Transcript
Hello, and welcome to the Download. I'm your host, Dave Richardson, and we're joined by an old friend that I have not seen since before COVID days. We've had him on the podcast before, but it's good to see him again. You can't see him. It's a podcast. But we do tape with a Webex platform where we're able to see each other as we're talking. So Mayur Nallamala, RBC Global Asset Management’s head of Asia, welcome back.
Thanks, Dave. Good to be back. Good to see you and speak to you. It's been a long time.
Yeah. How's the family? How are the kids? They must be getting pretty old now.
Well, we got through COVID relatively unscathed. Hong Kong has had its challenges, but we feel like it is pretty much back to normal. Kids are back at school. I've just come back from Thailand. I took my middle son to a soccer tournament. And the week before, I was traveling to London to do a forum with some of our investors from Canada. The week before that I was in Japan. So a combination of stuff for the family and work. Travel is back on the agenda. Still very expensive to get flight tickets, but it's back to normal.
In Canada and North America, I know that flights are expensive, and travel, for lack of a better term, is really just a pain in the neck. Every flight's delayed. Forget about checking luggage. You've got to carry on because you may never see your luggage again. Is Asia running a little bit more smoothly than that or is it about the same?
The Asian infrastructure for airports is excellent, so it's actually running pretty smoothly. The only issue is our national carrier, Cathay Pacific. They put a lot of their planes in the desert, so they just haven't brought capacity back quickly enough. So we've got very expensive airfares just because they haven't got all the routes running yet and the frequencies. But I'm sure you remember when you came to Asia, we have excellent airports and infrastructure. Very efficient across most of the countries in Asia. There are very few countries where you go and say, oh my God, this is terrible. It's usually very smooth.
Yeah. That is one of the things that is quite remarkable when you are over in Japan or China, Hong Kong, really, like you say, anywhere in Southeast Asia, the airports are fantastic. That's good. At least you don't have that headache, I can tell you. When we get you back to Canada— and maybe we won't get you back in December or January because that has its own joy.
I'm a fair-weather traveler, Dave. I told you. March onwards.
I had you at a football game in Utah, though, where it must have been -50 when we were standing in the stands. But anyways, enough of that. We said the airport infrastructure is good and maybe travel is a little bit better, though expensive in Asia. What's going on in Asian markets in particular? Why don't we start with the biggest market that's right next to you and then we'll work around the region. What's going on in China? Is there anything interesting from an investment perspective going on there? Is that an area that you like right now, or is it something that is challenged in a particular way?
So, Dave, China is, for want of a better word, a bit of a mess at the moment. There are pros and cons to thinking about investing in China right now, but essentially the cons are massively winning the day and the bears are out in full force. I suppose if we think about China's issues, we go back to Trump. He started this America First policy and the target of that was largely China on the trade side. China's really, over time, become a bipartisan— it's one of the few bipartisan agreements out there— about how much of a threat China poses to the interests of the United States. And that percolates all the way from the very high-end semiconductors— which are a threat because they could be used in missile technology and in defense and so on and so forth— and AI, and obviously there are concerns about what AI actually means and what it will bring to the human race. But it percolates all the way down to concerns about unfair competition, bad labor practices, and concern that effectively, in reality, the hollowing out of American manufacturing. And all of that has continued since Trump into Biden's administration. It's not going away anytime soon. So you've got that geopolitical issue hanging over us. And then you've got what happened during COVID. So initially, obviously, China probably dealt with COVID a lot better than other countries in that they managed to lock it down quickly and effectively. And then while we were all struggling for a good year or so in Western markets, and indeed in Hong Kong, China actually reopened internally and was almost back to normal. Those are the boom times. Then, of course, when everyone else allowed an Omicron rip through— everyone else, every other country in the world—, it's pretty clear at some point China would potentially see this enter. And it did. And it caused chaos. And I think that's probably a trigger point where I think rather than just think about the external issues facing China, it became more of an internal issue. And by that, I mean the Chinese people have always had a pact with the Communist Party of China. Make us richer and we're happy. Well, the majority were happy. And what's essentially happened since COVID— and that was a poor policy that ended in a lot of economic pain— and you compound that with other decisions which is more of an ideological decision making by President Xi, who has essentially said that he prefers state control of the economy versus the private sector. Pre-COVID, the private sector was booming. It was dominated by these great behemoths of tech companies like Alibaba and Tencent, and other ones, like PDD, and so on and so forth, which were actually making business globally. Really large companies. And I guess because of a combination of his being worried about their power and influence over the common man, and also his particular distaste of Jack Ma and Alibaba, Xi essentially cut the legs out from under private enterprise and pushed for public enterprise. So now we've got this issue: what made China work for the last ten years, that model has changed, and ultimately there are some pros in terms of policy making, but there are an awful lot of cons. And the real issue for China now is domestically, consumers have lost confidence. It is very hard for consumers to get confidence back.
