Hello and welcome to The Download. I'm your host, Dave Richardson, and we have a special—special, special—guest with us today, Laurence Bensafi. Laurence, did I get enough «specials» in there for the special guest introduction?

Yeah, about right.

About right, eh? You'd like a couple more «specials». Well, you are a very special guest. We don't get to see you all the time. Laurence works in London with her pal who we've had on the podcast before, Phil «the thrill» Langham, and they are experts in emerging markets. Of course, emerging markets have been fantastic this year. When we've had Laurence and Phil on before, they've talked about emerging markets ultimately emerging from…—how long was the slump, Laurence? Fifteen years?

It’s been a while, yeah.

You don't want to put a number on it? It's been a while. Then, about 18 months ago, things really turned along with really a lot of the markets that had underperformed the US, and particularly US technology. Then since then, emerging markets have been really fantastic. We've talked in general about the opportunity within emerging markets from a valuation standpoint, and how at some point the underperformance had to turn into outperformance as it has. But I thought today we’d dig a little bit deeper into what's driving the strong performance. If there's anything that we see—or you see—as opportunities going forward. You and Phil have mandates that are a general large cap or overall emerging market portfolio. You also have a small cap portfolio. I know your particular expertise and specialty is in dividend stocks. A lot of people don't think of emerging markets as having dividend stocks, but they do, and they work there as well as they do in Canada. How does that sound?

Yeah, it sounds good.

Well, in our pre-conversation, you only had positives about emerging markets and everything in emerging markets. You did mention my weight gain, though, which was hurtful.

Look, I think we're entering a really interesting era for emerging markets. I think, as you said, we've been positive for a very long time. The market didn't really recognize that. But I think this year we're really at a turning point.

A turning point. As we were discussing before we started recording, I actually wasn't aware of this. A lot of investors think of emerging markets as just one big blob of a bunch of companies and a bunch of countries and markets. But it's actually similar to the US and other parts of the world. Technology has been what's leading in emerging markets.

You're absolutely right. I think what is interesting in emerging markets is that people have ignored for a long time the asset class. I think it's mainly because you will get good returns from US equities. Some corporates have been very strong. You had the support also from share buy-back, tax cuts, really the AI sector, technology in general, have been doing really well. There was no need really to look outside of US equities. But I think quietly in the background, there has been a lot of changes in the emerging market. Actually, if you look at nowadays, developed countries start to look more and more like emerging markets of the past. Where do you have political instability? I'm French, so we can talk about it. We cannot keep a government for more than a few weeks. But political instability, rise of the extreme—extreme left or right— increased debt level, deficit level reaching also really high. In some countries, inflation struggling to get down. That's the developed market. On the other hand, when you look at emerging market, there's been so many reforms over the past 20 years, that in emerging market, you have much low—half the level of debt, actually—deficit under control, really good trading patterns. Actually, we're really seeing that Liberation Day this year was the turning point for emerging market because what we've been saying all along, that the fundamentals for emerging market are actually strong and not reflected in the valuation level, at least on the equity side, I think the market has relied that indeed something doesn't seem right and that maybe EM are a lot stronger than they thought. That's why when it came to the tariffs and Liberation Day, we really think that backfired on Trump because actually what they did and put the spotlight on the weaknesses of the US economy, which is obviously high level of debt and deficit and dependency on a lot of countries, especially emerging markets, for importing all sorts of goods. On the other end, countries such as Taiwan, Korea, and China, obviously, people realize that they're actually at the upper end. Every day now, we hear a negotiation on tariffs going down and down and down. Just today, there's a deal between Korea and the US, with the tariffs on cars that are imported to the US being much lower than was announced at the beginning. Really a turning point this year. For us, we really think that emerging market are back on the map. We talk to a lot of clients all around the world that are very excited about the asset class again.

