Hello and welcome to The Download. I'm your host, Dave Richardson. And we're joined by a guest that is always complaining about the weather wherever she is, Laurence Bensafi. Now, what's wrong with the weather today in London, Laurence?

I mean, it's the 15th of July and it's raining, and it's cold and gray. So I can't complain, I think, in London.

If you live in London, you kind of take for granted that the weather is always going to be bad, right?

In the summer, usually we have maybe a week or two of nice weather. We haven't had that so far, so that's why I'm complaining.

But what would you define as nice weather? What's nice weather for Laurence Bensafi?

I don't know. Temperature above 20 degrees, maybe. No rain for a couple of days. That would be nice.

You're not too difficult to please. But I don't think in all the times I've met you or seen you or talked to you, that you've ever been happy with the weather at that particular time. When we were in Canada, it was minus 20 and snowing and you seemed to have a problem with that. So, we have Laurence Bensafi with us today, and she is one of the lead managers on emerging markets at RBC Global Asset Management. Laurence always joins us to give us a look at — not the weather, because we know that's not going to be positive — but we can get a positive view when we look at emerging markets. Emerging markets, as we always talk about, Laurence, is a very important part of global growth. This is where growth is going to come from in the future, but at different points in time, for a lot of different reasons, emerging markets will outperform or underperform developed markets. And it's been a bit of a tougher run for emerging markets for, I guess, almost a decade now. But there's a lot of things turning that are going to make emerging markets attractive again. And you always do such a good job of explaining that. I think we had you on in January with us. So if we look at the first six months of the year, it's ended up being a pretty good first six months for emerging markets, has it not?

You're right. Emerging market equities so far this year are up about 12%, I'm talking in US dollar, compared to MSCI world, which is about 15%. So both have been doing pretty well. EM slightly behind, but really doing quite well. If we talk a little bit about what has happened over the past six months, it's actually quite unusual what happened in the emerging market, I must say. I've been investing in the emerging market for close to 20 years now, and I don't think I've ever seen something like that. What we've seen in the emerging market so far since the beginning of the year is that a handful of names have been driving equity returns, and those handful of names are in the technology sector and related to AI. If that rings a bell to everyone, it's because it's exactly the same that we've seen in US equities. That's unusual for emerging market because usually we have different drivers. We have 25 countries. We've got more than 1,400 names in emerging market. It could come from anywhere, but usually, the performance is driven by a lot more countries or sectors or stocks than a handful. But really what we've seen, we've seen Taiwan, which is the largest EM country, after China and India — it's 16% of the index, so it's not that big, but it's relevant — what we've seen is that it's up more than 35% this year. Already last year, it was up 30%. Why is that? It's because you may remember — I'm pretty sure we talked about it in January — that we were urging investors to look at EM equities to play actually the AI theme. It was one of the interesting areas we were highlighting about emerging market because Korea and Taiwan, in particular, that's where you have the entire manufacturing chain for AI products. They tend to be designed in the US. Obviously, you all know the companies I'm talking about. But the manufacturing part is in Korea and Taiwan. We have a company in emerging market right now — and again, that's something we've never seen before — a company that is more than 10% of the index. We never had anywhere near that, a company that's just touching a trillion-dollar market cap. This is the manufacturing company for AI products. They do the most advanced chips that no one else in the world can make. In Korea, we've got a similar company that is also getting bigger and bigger, that makes the memory chips, and again, they are the only one being able to make those products. It's quite crazy. Those names are more than 100% over the past year. It's interesting what happened in EM, but very unusual, I would say.

Very unusual. Again, you had noted this trend on your last visit with us, and I take it that's something that you took advantage of in the portfolio?

Yeah, absolutely. We had a large position in the names I mentioned, and we got pleased with that. Having said that, if we look forward a little bit, I think we've got the same discussion as in US equities: how long is that trend going to last? Because even though valuation in our EM stocks are a lot lower than what they are in the US equities, they look a little bit stretched now. Also, for diversification purposes, we want to take advantage of the good performance and we trim those positions and put the proceeds on other names. I would say, what is interesting is that if you compare EM versus DM, in EM, the positive of that situation is that we have a little bit of the best of both worlds because we've got at the same time this exposure to AI and technology, but we have also a lot more interesting stories. If this one stops or slows down, which will happen at some point, in EM, we have a lot more going on in a lot of different areas. I can mention some of them.

