Speaker 0:
Hello and welcome to Asset T V's Master Class with me, Mark Co. We are looking at the outlook for global emerging markets with so much volatility and uncertainty around developed markets. What happens if you go further a field? Are you having to take a lot more risk for your reward? Or you do look like

Speaker 0:
you're gonna get a lot more reward for taking a similar level of risk? Well, to discuss that I'm joined here in the studio in London today by James Mcdermot. He's manager of the Investor Emerging Markets China Fund and we're also joined by Y No, who is manager of the Polar Capital Emerging Markets Stars Fund. And we're joined down the line from Edinburgh by Sri Awal. He is part of the investment team at FSS A and he is co manager of the Scottish Oriental Smaller Companies Investment Trust. Let's get things underway,

Speaker 0:
James, If I can come to you first, you're running, uh, emerging markets China fund. Um, why take China out of emerging markets?

Speaker 0:
Well, we did so, uh, to address client demand that we were seeing So at the end of March last year, uh, we decided to launch the EMX China Fund. Uh, on the back of growing client interest for such a product, and people were wanting to exclude China for a myriad of different reasons, whether it's ESG whether China was they thought it was too big in the index, um, or whether they wanted to manage China money separately.

Speaker 0:
Um, previous to that, we had been running an Asia China mandate for an institutional client, uh, for a year before that. And so we saw traction from it from there and in the round. Uh, I hate to put a tag on the way that simplistic tag on the way you run money. But would you describe this fund as as running a growth style value style, we would say Valuation bias? Um, I guess with a well valuation with a value bias essentially looking for things that we think are trading below fair value

Speaker 0:
and contrarian in nature, I'd say our style is thank you. Uh, let's bring you in. Um, again, Emerging market is a huge area. So do you have any particular sectors or geographic reasons that you, as you look at it back over the you've tended to favour?

Speaker 0:
Yeah, We've not been running with the strategy for more than 12 years, and I guess there's no question or that time arise. We had quite a bit of an an Asian buyers, and it's probably been kind of a little bit, you would say, building around a lot of focus on India over the years, uh, a lot of the kind of domestic development going on in India

Speaker 0:
and then in the other in there within the Asian universe. It has been quite a bit biassed to technology over the years and again that, of course, cluster in around Korea, Taiwan, but also some degree, some of the Chinese technology names. That's probably some of the key biases we had there, but we are definitely a broad based E fund, and we have been coming pretty pretty wide around around over the years. But there's probably these biases towards India, India and and technology,

Speaker 0:
and you mentioned Tech. I mean, it had an incredible run over the last few years, but I think it's a bit of a sense the gloss has come off that. Are you still a believer in the tech story? Is just having a couple of bumps at the moment. I'll definitely say very much now. I actually think technology looks exceptionally attractive right now. So, uh, I still believe you can find a lot of really attractive companies that are growing very well. And, uh, we do believe we are generally in front of a new, quite significant last technology upgrade cycle.

Speaker 0:
And yes, it's right. We don't have an NVIDIA in in Asia, But again, we actually have companies like TS MC that are producing the chips for NVIDIA. And I still see we have a very big kind of ecosystem and supply system and actually really

Speaker 0:
very well positioned to benefit from other of the new technology trends that are coming on there. So, uh, and again, we have much, much cheaper valuation that what you'll find technology companies in developed world. So we actually very constructive on technology. OK, thank you. Well, lot, lots. We can come back and talk to over the course of the next 40 minutes, But sure, let's bring you now. You, you you've got a smaller companies portfolio. So in the round,

Speaker 0:
do the smaller companies in emerging markets in Asia perform very differently from more mainstream or large cap. Uh, offerings. What? What makes them different,

Speaker 1:
right? Uh, thank you. Thank you so much, mam. Um, so, firstly, I'll I'll tell you a little bit about how we define smaller companies. So in Scottish Oriental, uh, the definition of a smaller company is a company below $5 billion in market capitalization at the time of first investment. So that's how we define it. Um, and in terms of, uh, how we see the opportunity compared to larger companies, I think one of the most unique aspects of, uh, how we define smaller companies in emerging markets is

Speaker 1:
that we you We tend to find

Speaker 1:
businesses that can become very big businesses in the future as these economies develop currently hiding in smaller market capitalizations. So you could have, say, the largest beer company in India, uh, which has over 50% market share that trades at a market capitalization of $4 billion.