Yeah. We always focus on long-term investing on this podcast. Again, for those of you who are new to the podcast, please follow us, subscribe to us anywhere you download and listen to podcasts. We are also on YouTube. Please subscribe to the YouTube channel. You're going to subscribe now because you just found out that the podcast is on. But we focus on long-term investing. We focus on diversification. And one of the reasons why we've had Laurence and Phil on so often to talk about emerging markets is the opportunity long term. The future of growth around the world lies primarily in the emerging markets. Then I think what a lot of Canadians would be surprised to hear is what Laurence just shared, which is talking about a household balance sheet or a company balance sheet. There's good balance sheets and bad balance sheets. There are households who manage their affairs and manage their budgets effectively. There's those that don't. Most people then would just assume, well, the countries that do a good job of that are developed countries. I live here in Canada. Canada does a fabulous job managing their accounts and inflation. Well, maybe not so much coming out of COVID in the last couple of years. In the US, of course, I start to look at the US with a debt to GDP ratio of 125%. Look at Japan. A lot of the emerging markets, when you actually look at them. Don't put a name on it, just look at debt to GDP, inflation, where they sit from a monetary policy perspective and where their currencies sit. If you didn't know the name, say South Korea, you would think you were looking at the US maybe 50 years ago when they did have their house in order. You have to think very broadly as an investor to find opportunities everywhere. That's the opportunity you have right now when you're investing as a Canadian, you can go anywhere. You find the best opportunities everywhere. Laurence and Phil just do a spectacular job of finding the best opportunities in emerging markets. So you lay the base case. The other thing we talk about, and we'll just finish very quickly for those who haven't been with us before, when we're talking about emerging markets, the US dollar. It has been a little bit stable over the last three, four months, but had gone through a fairly significant depreciation from its peak in 2023.

Yeah, definitely. I think the US dollar has been one of the drivers for better performance this year, for sure. As you said, I think earlier, after Liberation Day, clearly, as I mentioned, the spotlight came back to the US and thinking, oh yeah, the stock market has been doing really well, but it's actually a handful of names. When I look more closely at the economy and the state of finances of the country, it's a little bit more complicated. You had this big sell-off in the US dollar, stabilized more recently because obviously, the administration act quite quickly. But we still think that the dollar still looks expensive, and there's definitely a risk over the long term, especially, as you said, Dave, we are a long-term investor here. When you think about it, those big superpowers that have emerged over the past few years—India, China, Saudi Arabia—there'd be a time where for them trading in US dollar won't make as much sense as it does now. The US dollar is still used in the majority of trading around the world. There's definitely moves to change, being able to use other currencies. It's not easy, it's not going to happen overnight. But clearly, if you look at a medium long term, there's probably going to be some pressure to the US dollar, added to the difficulties, obviously the difficult situation fiscally, I would say, and in terms of debt in the US. That would be a further, I would say, tailwind for the asset class, but that would be one of them. I think there's so many other positives in emerging markets. You've got this longer trend of urbanization that is still ongoing in most countries and just starting in some of them. Like India, where the majority of people still live in the countryside as farmers. You can have really year and year of urbanization. Some of the opportunities really are in emerging market, in more the domestic name. Technology has done really well and that has been really a great trade, and you've got fantastic companies in emerging markets linked to that sector. But there's also a huge sector outside of technology, which is financials, domestic consumption, consumer stable, consumer discretionary. The good news is that despite the big rally we had in the asset class this year, those segments are really cheap, actually, because similarly to the US equities, the rally has been concentrated in technology. You have lots of opportunities to invest in long-term growth companies which are high quality and still trade at a big discount to the developed market just because investors haven't looked at them maybe for a long time. Long-term potential for the asset class. One thing I would add as well, at the end of the day, a stock market does very well when there's value creation for the shareholders. When returns increase, earnings growth is strong. We've been lacking that. The reality, we've been lacking that a little bit in the emerging market over the past few years. We had a lot of good reforms on the top-down, as I mentioned. The economies are doing well. But at the corporate level, it was always a little bit more complicated. Either you have lots of state-owned enterprises that don't really care about the minority shareholder, or you had a lot of dilution in the market. You had a lot of IPOs in new markets, so you dilute a lot. Or just corporate governance was not to the standard it was supposed to be. But that's another part, that quietly a lot of EM countries have changed in that front as well because they had pressure from us, for investors. They had pressure for their domestic sovereign fund or pension fund, pressure for the government that want to have a good stock market. It's important in the countries to have a good stock market to support the economy and often to take money away from the property market because you know all that end up if all the money goes into the property market. In Korea, for instance, in China, you've had really big moves recently into improving shareholder returns through more dividend, buy-back, improving corporate governance, having more independent directors on the board of the company, for instance. It's all going into the right direction, but nothing of that pretty much is priced in in the market. That's another area where we see opportunities.