Maybe before we go on to some of these other interesting areas, I just wanted to talk to you about your thoughts and your approach, with you and Phil Langham, who we've had on as a guest before. You have such an amazing team, along with many other people who make up the team around emerging markets at RBC Global Asset Management. It's a phenomenal team. When we talk to other managers in other parts of the world who are managing this issue. It's happened before in the United States but not as much in emerging markets. But how do you deal with a company that's 10% of the index, that's clearly in an area that's going to have amazing growth over the next decade, but the stock itself has become extremely expensive? How are you thinking about managing your weighting and exposure, with some of these other opportunities that you're going to look at?

Yeah, it's a good point. I think in EM, we're lucky that it's an entire manufacturing chain that we have. Korea, Taiwan are quite important. There's quite a lot of companies. We're able to always analyze the universe and move on to other companies when one is becoming a little bit more expensive. You can find names that are also going to benefit from that trend, the AI trend. And more in general, digitalization, which is a trend we've been playing in our portfolio since inception. It's one of the themes we're playing in a portfolio. What is true is that every couple of years, you have a different way of playing it. You identify an area — so we have to identify this really big company. I think at the moment, we feel we're taking profit and we're moving that money to a different area. Because the market is quite deep now in emerging market, you're always able to rebalance, I would say, and reallocate the money into different areas. This is only one of the themes we play in the portfolio. We've got five different themes that are all really interesting, and we constantly look at valuation. There's a lot of volatility in our markets because of elections or events, or currency. You always have the opportunity to go from one to the other, which is great for emerging market because there's always a lot of opportunities somewhere.

We talk about how we deal with these companies where you were on top of early and you've rode out this tremendous success, and now you reallocate. And where are those other opportunities that you're seeing now as we look forward?

In other opportunities, you still have India for sure. I know we mentioned it also last time. India continues to do quite well. We had elections that were a little bit surprising, but they don't change really the long-term case for India, where we still see a lot of opportunities. Valuations are elevated, but the type of companies we invest in, because that tend to be long-term compounders rather than being the very short-term, highest-gross companies that tend to be a bit cheaper. We feel comfortable with the names we own in India. It's still an area where we see for years and years potentially a good performance. Other areas that are interesting where we've allocated some of the money we mentioned that we took from the AI theme that we reallocated is, for instance, in Latin America and Southeast Asia. Those two areas are quite interesting. They've been hurt by higher-for-longer interest rates because they're quite correlated to interest rates and the currency in the US. They've been doing relatively poorly. We have had election as well in some of those countries. Even though there were pretty good results, the elections, they've created volatility. That has given us the opportunity to buy a couple of names that we really like, that are high-quality names in those countries. What we believe is that even though we're going to have higher rates for longer, that's true, we still should start to see a cut at some point in the coming months from quite a high level. That would be very positive for those countries which are trading at really attractive valuation. That's an interesting area. Another area is re-onshoring, and actually that's overlapped with some of the countries I mentioned, such as Mexico, Indonesia. That's still ongoing, even though we talk a bit less about it. South Africa, we had very interesting election. For the first time, the ANC party, which liberated the country, didn't get the majority. They had to form an alliance with more reformist parties, so that's great. Finally, if you want to talk about China. At some point, we're hoping China will start to perform a little bit better from a very difficult environment, I would say at the moment. But usually in China, the worse you’re getting, the closer you're getting to reforms and improvement and a rebound in the stock market. That would be also quite positive at some point. It's still the biggest country in the end, so that would push the entire market up. We had a great performance year-to-date without China so far. That could add up to the performance.

For a while now, I know you've generally been a little more negative on China and been underweight China. But are you starting to see some of the pieces come together where you might be able to move to almost a market weight in China, or are we still away from that?

