growing maybe not at the 30% of the market get super excited but they are growing with a very good balance sheet and at a very attractive valuation. >> When you say use cape, are you using that at a country level or are you using that at a company level? >> So both so the matrix will show you the aggregate for the country in in as a whole and then in that specific quintile. So I think that the cut would be anything below 14 times or 13 times and it will show you the different countries. So Turkey will be at five times and then Brazil will be at 10 and then it will show you across the different sectors and if you hover on top of the cell say for instance Turkish banks then it will expand it will show you every single bank or financial institution within that specific quintile that is making the cut and it will tell you which companies are in that. So a very good example of that is in the at the end of 2024 Brazil was under a lot of pressure across the entire asset like all asset classes were selling like the currency the sovereign yields the equities the high yields and so we did a deep dive and the cheapest company in Brazil was valley which was a a very large cap company back then >> and it was trading at something like 4.5 times cape >> so we did the work and and we found out that was pretty attractive to >> when it comes to uh sometimes you try to bring those returns home and there's not as much left by the time you do the currency conversion. How do you think about hedging for currencies? >> So we don't and the reason for that is the following. We go into an situation with the mindset that we're going to own whatever business we buy for at least five years. And the reason for that is whatever is happening there's uncertainty. Whatever the problem is, it will take some time to get sort out. And so if you are going to hedge the currency, it's going to be extremely expensive to do it. If you're going to hold that security for the next five years. The other thing is and it's not perfect but the the the aspiration is that when you are entering a country where there's a lot of uncertainty that uncertainty is already priced in across the board. It's already showing up in the sovereign yields in the corporate bonds in the equities and in the currency. So it's not perfect. You might still find yourself in a situation where the currency could uh keep falling. But we have found over the past that once we get into a country where there's a little bit of panic, the the sell off has already sort of happened or that's at least the hope >> and we tend we tend to think in terms of dollar we we understand and we think in terms of dollar returns which is what matters. So it doesn't really matter if you buy I pitched Telecom Egypt when I was joining Ches back in 2017. That was my pitch to them and the in local currency did amazingly well like 100%. But in dollar terms it was flat or five or seven whatever [laughter] that is. >> Yeah. >> And so yeah I mean you didn't lose money but it wasn't great. >> Well and then theoretically a lot of times there's an export driven component to these businesses I would imagine and therefore a little bit of currency devaluation actually kind of helps you be more competitive on an export basis. >> Yeah 100%. Especially if you are investing in businesses that are cyclical in nature uh your commodities or businesses that have uh a footprint that is more global than than local. Um yeah >> another question on is there anything that any countries that are no goes for you and like what what would be required for you to put uh you know on the on the do not invest list for you? So, no, we I think that there is no such thing as an an investable asset. It's all about the price that you're paying for the asset and whether or not you're being compensated for taking that risk. >> How about Mars though? Are you ready to >> But >> is that EM enough or is that Frontier? >> Yeah. Yeah. Exactly. I But having said that, I mean, it would have to be from a a regulatory perspective mandated that you cannot actually invest in those specific countries. Now having said that, look when you every time that you read about finance theory and markets and investing, the textbook example is always like you need to buy something like super cheap that's going to grow with a very good balance sheet and all of that. And and you know where you find a lot of that in frontier markets, >> but frontier markets are very risky for a reason. and they are less liquid and they are more prone to changes in the macro and political environment where you might get stuck in a way that well actually that's what the price is telling that's why it's at two times P or whatever >> so and so it's not an investable you just just need to be very careful we I always we always tell clients when people are pitching EM as an asset class it's an amazing asset class it has from macro perspective all the growth going forward the demographics in some places the youth u the the younger uh populations the GDP per capita but the one thing that they never say that em as an asset class is a risky asset class and you need to be compensated for taking