For a lot of Canadian investors, when it became easy to invest in emerging markets, when emerging markets were doing relatively well compared to US or Canadian market, it was a time when a lot of those things weren't in place. It may have been the last time that a Canadian investor looked at emerging markets. Of course, we are 20 years later. 20 years of progress, 20 years of focus on these reforms and just tightening up all aspects of the financial system in many of these countries. You're left with a very different world that Canadian should come back and take a look at. I wanted to finish off on the technology thought. From a valuation standpoint, the technology companies in emerging markets, you mentioned the concentration, but do we see the same valuations across the board for technology companies in emerging markets?

They have re-rated, for sure. They're not as cheap as they used to be. Taiwan, where we have really the biggest ecosystem in terms of AI suppliers—you maybe heard the CEO of NVIDIA recently saying, there's no NVIDIA without TSMC, which is obviously making all those chips—really, the ecosystem of manufacturing, all the components are in Taiwan. Interestingly, for the first time ever this year, Taiwan has become the most expensive market in emerging markets. Clearly a nice re-rating. I would say that has been justified by fundamentals because the fundamentals have been really strong. I mean, those corporates make huge amount of profit, very strong margins. They tend to be really high-tech companies with very little competition. When you do something very well, obviously, you get rewarded. The valuation, even though there's been a re-rating, is nowhere near what it is in the US. We trade at a massive discount to the US. Having said that, independently on that, I think it's very important to think about where we go from now on. It's very difficult to sustain really abnormal, really high returns for a very long time, in any sector. It happened in the past many times. I think we've turned a little bit more cautious, even though valuations since look reasonable and backed by strong fundamentals. But I think it's a good idea to take some profits. As I said, you have sectors such as consumer stable, financial, that are incredibly cheap in the asset class. For us, we always look at reallocating capital, taking profit, reallocating capital where we see the most opportunities in terms of potential for re-rating and performance.

Similar to what we've been talking about in Canada and in the US, primarily, that you've got this concentration of stocks. Maybe it's 20, 25 stocks in the S&P 500 that are driving the bulk of the returns. But then you've got another 475, and there's some attractiveness there, not just from a valuation perspective, but from the opportunities that these companies have. I would have to think that emerging markets would look the same way. When you go beyond tech—and you still want to have your exposure to tech—but when you go beyond that, there's some really nice value there with really strong prospects.

Yeah, absolutely. If you look in terms of sectors. I mentioned financials, consumer, especially staples. But in terms of countries as well, when you look at the countries that have been doing really well, China, Korea, Taiwan, Mexico. But some of the countries have done quite poorly. Actually, again, it's been a little bit concentrated in terms of the performance of the country. If you look at Southeast Asia, for instance, Vietnam, Indonesia, Philippines, which are really big countries. They're very small weight in the index because the stock market is underdeveloped, I would say, but they are a very big country. I mean, Indonesia is the fourth biggest country in the world. Extremely cheap, so you definitely have opportunities in this area. Latin America has done decently, but still very attractive in terms of valuation, really, world-class corporates. As a region, Latin America is very small in the benchmark, and we think that should re-rate, especially as politically, we've seen a good move towards a more business-friendly administration and reforms coming. Obviously, the main one being Argentina. You've seen what happened in the election recently. That was a game changer. Really, in those countries, populations are fed up with crises and not being able to leave those periods of high inflation or low growth and employment, etc. It's really happening. Middle East is interesting. South Africa is interesting. Yes, some countries have done very well, but there's opportunities outside. Maybe the one country I can mention—because there's been a lot of talk about it in the past few years—is India. India looks also, as usual, very attractive from a long-term standpoint in terms of end-up penetration of everything, financial products, consumption. But really, we see the potential over the next few years. Valuation is still a little bit stretched. Over the short term, we may see still a market a little bit stagnant. But this is really a very interesting part where you want to be invested as well for the long term. So outside technology, plenty of opportunities with this rising middle-class, urbanization, penetration of financial services, which is still going to be there for years and years to come in emerging markets.