Yeah, you're right. On China, we're always very cautious. We have been underweight for quite a few years now for different reasons. Previously, it was some companies that were reaching really high value without being very profitable — not the type of companies we like. Then obviously, you've seen the entire sell-off because there's been a lot more intervention from the government, which has hurt quite a few companies. But recently, it's been really, really difficult in China. Actually, the latest numbers came up recently. GDP growth is quite good. I mean, 4.8%. Many countries around the globe would dream about 4.8%, but it disappointed a little bit because what was really good is exports. China has been focusing a lot on exports, and that worked really well because they're exporting their deflation, basically, and that worked really well. They have really good quality competitive products. They're moving up the value chain and they're taking market share from developed market companies that have had those market shares for a long time. That worked really well. But the other engine of growth, which are domestic consumption and real estate are as weak as they've been since the beginning of the year, and we haven't seen an improvement. It's quite interesting because the confidence in the country is very low. You have to remember that most people, or at least working people, the people that are consuming in China right now, have always lived in an area where China was doing really well. China was growing really fast. Property prices were going up every year. Remember, 70% of people’s wealth is in real estate in China. People don't really own a lot of the stock market or even savings or insurance, all those things. It's like your savings are in property. Everyone owns one or two properties. When the prices go down, you feel a lot poorer. You have really big repercussion then. Not wanting to buy more property, so prices keep going down, but also not wanting to consume at all because you feel a lot poorer. This bad cycle China has been for a few years now, the government doesn't seem to want or be able to break it. This needs to happen for the confidence to come back in the country in a stock market to rebound. We're getting to a point where it looks really bad. I must say the numbers we've seen recently on retail sales, on property sales, property prices have been really poor. This week we have the 3rd Plenum in China, which usually is when they can announce some economic measures. So hopefully we'll see something. Again, China being so big in emerging markets, if it rebounds, it would be really positive for the asset class.

As you mentioned, you're happy with your performance with a big chunk of emerging markets really not doing any or you're really not even investing in it or being able to take advantage of it in a way you'd like to. And it would mean so much if that was to reemerge and come off the ground. But the nice thing is, in terms of the way you're positioned anyways, you've taken advantage of the areas that you need to, which has helped you drive really strong outcomes in your portfolios, and you'll be able to move back into China as you want to at very nice valuations, which again sets you up for, hopefully, that phase where China comes back.

Exactly. We've been doing a little bit already. We've added a name in China. We're topping up a little bit some of the highest quality name because the interesting bit in China, everything was sold off. Because the positioning from investors in China is the lowest it's ever been. People have just been selling everything. What you see, you see really high-quality names. There are some really high-quality names in China, like in every market, that have been sold off the same way. We're taking advantage of that. Our experience is that usually those things don't last for too long. High-quality names, we rate at some point, and we position for that. When we start to see really a bit more confidence coming back into the market, we can be very quick at taking advantage and making sure that our exposure is increased.

That's one driver in emerging markets. The other one — and we spoke about it at the start of the year — I think we've all been waiting for the US to lower rates, which should, in theory, weaken the US dollar. The US dollar has proven, as the US economy, to be fairly resilient. That remains the big shoe that has to fall to see emerging markets start to retake the position as an outperforming area relative to the US. Is that not really still the big one?

Yeah, you're absolutely right because usually the two big drivers for emerging markets tend to be superior growth — an accelerating superior growth because it's always growing faster — and a weaker dollar. We've seen this superior growth. Growth is definitely accelerating much more in EM than in DM, so that's already there. But what we haven't seen is this dollar. You're right, we're in a difficult geopolitical environment. Every day, it seems that something happens that is a little bit scary for the world. We have some wars. There's a lot of events that, every time they happen, the dollar gets a bit stronger because in a scary environment, that's where you want to be. You feel like that's the area where your money is going to be safe. But I think you're right, when interest rates start to drop, that would be really the signal, I think. Some of that money, at least, will go somewhere else, and that should start really the beginning of the dollar weakening a little bit, at least. That would be positive for EM countries.

Yeah, it's just really held steady through the whole year with the anticipation that the dollar would weaken. And we talked about this with many of our guests over the last few years with relation to the US dollar. If you look historically, you go through bull and bear market cycle — up-cycles in the US dollar versus other currencies and down-cycles — we've really been through an extended period of an up-cycle in the US dollar. But we don't have a COVID pandemic every few months. It never happened before in that way. We've got situations globally, geopolitically, that are unusual. Those things happen, but maybe not to this degree, which has created that flight to safety, which is still represented by the US dollar. It's still the world's reserve currency. So we've had this extended period of strength in the US dollar, but that's typically followed by an extended period of weakness. And that's when emerging markets in particular, but even Canada, Europe, other parts of the world tend to do better relative to the US markets. But again, it's that emerging market piece that really can take off when you see that weaker US dollar. And as you say, you've already got the growth there.

