Hello and welcome to The Download. I'm your host, Dave Richardson. It is time to travel somewhere where many of us never go, particularly from an investment perspective, but we should. And we have, I'm not just going to say one of our favorites because I'll just give you the name that I use for him, and then you'll know where he sits in terms of my view of him. And we call him Phil the Thrill. And that is Phil Langham, who is the head of emerging market equities at RBC Global Asset Management. Phil, Happy New Year. Great to see you. You look fantastic. You had a great year. Is anyone having a better time right now than you, Phil?

No. I can't complain. It's been a really good year in emerging markets. So emerging markets overall were up, in US dollar terms, 35% and strong outperformance over developed markets. So yeah, I'm definitely very happy at the moment.

And I'm happy because my wife was looking at her portfolio. She invests with you. And she had a big smile on her face. She had a big smile on her face, and she was with me. So this is unusual, Phil. So you're doing something right. So when you look back at 2025, Phil, what drove the great returns in emerging markets?

I'd say it was a combination of multiple expansion and earnings growth. Valuations in emerging markets were extremely cheap. We've seen emerging markets underperform for several years now. And in the last two or three years, we've started to see much better earnings as growth coming from emerging markets. What I would say is that if you look at the performance of emerging markets compared to developed markets, historically, it's tended to occur in very long cycles, typically cycles of 8 to 12 years. We've just come through a very long period of emerging markets underperforming. And although last year looks extremely strong, if we look back at performance over a longer period of time, really, it was just a blip. But it would feel that if we judge what's happened historically in emerging markets, we can expect there to be much more upside going forward.

That was a really important thing to add. And really, what would be the starting point? Eighteen months ago, Phil, or almost two years, where you saw the transition between the relative performance of emerging markets move ahead of that of the US? Would that be the time frame?

I'd say probably not even quite as much as 18 months ago. We saw the US market peak as a percentage of global market cap in December 2024 at around 67%. It's currently at about 64%. And if you look at it 12 years ago, it was around about 40% of global market cap. And since then, we have seen non-US markets, and particularly emerging markets, start to break out in terms of overall performance.

Yeah. And so only just a touch over a year into that better relative performance. And again, when these things reverse, they tend to hold, as you mentioned, for an extended period of time. Now, that doesn't mean that every year through that extended period, emerging markets will do better than the US or do better than Canada, but it'll be a trend over time. So you went from 40% up to 66% of the global markets being US weight. And now you've started to see the US start to move back down. And again, over the long term, you'd expect that to normalize back towards its longer-term trend, which would be right around 50%, right?

Yeah, I'd say it came from 40%. And just thinking about it, 67% of all global market cap in one market is clearly extremely high. And valuations in the US look very elevated relative to history. I think another way of thinking about it would be that for most investors, they'll tend to have something like 5% or maybe a maximum of 10% of their assets in emerging markets. But emerging markets overall broadly constitute something like 50% of global GDP and something like 70% of global GDP growth, 80% of the global population. So overall, people have relatively little invested in emerging markets compared to the size of emerging markets.

And so, if we look back at 2025, and you say it's a case of a multiple expansion and earnings growth, were there any areas of emerging markets in terms of geography or sectors that particularly stand out through 2025?

It was very broad-based. Like developed markets, we saw the IT sector leading, but I'd say the performance in the IT sector wasn't as dramatic as it is in the developed world. And if you look at valuations of IT, again, they're high in emerging markets, but far from extreme and much lower than they are in developed markets. But we also saw domestic sectors be relatively strong. So sectors such as financials and the consumer. And to us, these sectors actually look really attractive going forward. And again, we started to see some of the commodity sectors more towards the end of the year do well, not so much energy, but more areas such as materials. From a country point of view, we've seen China be quite weak until the last 18 months, in the last few years. But China has started a much stronger period of performance. We've also seen the other North Asian markets, so Korea and Taiwan, be relatively strong. And for the most part, we've seen strength across the board. One market that did lag last year, but that has been very strong over the longer term is India. Really, the key issue in India was valuation. So India had performed very well for the three or four years coming into last year. We still feel that India has a very strong structural growth story, likely to be the fastest-growing emerging market. Lots of great companies. Penetration in India in a large number of different areas is still very low, still growing. Urbanization is still growing. The demographic story is still very strong. So we're positive on India over the long term. We did move to being slightly underweight, and we're now looking at India and looking at some increasingly attractive assets in India, and we're likely to increase our weightings in India over the coming months.