Canada—obviously I’m a little bit bias here—is blessed to have an incredible financial and banking system. Canadians take for granted that you have a bank account, you work with a bank, whether it's an established bank or a new bank that's coming. But generally, with traditional banks. It's not the same thing in the rest of the world. You start to look at countries like India or countries in Latin America where the penetration of just even basic financial services, a bank account, let alone these large financial corporations that can have investment sides, credit sides, credit cards, all the things that you think of with a traditional Canadian bank, it's hardly built out at all in these areas, and it's a huge opportunity.

Yeah, and it's interesting because every country is at the different level of development. As you said, for some of the countries, it’s just having a bank account. Philippines, Mexico, in these kinds of area, half of the population doesn't even have a bank account. Imagine if you can double the number of bank account. If it was happening at RBC, you'd be very happy. Just getting this penetration of being just included, financial inclusion. But then in some areas, they have bank accounts, but there's no credit card or mortgages are underdeveloped. In some countries, you got all of that, like China, for instance, but what you don't have is really insurance product or wealth management product, where people in China invest mainly in a property market, and they save their money. There's an entire industry in wealth management, mutual fund, that will be developed over the coming years. You've got opportunities across the entire value chain in emerging markets, but overall, it's really this end-up penetration of financial services that is exciting to us. Because in emerging market, you had so many crises over the past 20, 25 years, the surviving big banks or insurance companies, they tend to be of really high quality because you had to navigate crisis after crisis. You got really financial company that are of high quality and tend to be quite cheaply valued, and they have some growth, and they're quite profitable because the sectors tend to be a bit concentrated because it's been so difficult. You have everything there, really, to create value for shareholders over the coming year. That's really a sector which is quite big in the end, but we think will continue to do well.

They pay dividends as well?

They pay a really nice dividend. You're right, in the dividend strategy, we have a good big exposure. It's our biggest overweight. You can really go in so many different countries and have very diversified exposure and create a really nice portfolio of companies that are paying good dividend, on high return equity, and on the valuation that are extremely attractive.

Some long-standing firms despite instability at different points in the last couple of decades. But Argentina was a wealthier country than Canada 100 years ago. You've got some more outstanding institutions. The track record on dividend payment, though, would it look anything like a European or a Canadian bank in terms of the long-term growth of the dividends?

You're right. It's really case-by-case. Some of the countries had issues in the past. I would say the regulators tend to be really good in those countries. Again, they learn that if you don't have strong institutions, you’re in trouble. They tend to be quite strong, and that means that sometimes they tend to be quite cautious. Sometimes they're very cautious in allowing corporates or banks or financial institutions to pay dividends. They want to make sure that the number one priority is to have strong capital base. Sometimes when things are a bit tricky, they're going to say, okay, you keep your earnings as capital, but then you can deploy them a little bit later. But the flip side of that is that you've got more growth as well, so you need to allocate between growth and dividend. Overall, it's going to be a little bit more volatile. It's always emerging markets, but there's definitely more growth, more potential, and the valuation reflects that environment. You're right, it's going to be very different compared to a big traditional bank in North America. But that's where the due diligence is very important as well. That's where we go to the countries and we meet the corporates face-to-face to judge the quality. Are they going to be able to navigate in a more volatile environment? If they do, the opportunities are there for them.

This is where, for Canadians, hiring a great money manager in that space is really the best way to go at it. You want to see that track record. I know you and Phil have a remarkable track record in the space. I think what's most important there is knowing the breadth of what's out there and having long-standing relationships. Because, again, sometimes you've got to dig in deep to make sure that what looks like on the surface is a great investment is really a great investment. That's where having professional eyes on it is so valuable.