You're right. The second part of the year will be extremely important and interesting, notably because of the US elections. We obviously don't know who's going to win election, but if we get into a new leadership — I mean, an old new leadership — where we will see further tax cuts, maybe some more tariffs that could be negative for inflation or driving more inflation. A lot can happen in a country where you have really much higher level of debt than we had years ago, deficits that are really at a high level as well. So it could be very volatile in the coming months. So yeah, we're not going to be bored, as usual.

Something that a lot of people don't recognize — and we can’t lump all the emerging markets together — but there's a lot of countries in the emerging market category that you're looking at and investing in every day whose debt situation is actually vastly superior to that of the United States right now.

Absolutely. I think that's the thing that we find doesn't make sense in a way. When you look at EM countries and if you aggregate them — as you said, every country is different — but when you aggregate them, the fiscal deficit, the debt level on aggregate in the emerging market is much lower than on developed market. Because those countries learned their lesson. They suffered so much from higher debt and higher deficit on the currency in particular. They tend to be quite cautious now. But at the same time, EM countries trade at the lowest valuation compared to developed market that has ever been in the past. There's a complete mismatch between the fundamentals of EM versus DM and the valuation. That's why we think, if you look ahead, is it going to happen this year? Is it going to be in six months or a year? It's very difficult because of the geopolitical movements you mentioned. But we feel like this mismatch, this anomaly between the two, at some point, will have to close one way or the other. We think that this gap of valuation needs to narrow at some point. It's not sustainable.

When we're starting to look at some of these AI positions in the US market, I think of Yogi Berra. Do you know who Yogi Berra is?

No.

Not Yogi Bear. You might not even know Yogi Bear, growing up in Europe. But Yogi Berra was a baseball player and manager. And he used what they call malapropisms. He said stuff that didn’t make sense. But then when you think about it, it kind of did. But he's got a line that says — and I think it applies to artificial intelligence stocks — talking about a busy restaurant: why don't we go to this really popular restaurant? And he says: nobody goes there anymore because it's always lined up. And it's the idea that the lineup is still there and people are going in, but it's a bad experience. When over here I've got a great restaurant as well. And the analogy here is with emerging markets. I've got all these things. I have better growth. I have lower debt levels. So everything's great. People should be going there, but just nobody's discovered it yet. Somebody needs to stop going and lining up to go to the expensive place where you wait in line and go over and start to buy the stuff that's more attractive, which has all these great attributes.

It's interesting you said that because we look at the market and the factors that tend to drive it. What has been driving the market this year is pure momentum. People have just been buying what has been doing well. It's tricky because when you have a momentum-driven market, it can go on for a while because obviously you make more money, and then you make some more money. But what happens usually with those momentum markets? One day they turn, but you don't know why. Usually, there's not always a reason. In March 2000, we don't know why the market turned. One day the market turns and then it goes in reverse. It's tricky, but you're right, we're exactly in this kind of momentum market.

Let's just finish off with one thing because I know your particular area of expertise in emerging markets is around dividend stocks. We just had another guest on who was talking about yields in the US and Canada, which have a lot of dividend stocks. Because of the appreciation of the stocks, the dividends haven't increased as much as the stock price, so yields have come down. Are we seeing the same thing in emerging markets? Do emerging market dividend stocks offer an interesting opportunity as well?

It's interesting, in emerging market, dividend stocks are maybe a little bit less in favor. What we've seen in emerging market over the past year or so, is companies discovering buybacks, which was never a big thing before. Now they've discovered that they cannot have enough. It's quite interesting. I think there's a little bit less focus at the moment on dividend yield and a little bit more on share buybacks. But I would say there are some really interesting high dividend names still in the emerging market, but maybe at the moment, a little bit less in favor. But I think that may change in the future as interest rates go down.

Yeah, and buybacks are all part, along with dividends, of this overall shareholder value. That's really interesting. Again, going back to my restaurant analogy, the chefs at these restaurants that nobody's going to, they're eating their own food right now, and the food is amazing. They're just waiting for someone to discover it.

It's exactly what's happening.

If the chef is eating their own food and it's great, eventually someone's going to discover it. We love to find these opportunities when the valuation is just out of whack with all of the metrics and all the ways you think about what should drive investment performance. That's what really creates an opportunity. And that's why we love to talk to you, Laurence. It's always a great opportunity to talk to you in bad weather, but we find good investment opportunities.

Absolutely. Really nice speaking to you as well.

Laurence, we'll get you back on to check on emerging markets in the third and fourth quarter. But thanks again, as always.

You're welcome. Thanks, Dave.