that risk and so just don't get carried away you know like when um you know Joel Greenblat's book on special situations in the 1990s when he was talking about bankruptcies he said approach them with approach them with an open mind not a hole in your head >> I think that that applies to emerget all the time >> do you travel to the markets to you know what does that achieve how important do you think it is >> so I I've done it in the past and my manager bureau German she has done it as well over the course of the last five years since we launched the strategy we have not really done any visiting I believe that it's it's it's important to travel to many of these countries just because just by being being there you understand what that culture is and how it operates and the different brands and the shopping mall and the stores and all of that. But doing the the the visits to the companies, number one, many of those companies will come to London at some point. And number two, all the information that they can give you, it's already publicly disclosed somewhere else, >> right? And so what you don't want is or what we try to avoid is is being biased by the narrative that management might bring to the table and we try to allow as much as possible for the numbers to do the the talking. >> Well, that brings up another point though. How do you feel about the quality of the accounting in frontier and emerging? >> I again I think that you need to be super careful. So we actually in our process we build models that go back 10 years in time because we want to actually cross check the accounting over time and to be pick up um red flags along the way. But I would say that accounting in many of these places has meaningfully improved over the course of the last 25 years. Um and I you look at the disclosures of the companies that are listed in Hong Kong. Hong Kong exchange is pretty punchy in terms of what they require in for many companies to to disclose. But then like you have MSI and what MSI is telling Indonesia is that their disclosure and transparency is not very good. Hence why they are threatening the country to actually be downgraded to Fier. So I mean there's a point about that. I find it a little bit funny that they do have an issue with Indonesia but they don't have an issue with all of the sholles in Korea but that's I guess another another topic >> right? I mean Buffett's observed that he he thinks the accounting now is tells a worse uh version than it did 30 years ago in the US. So >> because because the capital gains flow through the earnings statement on a >> basis. No, that's even more broad than that. More like oh we we put it in a footnote but like to actually help you understand the business. The accounting is much more obscure than it used to be. >> Yeah. I mean I mean yeah the accounting is where it is. I mean you need to make a call on whether or not you're going to believe what the numbers are telling you. That's some of the issues that people feared with the accounts in EM. But that was the case when when the when when UK investors were allowed to invest in European companies in the 1970s. They had that same fear like I I can I cannot trust the accounts. I cannot trust the account of the European companies. And then with time people actually grow into it and they understood a little bit better what the accounts meant. Yeah. I mean, could you have you were buying a uh a company in Deadwood uh in the 1870s? Did you trust the accounting of [laughter] the I mean these things are all just works in progress, right? >> Yeah. Exactly. I mean there are things like when we are checking the accounts we always look at has the auditor changed in the last 10 years and why and I mean that is is super is a very simple check but it's so powerful because many times when the when the auditor auditor is changing is because there was something happening before um and then you make a judgment call whether or not the the new accounts or the council the last five years uh after the change in the auditor are a good reflection of what the business is actually doing. >> It's mostly big four or I don't know whether big seven or whatever the the slightly bigger group than big four is the local office of some big four accounting firm. >> Um no I think still the big four. There are some in some countries you will still find your local auditors that you might not recognize but then you can just cross check whether or not they are real. You can ask the sell side. You can do a little bit of digging. There are some countries where the big four have acquired a local and and they keep still the local name but it's the big four four behind that that doesn't really I I think that I don't know which of the big four has been involved in like 80% of the frauds in China over the course of the last 10 years. Uh the fact that the big four is there might give you a little bit of comfort but but like like >> yeah whenever you big five before that [laughter] that's a good point. >> Yeah. [snorts] Uh that's the top of the hour. Uh let me just give a quick shout out in JT. I want to do some uh vegetables. Uh got a good spread