Is there a way for them to reverse course, Mayur, or have they set a path that they're going to be on for quite some time and it's going to impact your investment decisions and what people should be thinking about if they're looking at investing in China?
Look, they have tried to modify the investor base internationally and domestically by saying, we're still open for business. We have no issue with private enterprise. But actions speak louder than words. And frankly, a lot of people just find it hard to believe. Wrapped up in this is a whole bunch of other things. The anti-corruption drive that President Xi started arguably needed to be done. There was a lot of corruption, as there is in many emerging market companies. But the general consensus amongst people is that actually, as well as being an anticorruption drive, it was a way of cementing its power by getting rid of undesired competitors to the throne. So a lot of people who used to speak their mind, technocrats who actually helped the bureaucracy work in China, became too scared to speak up. And now the power structure is very much top down. The decision making is stymied as a result. And that's the real issue. There's a paralysis of sort. And they do try and do things, but generally speaking, I don't feel like the confidence levels are coming back. They've done some positive things. Actually, interestingly, the thing that's doing the rounds and is in the press all the time now is about property measures. There was a property bubble. There was too much debt in the Chinese property market. There were these extremely large behemoth property companies that had been way too aggressive. He did the right thing there, trying to reduce that. Maybe he could have done it in a slightly more measured way because it was quite aggressive. And then the debt markets fell out of bed and bonds for some of these private sector property companies blew up. And obviously that doesn't help the crisis of confidence, but essentially that's what we're facing right now. You've got these external threats— not threats, but pressures from the US. And mixed in is the geopolitics of Taiwan and so on and so forth. The ideological top-down views of the President are very nationalistic. And then you've got this domestic loss of confidence, which makes it very difficult to really think what is going to be the catalyst for change. They've tried a few things, talking about fiscal loosening and so on and so forth. You get a one-day rally in the market and then people sort of lose their optimism pretty quickly.
Is this an area then of Asia that you're likely underweight at this point?
Yeah. In terms of our positioning, in our strategies, yeah, we are. But there is a big caveat. China is now cheaper than it's ever been. Well, pretty much, since the last crisis in the early 2000s. If you look at the last 20 years, it's very cheap. And there are some still very good companies out there, perhaps with unfavorable regulation. But there is a valuation argument that's pretty compelling right now. I've worked in this part of the world and looked at the Chinese market for 20 years, and I've become very attuned to very rapid boom bus cycles. I suppose maybe I was a bit overly hopeful that there'd be a recovery earlier than this, because historically you've seen twelve-month cycles. It seems not at the moment; it seems pretty negative. But it wouldn't surprise me, come the new year, that there's some kind of weird January rally. Quite often in Asia, there's a big reversion trade that happens in January. So we are underway. We're actually looking to add good businesses that look really beaten up. It's painful, obviously, to try and buy stuff that keeps falling. It's like trying to catch a falling knife. It's not particularly appealing, but from a pure valuation perspective, it does look interesting.
Yeah, that's a big part of your approach. You're looking for those opportunities when you get the right valuation. And this is general philosophy: you've got to be patient and at some point, that fair value will come through. So if I can buy it at a low valuation, I'm ultimately going to benefit, and the people who invest with me are ultimately going to benefit.
Yes, that's absolutely right. The flip side is, we've got another market that we were just talking about today: India.
Well, that's where I wanted to go. Yeah. The other big behemoth there.