Going to the countries is key. You can read as much as you want. I think it's going to the country. We travel to all the countries we invest in at least once a year. The big ones, several times a year. We go on the ground. Because we are one of the biggest EM team, we got really good access to government, to obviously top management at a corporate level. We tend to talk to observers. We got a really good access, and we can really form a view. Being able to do that, going on the ground, makes a huge difference to the quality of the investments, for sure.

Yeah, and generally, it's warmer than it is in Toronto today, too, which has got to be a plus.

We may choose the countries, depending on the weather. Maybe you're right. At the moment, two people from the team are in Brazil and Chile. Good timing.

Good timing. Summer down there. We talk about financial services. What about energy and mining? Maybe going in different directions. But there's also some great companies in different parts of the world, outside of Canada and the US, that are involved in those extraction activities, which are going to be so important for artificial intelligence and just energy use in general as the world gets wealthier and continues to modernize and urbanize, as you mentioned.

Yeah, you're absolutely right. I think there's two things on the energy and materials. One thing, it used to be a major area of emerging markets because we didn't have much outside of that. It was good, but it was also very volatile, because by definition, they're very cyclical corporates. Sometimes you make tons of money and sometimes prices collapse and you really struggle. That's why the reputation of emerging market for a long time has been more of a cyclical, very much exposed to commodity prices. That has changed completely. Emerging markets now, the weight of energy and materials combined is about 10%, so that's really low. But as you said, it's still an interesting sector. I would say energy, not so much because it's mainly state-on enterprises—99% are state-on enterprises—they're not managed for value creation for the minority shareholders, so we tend to stay away from those corporates. But on the materials side, that's different because that's exactly what you said, especially transition materials, the one that are used for electric car, artificial intelligence, etc. In particular, copper, which is very interesting. As you know, the biggest concentration of copper is in Chile. You have very high-quality corporates that operate in that field in Chile. It's an area I think you have to be very selective. You have some very good gold companies as well in South Africa. It's an area where we see also, interestingly, a lot of changes in terms of ESG, corporate governance, the way those corporates approach the way they mine, especially when it comes to local communities. In the past, there's been also issues. That has changed, improved dramatically, and that led to a re-rating also on some of those names. I think those names definitely should be in the portfolios, and we are invested. It's a good complement to the rest of emerging market, which tend to be a bit more domestic. I talked at length about financials, consumer, but those global industries that are exposed really to an area of growth, which is what we call future infrastructure, is also very interesting and good quality corporates, again, in that segment.

Let me finish with something that every time I have you or Phil here, I get several questions from advisors across the country. You don't ask enough about Africa. You mentioned South Africa and gold. But are you seeing things happening in Africa? Obviously, it's an area where you're going to see the bulk of population growth around the world over the next 50 years. It is an incredible emerging economy. Anything tipping your interest in that area of the world?

Africa is always a bit of a tricky one. In terms of investment, first, it's very difficult to access. Very underdeveloped in terms of stock markets. Very few have a functioning stock market. They have a really small liquidity. Apart from South Africa, I would say at the moment, not really there. But things are changing slowly. You need to see reforms, you need to see more stable government. We've seen a bit of changes in Nigeria, for instance, more recently. But I would say that will take a long time. I don't expect Africa to be a really significant exposure outside of South Africa, which is a very different country, and where we have some good exposure, some really high-quality corporates, and improvement, actually, on the political level, I would say. But the rest of Africa, I think we're talking about quite a long time before we really see a development of the stock market in those countries.

Most of it you describe as a frontier market as opposed to an emerging market.

Yes. Frontier, or not even frontier. A few are frontier with very low liquidity. But it would change. I think it would change, but very slowly, I would say. Very, very slowly.

And as they emerge, I know you'll be there. That's a great tour. We never have enough time to get through everything. We'll leave a few things on the table for yourself or Phil or Christian, who we've also had on to talk through those other areas. But Laurence, always great to see you. We never expect to see you here in Canada when the weather is below zero. But you're a trooper. Of course, the demand is there because people want to hear about what you have to say about these markets because there's a real opportunity here. Again, people have shied away from it over the last 15 years. They're starting to rediscover it, and that's a great thing.

Yeah. Thank you for having me.