today. Tallahassee, Yorkshire, Pedatik for Israel, what's up? Serbbertton London suburbia. Thank you. Oregon City, Oregon. Jupiter, Florida, Kennaur, Georgia. Boyisey, what's up? Breenidge. Limmerick City Island. What's up, comble Texas Philly Charlotte? NCR Delhi, Transylvania, Romania. That's uh that's a good one. Goththingberg, Sweden. Good to see you again. Uh JT, take it away. >> Sure thing. Uh I thought that Juan might get a kick out of this this week's veggies. So, I've been saving it for a little bit, but uh so I want to look at a behavior that's that's really feels like it's been trained into markets over the last decade and a half, which is is buying the dip. And you know, at first, you know, BTFD was a was a thesis. You'd see weakness. Maybe you'd assess the policy, balance sheets, valuations, you know, recession risk, and you decide whether the expected payoff justified that risk and and maybe even, you know, try to price uh the Fed put, you know, what was that worth? And but when a behavior gets rewarded repeatedly, it stops being a thesis and starts becoming just a natural reflex. And this isn't because people are necessarily lazy. It's because our learning systems compress what works into something fast and and quite literally calorically cheap to execute. So here's the question that really matters. What happens when the payoff function changes but the cues stay the same? So in markets this core payoff function for dip buying has been dominated by the price of money really like you know real rates liquidity discount rate uh all that's applied and it's all been going down right and we had a a zerp period forever nerp even uh and when the when the price of money falls duration gets rewarded and multiples expand and draw downs are shorter and shallower and when the price of money rises and stays up that kind of mechanical tailwind wind obviously weakens or maybe even disappears and that same draw down can be a completely different animal. So there's actually a clean laboratory analog for all this which was the psychologist Anthony Dickinson in the early 1980s. He had rats where he trained them in a simple box. They pressed the lever and they get a little food pellet and you know it's a very stable contingency a repeatable trials. Over time these rats learn the rule and and they pressed very efficiently. They push the button they get a treat. push the button, get a treat. But then Dickinson devalued the reward. And he did that he outside of the box. The same pellets were then paired with a nausea inducing chemical. So when they would the rats got sick from eating the pellet, they recovered and and then afterward they avoided that pellet when it was offered directly to them outside of the box. So they clearly knew that the pellet had become undesirable. Well, now here's the critical test. They put them back in the lever box after this. And you know if the if the lever pressing was goal directed like pressing in order to to obtain a specific outcome then pressing should decline once that outcome has been devalued right like we see like the outcome and we say okay we don't want that anymore don't push the button. Uh and for many rats that's exactly what happened. They they reduce their pressing. But the overtrained rats those that had pressed hundreds of times for this magic button they often did not. like in fact they just kept on pressing at the old rate even though they would refuse the pellet when it was handed to them outside of the box. So same knowledge but very different control system actually. So this is a real key distinction of what's happening gold- directed behavior versus versus habitual behavior and goal- directed behavior is is outcome sensitive. So it uses a model in your head of if I do X Y will happen and then it updates that value as Y changes in the brain. This kind of evalu evaluation leans on your cortical like neo you know your newer part of your brain uh and it's involved in planning and inference and and it helps represent like what is this outcome worth right now and that's like your system too thinking really now habitual control is different it's it's stimulus and then response the Q appears the action fires it's learned through repetition and reinforcement and it can it run with minimal minimal evaluation of the current value of the income it's it's that system one thinking so and the basil ganglia as part of your brain that is at the at the heart of this and you know these things are not just for like movement they're they're also selection machinery for action. So with training uh control can shift from more associative outcomes sensitive pathways towards more like just habitual pathways like you're just going to basically hit the bid. Uh so [clears throat] the now let's map this kind of back to the markets and for a long stretch after the GFC the environment has just repeatedly rewarded this one pattern like buy every single weakness catch the rebound uh monetary policy has been accommodated this whole time liquidity is quite abundant rates trended lower multiples expanded and the queue basically was the draw down the market you know would have a tantrum about