That does transition us into 2026. So India is an area, again, after having a relatively weak year due to valuation, a year of going sideways, makes it more attractive as you come into 2026. Anything else that you're looking at in 2026, again, either geography or sectors of the economy that you think are going to be particularly interesting? Are there areas of your portfolio where you might be looking to be overweight as you go through the year?

Yeah, I'd say from a sector point of view, we've always liked domestic sectors, so sectors such as the consumer and financials, but we feel even stronger about that now. I think with the tariff regime that's in place, we're seeing emerging market countries focus much more on domestic demand. We do feel that valuations in those areas are very good. Interest rates are likely to come down, again, supporting domestic demand. And I'd say we have some concerns on some of the other areas that have done well, IT in particular. We feel that over the next one or two years, we're likely to see investors increasingly question the huge amounts of CapEx that have gone into AI and the returns. As yet, we haven't really seen the increasing competition, the increasing leverage, with the very high valuations in those areas. Now, emerging market companies have largely benefited in those areas by being essentially the pics and shovels, so the leading semiconductor companies. But certainly, if we were to see a correction in IT and AI stocks in particular, we feel that emerging market IT companies would not be immune from that.

Yeah, I want to talk about an area that I know you like, and you've already mentioned, which is the financial sector. As you say, those are more domestically focused. Canadians would be very familiar with the Canadian banking system, as most people are familiar with their own domestic banking system. And you tend to think that the rest of the world looks like that. If you go to the downtown core of any city in Canada, there's a bank on every corner. There's lots of branches all over the place. There's a small number of very successful banks, and there's other options as well and some emerging options online. But everyone has a bank account. It's a very strong bank culture in the country. People trust, rely on banks, have certain expectations of what they're going to get out of their banks. But if I go to an emerging market country, say I was to go to, I don't know, Bangladesh or Peru, what would I see that was different in the banking culture there than what I would see in the UK where you live or in Canada where our listeners live?

Well, I'd say in countries like Bangladesh or Peru, the standout difference would be that credit penetration is much lower than it is in the developed world. In Peru, for example, credit penetration is something like 20% of GDP. It would be four or five times that in the developed world. If you look at mortgages as a percentage of GDP in a country like India, they're around 9%. They're 25% in most emerging markets, and 80% to 100% in most developed markets. Credit penetration will be the standout difference. I'm not sure to what extent this is the case in Canada, but it's definitely not the case in a lot of developed markets. But one thing that we do see in emerging markets is that the very best banks are really able to maintain their competitive edge over long periods of time. And what we found is that there are perhaps two key factors that really determine that competitive edge. The first one is your deposit franchise. So to what extent do you have access as a bank to low-cost deposits? And the banks that have the highest access to that tend to be extremely successful. It's not something that is easy for other banks to gain market share on. The other thing that we feel is important is in terms of management, having a prudent approach, a focus on credit quality. And again, that's something that tends to be part of the culture of banks. And those banks and those management and owners that really focus on this over the long term have tended to be much more successful. And therefore, what we've seen as a result is the very best banks in emerging markets are able to produce the highest return on assets over very long periods of time.

Yeah, and I should say, the listeners might say, I'm obviously biased because I've worked for a bank for 34 years. So when I say banks are trusted and loved, maybe I'm showing my bias, but at the very least, there's a stability and a power in the perception of that particular institution, which, as you say, draws assets in so that they can be lent out, which is basic banking. And what's exciting when you talk about these other countries, and if you put your Canadian banking hat on, is that lack of penetration. That as these countries continue to emerge as they are, and if you spend any time, as you do, in emerging market countries. You've been traveling the emerging markets for what, Phil? 30 years?

33 years.

33 years. I mean, when you go to—we pick any country—you go to Vietnam today versus Vietnam 30 years ago, there is a distinct difference in what you see in terms of infrastructure, in terms of modernization, and if you just apply those same things to financial services, that's where you can get pretty excited about the financial sector in emerging markets.

Yeah, I'd say the financial sector in emerging markets is still very much a growth sector. Penetration is still growing. Clearly, it's much more mature in the developed world, and we're actually, for the most part, seeing branches close and online competition. That's not the case in emerging markets.