Yeah, the other big behemoth. And every year that passes, it grows in the benchmark. The economy is now probably the fourth largest economy in the world. Along with China, is the biggest contributor to global GDP growth. Huge population, rising middle class, lot of demographic tailwinds with a cohort of very well-educated engineers and so on and so forth coming through. And benefiting from the fact that it is geo-politically non-aligned— although it’s shifted its stance partly because of a perceived threat from China to be quite a bit more pro-Western. And the US has tried to woo the India since the Bush junior days. W actually gave them a nuclear deal that was very controversial at the time, for civilian uses. There's a massive Indian diaspora in the US. Kamala Harris is actually half Indian. One of the nominees for the Republican election, Nikki Haley, is fully Indian. A lot of this diaspora is basically quite probably influential in trying to change that relationship between India and the US. And that allows India to potentially step into this anti-China supply chain argument. If you're an MNC in the tech or pretty much any space, do you want to rely only on China given what happened during COVID? So you got a China-plus-one argument or even just, let's move out of China because the labor arbitrage that gained the work for the last 20 years no longer works. India will never be the next China. I always caution people to think away from that. The infrastructure deficit is much larger. It is a democracy that, while functioning, is somewhat haphazard on a relative basis. And China as a command economy has done extremely well. Of all the command economies in the history, post Second World War, after a very rocky period for 40 years, China has probably done the best of getting people out of poverty and so on. But India is a messy democracy. You have expensive elections every five years. One is coming up in May next year. You've got a lot of politicking. You've got corruption, which is borderline endemic. You have a lot of challenges, but it is seizing the day. And for the last ten years, a lot of very positive things have come under the BJP government, namely taxation changes. They brought in the general sales tax, which with one swoop changed the way states tax people. They massively improved logistics costs; hugely added to GDP growth. As well as that, they've introduced a bankruptcy law. There's a legislation of taxation changes that has increased fiscal power, so they are able to spend more on infrastructure. The changes are not amazing if you compare it to China, but it's still very remarkable. I was born and grew up in India. Every time I go back, it is just a different story, and it just looks amazing every time. So that has allowed India and Indian companies to drive up the valuations of the market. And the market's been the best performer in Asia up there, for major markets in the world. There is obviously a caveat now, though. It's the reverse of China. It is incredibly expensive, and that is something we need to take into account. Again, structurally, we believe this is a great market. Long term, we really like it. But if anything, we are slightly more cautious just because valuations have run so hard.
Yeah, and we talk about this on the podcast all the time with Stu Kedwell. Talking about the different levers of the market. And one of the most important is valuation. You might love an area, but if it gets too expensive, you've got to be cautious. And then I guess, if we look China and India, it was always that case of that command economy to emerge out of being an emerging market. A command economy gives you some advantages. You can push resources around where you need them. Democracy, as you say, is a little bit more clumsy, more complicated, but ultimately, it tends to win over time. And it's exciting to see what's going on in India. As you say, being from there, it must be very exciting.
Yeah, it is. I think the Chinese are obviously trying to push what they call the Beijing consensus over the Washington consensus, and the fact that they have a superior system over the West and democracy. I'm obviously not a believer in that. I don't think you would either. But they have managed to drive certain factors very quickly, obviously, so they're pretty confident in how they see the world. Still, despite the current malaise affecting the markets, I don't know if everyone's confident. I think there's definitely an issue of confidence over a broader swathe of Chinese society. But the party and the government continue to beat to the same tune about how great their system is at the moment. But, yeah, over time, autocratic governments tend not to grow as fast and not to develop as fast. We've seen that, and I still believe that's the case. Again, another reason why, long term, we would prefer India over China.
Mayur, let's finish off with the off forgotten Japan. We should probably not leave the region without checking in in Japan and then maybe a favorite country that's under the radar that you're taking a look at. So, Japan first.