it the the response was was you know buying and all the rats hitting the lever, the Fed would panic and then intervene the then the your reward your pellet that you got to eat was uh this recovery and it was just like kept happening over and over again, right? I mean, when was the last time we didn't see that play out? Uh so it this this is like the important thing to think about too is this. This isn't really it's not really stupidity or lack of discipline that's happening. Like these poor rats were overtrained. Like they weren't confused. They knew that the pellet was bad. It's just the part of the control in the brain that was driving the behavior didn't it had this this not the context was different. So I think that might be a a useful way to understand why regime shifts can feel sudden even when the ingredients have been changing for quite a while. So these these habits don't update just because new information exists. They update through experience usually through repeated prediction errors. And you know, one failed rebound might get shrugged off, two starts to get rationalized, and it it's it takes a series of disappointments before the system reallocates control back to the deliberate evaluation. And my hypothesis is that it's going to require a fair amount of abuse to desensitize all of the dip buyers that have been pushing the, you know, little lever for the last 15 years. Uh, [laughter] so here's a here's a quick quiz to bring, you know, Toby and Juan back into this segment and and outside of my saliloquy. So, multiple choice, no pressure. Uh, if a rat refuses the pellet when it's handed to it directly, but keeps pressing the lever in the box, what's most likely going on? Is it A, it forgets what the lever does? B, it's it's hungry and just being a drama queen. C. The behavior has become habitual and isn't updating to the new value of the reward. Or D, it's trying to keep collecting its rat management fees. [laughter] >> Ah, good one, JT. C. C. >> So, yeah, of course, everybody knows the answer is C. Uh, I just like to give jokes in once in a while. Um, so, but once you see the the structure of this, hopefully there's some practical implications. Uh, the point is not never buy the dip. The point is don't confuse a a trained response with an evaluated decision. So next time you want to smash the, you know, BTFD button. Maybe run a quick little audit like write down the mechanism that converts today's draw down into tomorrow's rebound, not just a habit. Like what what specific evidence would you look for to confirm it? What would falsify it? Like over what horizon? uh and if you can't articulate those in advance, you're likely executing a habit rather than actually thinking through a thesis. So, um I think we just have to be careful that repetition builds this efficiency which is great most of the time in our lives, but it also creates an inertia that can be dangerous and you makes you miss the turn. Uh and and unfortunately pain is probably required to update the wrong habits. Uh and so we will all find out together when this actually plays out, but uh I thought I thought Juan, you might enjoy that one. Yeah, that was extremely good. Thank you very much for that. >> What do you think that is? A flush in the markets. >> A full flush. >> I mean, I'm going to editorialize a little bit more than I normally like to do, but I would say I think it probably has to look like a 2000 to 2003 scenario where it's just day after day of like the market going lower, you buy, it goes lower again, you buy, it goes lower again. It's just an excoriation uh of the bad habit and and eventually when everybody's like I can't do this anymore. I can't take this pain anymore. That's when you bottom uh and then you start to to recover. >> And I think that I read somewhere that during that specific period of time people forget that I mean there were days or months where the the market was still going up. It's just that the trend was still downwards. >> That's right. Yeah. you got big rebound and then you gave it all back and then more and then you just do that, you know, keep doing that over and over again and then your heart gets broken. >> Yeah. >> I mean I was um it's so interesting because sometimes we meet with or we we hear from capital allocators like while investing has become this asset class that is considered to be >> untouchable. No. Well well yes >> radioactive. [laughter] It's a it has a pretty bad vibe to it. But it it is it is associated with risk. But proper value or value investing doing done the right way is supposed to be a safe way to approach the market because it's all about embedding a margin of safety on what you think anything is worth and and embedding that specific protection downward. You think about the fact that over the course of the last maybe almost 20 years, no one has seen while investing properly work. For a new generation of investors, that's not the way to go at all. >> Yeah. You buy a you know a bulletproof business for 60 times earnings and then you're you're not taking any risk because of the quality of the business, right? >> Yeah. I find it absolutely fascinating that