So Phil, one of the concerns that investors express to me when they start to think about investing in emerging markets, and perhaps we've seen a glimpse of it right here, is the political stability or the influence of geopolitics on smaller economies, smaller markets. The US action in Venezuela is an example of what the perceived risk that Canadians would have investing in the emerging markets. When you're thinking about the companies you're investing in or countries that you're going into, is that something you're considering? Obviously, it's not something you can predict perfectly, but is that something you take into account, what the political situation is and the potential for issues that could spurn from a developed economy?

Yeah, absolutely. Perhaps the best example for us would be Russia. We didn't have anything at all in Russia going into the Russia-Ukraine crisis. Now, obviously, we didn't predict that Russia would invade Ukraine, but we did recognize very high political risk in Russia under Putin. The fact that Gold Post could be changed, the fact that he had a huge influence. And despite the fact that Russia was a meaningful part of the overall index, we still had a zero weighting to Russia and had had a zero weighting for several years. So it is something that we think about and that we feel is very important. I'd also say, just as important, if not even more important for us in terms of looking at overall countries, is looking at overall companies and management. And we spend a lot of time on corporate governance. For us, it's an absolutely key part of what we look for in the companies in which we invest. We want the very best corporate governance, management that we can trust, owners that we can trust, and we won't put our clients' money in any companies where we feel that's not the case.

Yeah. And I mean, that's something that you're looking for in developed markets as well, because companies that have good governance, treat their employees well, treat their customers well. Treat the environment well is another connection which would surprise people. But it's got to be even more important in emerging markets because the disparity between the best and the worst is probably larger than what you'd see in developed markets.

Absolutely. That's the case. People have been more focused on that in the last few years. But for us, that's been an area where it's been absolutely instrumental ever since we launched the strategy 16 years ago. And you're right. It's important whatever company you look at, but it's particularly important in emerging markets.

Has that been really the key to your success, just that, or the fact that you and the team hop on planes and travel all over the place to go and not just read about how good a company might be, but actually go and look them in the eyes and see them and then the depth of experience? What do you attribute the success that you've had around emerging markets over an extended period of time, Phil?

Yeah, I'd say you're right in terms of philosophy. So spending a lot of time on management, on owners, on people that we trust. And I'd say in general, the research that we do as a team, so the on-ground research, but also a lot of the top-down reports that we do from a sectoral and thematic point of view, and the detailed work that we do, meeting companies, meeting different layers of management, meeting industry experts. So for us, research is absolutely crucial. And when it comes to research, we do not cut any corners.

Yeah. And if the listeners are wondering why I threw out the relative situation of banking in Canada versus Bangladesh and Peru, I knew that Phil would know the credit penetration in Bangladesh and Peru, just off the top of his head, which speaks to the depth of knowledge you really need to invest in these areas successfully, because, again, there's all kinds of opportunities out there. And there are in developed markets as well, you would say, but there's always landmines out there. Maybe a few more landmines out in emerging markets than in developed markets. So that expertise and knowledge right down to the local level is really important to drive sustained success investing in emerging markets.

Yeah, absolutely. I mean, it's something that we, as a team, have been doing for 16 years, as you mentioned. I've been doing it for 33 years. When I first started doing emerging markets, it was actually a really small asset class. So I've seen very significant changes over the last three decades.

Yeah, it's really amazing. We're on YouTube, Phil, so they're seeing us on video and we've got the podcast on audio. By the way, subscribe and follow us on YouTube. Give us a five-star review because Phil is certainly a five-star investment manager. But you can see the humility. He's such a humble man for the success that he and his team, and I know you attribute everything to not just yourself, but the entire team you work with. We've had Laurence on the podcast, your colleague as well. But that's why his many fans, certainly internally, call him the Thrill. And I know that just makes you blush. But Phil, congratulations. Even on relative terms, you were doing very well through some of the tough years on a broader relative basis for emerging markets. But it's a lot more fun when the wind is at your sails instead of in your face.

Yeah, absolutely. Hopefully that will continue.

Great. Well, Phil, thank you so much for the time today. Always great to catch up with you. And again, just another example, as we go through all of these different markets and we look back at 2025 and look forward to 2026, that diversification, not getting stuck in the mindset that just because over the last year, something's underperformed, that it can't do well the next year. If you were thinking only that way, if you would have been overweight US and not touching emerging markets last year, that would have been exactly the wrong thing to do. But when you go into emerging markets, it's good to have a guide like Phil who knows his way around. And so I'm glad you're taking care of my wife much better than I probably do.

Thanks, Dave.

Thanks, Phil. We'll see you. Take care.

See you soon. Bye.