Japan is super interesting at the moment. Some of it is structural, which is fantastic because I again spent most of my career— well, actually even pre-career, I guess, when I was at high school and into university. When I was in high school, all my friends were learning Japanese because it was the Japanese century coming up. How dismal that turned out to be. Now everyone's learning Chinese, so there's a little warning out there somewhere. But the Japanese century obviously went into a two-decade slump. The lost decade became a second lost decade. There were periods of time within those two decades where reform was really attempted and resulted in decent rallies in the market. The first was in 2005, when I actually just started my fund-management career. Jun’ichiro Koizumi had just become Prime Minister and he was the first properly reformist-minded Prime Minister and he saw big. And part of it was because we were going into the big boom years of 2006-07. And Japan had a really good time. And then with the GFC, that all came crashing down. And then Abe came in as prime minister in 2010— or 2011-12, somewhere around there, I can't remember the exact date— and he came up with his three arrows, which was to really try and jolt Japan out of the deflationary slump it had been. Try and drive key things like women into the workforce, arguably a little bit more immigration, trying to get birth rates up, etc. Just really ultimately try and get out of that deflationary mindset with those three arrows. It's taken time, very unusual monetary policy for the best part of a decade. I think actually the biggest thing that helped them in the last few years in terms of the move from deflation to inflation was actually COVID. Obviously, you've had this global inflationary impulse and that has fed into Japan. And as we know from textbooks, inflation expectations take time to percolate through a citizenry's mind. And once inflation expectations are set, they take time to unwind. We believe that there has been enough inflation and wage increase for the first time in decades for the Japanese to actually believe that inflation is here to stay. And we actually hope that we've moved permanently— well, when I say permanently, I mean for at least some number of years— out of that deflationary slump. And hopefully the inflation expectations have reset into a positive territory. But that's potentially a cyclical argument. There are still structural things to consider. The negatives are very easy to figure out. The population issues, for instance. It's a homogeneous society that's not very keen on huge immigration to fill labor gaps. So I think what you'll see in the next 15 years is loads of robots wandering around the streets of Tokyo and in people's houses, doing all sorts of cool things. They prefer that to bringing in wholesale immigration. They have increased the levels of immigration in key segments of the workforce, but not significantly. So what I would suggest is that those structural issues aren't going away and ultimately they are deflationary. So that cyclical impulse of inflation may not last. But the reason I think we are quite optimistic on Japan is what corporate Japan is doing. After two decades, Japanese corporates basically barely covering— or not covering— their cost of capital, running businesses that seem to be run more for employees and maybe middle management than for shareholders. Balancing the stakeholder interest has become much more key to Japanese corporates. You've seen a rise in improved cash management, as in dividend payouts, buybacks, etc., but also an attempt to increase margins through price increases and so on, partly again, because of the inflation impulse they felt. They're doing it but it's been also done at a top level. The Japanese Stock Exchange has introduced an index called the prime index. You want to be on the prime index, you have to trade above book and do certain things and so on and so forth. And so it's a badge of honor to a lot of corporates. You wouldn't have thought, but there is a bit of a FOMO. We want to be that company. And then they see stock prices going up. It's happening. There's a re-rating in Japanese equities happening for a number of different reasons. Some of those are cyclical. The structural ones, which are still slow, but they are happening, which is, I think, very positive. And so, we're quite optimistic on Japanese equities. On a multiyear view— I'm not going to say on a ten-year view, but at least in the next couple of years—, I think things are looking all right and they’re still relatively cheap.
And I told you we were going to run 15… But it's such a fascinating conversation. We're running long and you're battling the flu and I think your kids are around the table with you. So let's just finish off with a quick favorite area of Asia or Australia, new Zealand, a particular area that you really like right now that maybe is under the radar for most people over here in Canada?
There's another large potential market, Indonesia, which is slowly developing, which we particularly like, if you're thinking about countries. And obviously there are other markets like Vietnam, which is actually still not even in our investment benchmarks, because they're considered an emerging market, as in a frontier market still, or I think they're just a common emerging market. But what I think is quite interesting is all the stuff that's interesting to Western investors in terms of AI and things like that, we make all of that. All the stuff that drives luxury stocks, it's our consumers. What drives the commodities cycle is largely what's happening in our part of the world. I think it's very easy just to look at the Magnificent Seven in the US and put all our money there. But at some point, the world should recognize that there's a lot of economic activity happening out here. It's actually dwarf, it's starting to dwarf what's happening in the West. And so from that perspective, there's still a lot of interest, from my perspective, in how these markets develop over time.
Well, Mayur, that was a fantastic walk around Asia. You're the best. I miss seeing you. And hopefully we'll get you back over to Canada, we'll get some of these self-imposed travel restrictions lifted and we'll get you back in the market. And along with the flu and other things, we're dealing with a 13-hour time difference, which is always a challenge to get you on. So I appreciate you working late to do this with us and hope you feel better. But thanks for joining us today.
Thank you for having me. I really appreciate it, Dave, and good to see you again.