software companies are becoming distress assets at the moment when like only 24 months ago they were right >> uh hold forever businesses it didn't matter what price you were paying for them because they were so safe that nothing was going to happen. It's some of the price charts from like 2021 peaks to today are just absolutely amazing to like what were you thinking in 21 uh and how did you be so far off from >> from what it looks like today? I mean it's and the businesses necess aren't necessarily the businesses look pretty normal throughout that entire thing. Like they're looks like they're growing at like they're what you would expect them to do. It's just the expectations got so far ahead and now maybe some of them the expectations have gone so far behind. I don't know. Markets be crazy, man. >> U two two things. I missed I missed the main streets of Jared's Cross and Midflight Quantis Quantis Midflight Across Oz. Thanks for both you guys joining. Uh I'm glad I grabbed you. Um, I've >> I've had this thesis that I've been like putting up on Twitter for a little while that basically there's market capitalization weighted float adjusted spy and there's everything else in the world. So, you know, that means equal weight. Um, >> is this the meme where like the the tupa is like right in the person's face and it's just blasting? [laughter] >> I I'm I'm going to say it until I mean it's maybe it's turned around. I don't know. But um you know values cyclicals um midcaps small caps and I guess uh emerging markets >> and probably XUS like everything else has suffered as a result. So, I feel like everybody in the world should be basically watching that relationship of um market cap spy to equal weight spy because when that relationship goes the other way, it gives everything else in the world a chance, which it has been since like mid October last year or >> jinx it, Toby. >> Well, I got to I got to talk about it because it's [laughter] >> because it's the it's the longest run in like two years. But >> but but that has that that did happen in you know like post pandemic there was like a 20 21 or two it it like looked like it had returned to and by the way that's the normal over a 100red years plus of data that's the normal direction equal weight outperforms market capitalization weight because small tends to outperform large and that's because they tend to grow their earnings faster. That doesn't happen all the time and that's been one of the little anomalies over the last few years. I just wonder if um I I know that I know that emerging had a good year last year. So emerging kind kind of started the year pretty well. What why why do you think that emerging has sort of started to look a little bit better? Was it just the valuation was so dis >> Well, I I I think that it was um look in the past it has been very difficult to allocate to anything outside of the US. I mean, if you put yourself in the shoes of a capital allocator in the US, say you you're managing an endowment and you allocate 5% of your capital to Yam or the course or any other asset class outside of the US over the last 15 years, it's been very painful what that that has cost that person in terms of performance, right? And so, I mean, I think it goes a little bit back to J >> and prospects. >> Yeah, exactly. Goes a little bit to that piece. I mean, if the markets keep going up, you just keep allocating to it until something breaks. Because even if even if many of these very uh uh smart capital allocators know that they are suffering from home bias, even if they know that they need to diversify away from the US, it's been extremely painful to do it. >> Yeah. >> So I think that it requires that that big correction for them to justify and then like capital will always kind of be chasing performance, right? I mean that's that's >> think about it from their perspective like am I gonna make a career bet on Kazakhstan? Like what do we Let's be real. I mean >> Exactly. Yeah. Yeah. And that's pretty that's that's pretty punchy. Yeah. That's pretty punchy. It's very difficult. It's it feels very difficult. >> Yeah. Particularly because these companies when you buy them I mean the the the reason that you get a discount in a business is because there's something not everything's gone right in the business >> and everybody knows how bad it is, right? Like that's the >> Yeah. Like you >> everyone could give you 10 reasons why this is a stupid idea. >> Yeah. >> Yeah. But but those are the best risk adjusted returns because the the the price tends to be so low that that you're you're placing pro I think that's the key. You're placing probabilities in your favor. That doesn't mean that if you allocate capital to Kazakhstan, nothing bad is going to happen because you're buying a bank with an ROE of 40% compounding every single year trading at five times P. doesn't mean that you're not going to lose money because there's a risk attached to investing Kazakhstan. Just means that probabilistically you're the odds are more in your favor than doing other wars. >> Well, I have a question. Uh, one hypothesis I've always had about like why value studies have looked really good in back tests is that just by their mechanical nature, you're taking all the like macro call things that you normally would want to think about out of it and it's just like you're just buying cheap. You don't have any opinion about where rates are going or currencies or uh, you know, regime changes or anything. You're just buying the cheapest stuff. How do you kind of square being able to talk to people about inevitably macro things are going to come up when you're in the middle of this? How do you square it? Uh trying to maybe avoid as much macro as possible while still maybe be mindful of it. Like it seems like a really tough balancing act there. >> So that's why the screen is based on just one metric and that's evaluation metric and it doesn't have anything else. >> Yeah. And look, I mean, I'm not going to say that macro is not important in the context of EM it is important. It's a big driver. >> But the vast >> how do you know though? I mean that's the just because it's important doesn't mean it's knowable. >> Yeah. So that is the thing, right? So the vast majority of people approaching EM as an asset class, they follow some sort of process that is first top down trying to get the countries right at the macro level and then >> what's think and then >> Exactly. and then doing the stock picking in those specific countries. >> Yeah. And but but what fascinates me about that is that we know that getting the macro right in one individual country over the next six months is almost impossible. But then trying to do this exercise with 25 different countries, the interlinkages in many of these countries with one another and then the influence that the US policy will have and the waterfall of that policy into many of these countries that's almost impossible. And so what we tend to say is we are macroaware. We're not macronet. we sort of understand what's happening on the ground. We don't want but we don't want to make our stock selection based on Korea is going to grow more than Indonesia. Hence, I'm going to allocate capital to Korea because actually we believe that the lower the price you pay for any asset, the higher you expect the return should be on average over time. And when there is a lot of noise, then the opportunity set is richer, which means that you should be able to buy I mean the misconception is that you're always buying something bad. And yes, those do exist. And probably yes, if you buy them and you get them right, you are going to get some good riskadjusted returns. But again, when the country is selling is selling everything and so you should be able to find some really good companies when everything is under a lot of stress. And so to answer your question, we try to be again we are aware of what's happening, but we don't allow that to let the investment process. Does it feel like today there's more kind of hot money chasing countries and ideas around than maybe 15 years ago, 20 years ago, coming and going? >> Um, I don't know. It's a good question. I I would like to think that markets are have evolved more today and em as an asset class is is more it has made way more progress than people give them credit for >> and I don't think that you see I mean you think many of these countries are quite wellrun from a macro st point of view like many of the central banks when they saw that inflation was coming uh during the covid years they move way ahead at the way way way faster than the developed counterparts. Um their finances are sorted in many in many case not not all. >> You mean moving rates up at the central bank level? >> Yes, exactly. And so they and and and many of these places have had uh a more prudent macro behavior over the course of the last 15 years at least relative to to the past. Um I think that I mean many of the risk in many of these countries is still you have political uncertainty. Many of these countries are very young in nature. Um, and so >> older than the US a lot of >> Yeah, maybe. Um, but I think that I think that people are I honestly I I don't know if flows have changed in in in a way that you still see that hot money that you were seeing before. I mean, I think I think it still happens in some countries, right? in some sectors. I I would say that what's happening today with Taiwan might be uh uh an example of that. And maybe Chinese tech five years ago, maybe I don't know. When a country when a country gets hot, it's it's it's it's the same behavior that you'll see anywhere else. >> The cognitive dissonance between like hot on Taiwan, but China's uninvestable makes my brain hurt. Ah, no. You that I love that bias. I love the [laughter] because No, no, no. It's like it's because when it comes to many markets, you like there there are human biases regardless of where you are. But when it comes to many markets, you're compounding all of these biases. And so um you have like when people say China's uninvestable and then you ask them why is uninvestable and then they will list the macro the autoc autocratic government uh the real state and somewhere in that list there's the possibility that China might move against the one and then you ask them okay so how much are you invested in Taiwan and they are like 20% 30% in TSMC or this is actually a fact this is a 93% of all longies own TSMC in some sort of capacity and the average weight of all those longies are is very close to 10%. So they are underweighted. So I think that they recognize that maybe the valuation is a little bit stretched but also I think that many of these funds are kind of bouncing against the ceiling of how much they can allocate to one specific company which tends to be 10%. Um but if you think that China is uninvestable and in one of those reasons one of those reasons is that it might move against Taiwan then you cannot have 20% of your capital in Taiwan. Yes, that was that's why my brain was hurting. [laughter] >> It gives you a headache as well. >> Is emerging mostly a bet on basic materials and like local banks financials? Is there is that the like if I think about Australia which is not emerging but Australia and Canada >> might not be a real country. We're still we're still waiting to find out about that. >> You know, if you look at those two indexes, they're dominated by banks and basic materials. And so the behavior of those countries is sort of dictated by the the behavior of those sectors of you know when the commodity super cycle was a thing in the early 2000s Australia did very well but less so when it's a tech dominated market as it has been over the last 10 or 15 years. >> It's not these like impenetrable rocksolid businesses like software. >> That's [laughter] right. That's right. So >> I think that that's right. I think that I mean one of the things that makes investing in EM a little bit difficult is regardless of how many companies are listed on a country basis you still have five companies that will dominate that specific like benchmark and usually it's either a telco telos tend to be quite big in the context of y banks or materials and that's that's a reality maybe a consumer name and healthcare real estate uh tech are a little bit under represented and so that's I when you look at the benchmark it's I mean 60% of it is pretty much greater China and it's that's Taiwan uh China Hong Kong listed names um that's where there's a little breath and then in India that's that's the other place where there's a lot of breath maybe Brazil South Africa but if you go to a place like Colombia I think that 60% is the Colombian uh I might be getting this wrong but I think the 60% of the benchmark is the Colombian stateown oil and gas company campaign I was actually checking before the the we came online the Cosby today two companies in the Cosby which is South Korea account for 38 38% of that index and those are Samsung and high that's that's a pretty punch concentration for one of the most developed countries EM >> it's not quite Nortell and Canada but it's getting it's pretty punchy >> when when gold and silver were going bananas a few weeks ago there was a lot of talk that it was Korean buyers of Korean speculators in gold and silver. Do you do you have any idea? Have you heard that? Do you know what that is? What I'm talking about? >> I thought I I thought it was I heard that it had something to do with China. But um >> Okay. >> But no, I didn't heard the the Korean bank. I have no idea. >> When you look at the consumer discretionary, there's really very little consumer discretionary around the world except in the US and China. I was surprised by that. There's a there's quite a few big Korean discretionary in China. Do you guys you guys look at that stuff in in China? Like to me, if I if I was unless you have that sort of specific reason to not invest in in China. If I look around the world, like I think China's kind of there's a lot of interesting businesses in China. A lot of big interesting some of them are replications of what we've got in the States and some of them are sort of new things. Do do you I mean are they just too expensive the big stuff there for you guys to look at or >> No, not at all. I mean we've owned some consumer names in the past. Um I I don't know and and also like a company like Alibaba is that tech or is that consumer? And I think that actually it's actually it's classified as consumer discretionary. I think >> that's the sort of stuff like it tends to be we tend to call it tech but I think that I think it's more consumer discretionary. So I think of stuff like Yeah. Yeah. >> Henent Pindu do Alibaba like all those kind of things. >> Exactly. And so yeah, for sure. I mean we've owned Alibaba in the past. Um they've owned BU uh Pindoo Duo. Um Pindoo is is it's quite interesting. I mean you look at the topline growth expectations that's still a company that it's supposed to grow at anywhere between 9 to 10%. At least that's what the street is kind of expecting. Uh but somehow the market is not very happy about that type of growth. But like how many companies would love to have that kind of growth somewhere else, right? The thing I took away from our trip to to China last year was that there are even if something is big and growing very very quickly, it can be just wiped out very quickly in China. That the competition seems to be just ferocious. >> Yeah. Oh yeah, absolutely. Um yeah, I mean that did you did you read that uh some officials or some employees of Pindoo kind of had a fist fight with the regulator? or some someone from the regulator a couple of [laughter] months ago. I don't think >> very much with the story. >> Uh I think that that's a pretty bad idea. Uh but no. Yeah. I mean it's a very competitive market, the Chinese market. It's a very competitive market. >> Yeah. We had a friend there say like he thought when he was buying JD that he was buying Amazon of China, but it turned out he was probably more buying Macy's. Didn't realize it. It's just things are just moving that quickly. >> Yeah. What what do you think Juan is the the valuation you you say the valuation on a relative basis for emerging markets is still pretty interesting but on an absolute basis less so because of the 35% run over the last 12 months which makes sense >> I think that um I think that in aggregate in absolute terms the asset class as a whole looks like fairly valued that's just my opinion um again One of the one of the beauties of the asset class is that there's so much in that asset class. It's >> not it's not just one block. >> So if you are actually ignore the bits that you might think that are expensive, there's so much that you can research and invest that is actually trading at very attract attractive uh multiples and valuations. >> And so it's not so much sectors, but you think Indonesia potentially because they they've been threatened with frontier rather than emerging. I mean Indonesia was already uh as a country over the last 18 months there has been a lot of uncertainty because of their political regime. So that has created a lot of uncertainty and that happens in EM all the time. From a macro point of view I think that nothing really is happening. It's just the uncertainty with the the person that is governing the country and then MSEI didn't help because they threatened the country and then the it happened what it happened. Um, but I think that uh again like at least on on the cheapest screen tower, you can build very different portfolios from that specific cohort and still expect to do well over time just because the valuations are attractive. >> Just cheaper starting ingredients on the whole cake. >> Well, what's Indonesia look like? Is it oil and gas and gold? Is it like a that kind of >> I think it's an island, Toby. Well, [laughter] it's attached to Papa Nina at least. >> Okay. >> I mean, >> which is oil, gas, and gold. >> Well, there's a there's a there's there's a meaningful coal mining stocks in there. There's a lot of mining. >> Uh there's gas distribution, the banks, the telco. I mean, it's not a small market. I mean, there's there's like good range of opportunities that you could buy in a place like Indonesia. I mean it's not like I mean I think that out of Indonesia the the cheapest country in EM and this this is based on May favors uh you know how he aggregates valuations on a quarterly basis. So I was checking the valuations that he sent in January. Then the cheapest country is Colombia but then there's not that much that he can buy in Colombia and then again why is Colombia the cheapest country? There's a lot of political uncertainty because of what's been happening over the last four years and the elections that might happen this year. But outside of two banks and an oil and gas company, there's not that much you can buy in Colombia unless you are managing very small pots of capital. >> There's like 300 million people that live in Indonesia, isn't it? I mean, it's not like a >> Yeah, it's like a It's like two I think it's 250 or something. It's a It's a pretty It's a big country. I would be curious like what uh market cap per capita would look like around the world and if it like would track pretty closely because you're you know at the end of the day you're what you really want is to own economic activity as a as an investor. So if you're had a very cheap amount of market cap relative to the amount of people, it might be a kind of an interesting initial screen to look for look for sort of like getting access to to human productivity. >> Yeah, I have never done that exercise, but I'm pretty sure that in the context of EM, not only in Indonesia, it would look pretty attractive. Um, >> Juan, we're coming up on time. If uh folks want to get in contact with you or follow along with what you're doing, what's the best way of doing that? Um, I think that the best way would be to look me up on LinkedIn. That's where I post most of my my work, my my stuff. Um, or reach out to Newberger in London. That would be the other place where they can find me. >> And uh, one called in from his vacation. So, we [laughter] we appreciate you. >> Thanks, Juan. >> We appreciate you. >> Tell your wife we're sorry. >> Yeah. And the kids. >> Always good chatting, too. >> Yeah. Thank you very much for inviting me. >> JT, any final words? >> Uh, no. I guess if you're a developer who likes investing, uh, we're always hiring at Journalytics, so find a way to raise your hand. >> BA basically. >> Yeah. Well, yeah, eventually. And uh we'll be back.