Speaker 1:
Uh, if you think about sort of the size of the market, the long term potential, that shouldn't be a $4 billion company, you know, five or 10 or 15 years from now. So as bottom up, investors with a very long term view, uh, in on the region in which we invest, Uh, we tend to think smaller companies do provide an exceptional opportunity for growth, Uh, and to capture that opportunity over the next next 5, 10, 20 years

Speaker 0:
and get in the round when you look at valuations, because all of our managers have mentioned valuation as as a really important thing to say. Um, how do small caps valuations look compared to the broader indices at the moment?

Speaker 1:
Right. Uh, so we are sort of index agnostic in terms of, uh, our investment philosophy. We don't construct our portfolios based on what is what exists in the index. We don't even look at it so I won't be able to give you a direct answer. Uh, however, what we do see, uh, with respect to valuations is that across our opportunity, set valuations are relatively attractive at the moment. Uh, so I can tell you for our portfolio, uh, we expect that, uh, the earnings per share gave up over the next couple of years should be over 15%

Speaker 1:
uh, in dollar terms. Uh, the portfolio generates a return on equity. Uh, of over 20% and it trades on a one year forward P of 16 times. Uh, so if we see that as a company, as a single company, which with Scottish Oriental is, uh, which generates over 20% return on equity, uh, growing its earnings at over 15% available at sort of a mid teens speed, uh, we would find that sort of reasonably attractive. So which is why we're very excited with with the opportunities set, uh, that we have at the moment.

Speaker 0:
Thank you. Uh, bring I'll bring you in first and then James just around. What? Some of those forward looking valuation and perhaps growth metrics are on on your portfolio at the moment. So if I can come to you on that first,

Speaker 0:
I think it's a big mix that you can say some of the more asset heavy company. If you look at something like a price to book, multiply and we very much believe in economic value, added E VA. So when we kind of look at the invested capital base and the spread they can generate in their capital, we do generally find that these companies are quite cheap, and they do not price in a lot of what we call E VA kind of creation going forward. So we do generally feel there's a quite a lot of support there.

Speaker 0:
There's no question going back to it again if we touch on something like the technology space before. Yes, there has been a sign downturn so clearly from a pure earnings perspective. Some of the earnings are pretty depressed now, and it does look like some of the multipliers maybe look slightly higher than they would normally do. But again, that is just part of, uh, using a PE methodology to be sign company. That's maybe not a really a fair reflection on on the valuation level.

Speaker 0:
So if we really look at you can say the the installed capital base and what we believe is a more kind of medium term or structural spread, they can run there. We actually still find this company being very cheaply, uh, priced there. There's no question bigger markets like India and so on. Yes, it does, uh, come up as as a more expensive market for sure, but I think if you're willing to move beyond the kind of classic, very expensive consumer stable names and so on. And maybe you can look like some more asset heavy companies, like, uh, property malls and so on.

Speaker 0:
Then we actually think we can find quite attractive kind of assets placed in in these markets. Thank you, James, As you're looking at your emerging markets China portfolio today what what are some of the kind of key metrics for you both on the valuation and perhaps on future growth prospects for it? Yeah. So if you think about, uh, headline valuation numbers So if we think about the EM. Index at the moment, it's around 1.5 times book, um,

Speaker 0:
world or developed market indexes around three times. So that's

Speaker 0:
obviously doubled. And that is a significant spread compared to what it was in the past. Uh, looking at EMX China. It's a little lower than that, because you've got markets like Korea with a bigger waiting, which are a lower price to book. So around 1.3 times and then the the fund, our fund is a a discount to that because of our valuation bias, we probably looking for double digit growth. I would say, um, next year.

Speaker 0:
Thank you. And I I wanted to to bring in II. I sort of brought this up with you a little bit around technology, but, uh, there's been an awful lot of change taking place in the world in the last couple of years. Um, do do you get a sense that there is a real sea change in terms of countries and sectors that have had a great last decade but might not might not be in the same place over the next 10 years or or are we confusing a little bit of turbulence for

Speaker 0:
a a major turning point in

Speaker 1:
Asia's economy?

Speaker 1:
Yes. Um, so So, Mark, Absolutely. I would agree with you that the winners, uh, both in terms of countries and companies or the kinds of companies over the last decade, will probably not be the same as the winners over the coming decade.

Speaker 1:
Uh, so one of the things that the other panellists also mentioned was, you know, countries like India or or say, Indonesia, both of which are large parts of the portfolio of Scottish oriented. Um, in both of these countries, we saw that the last decade, uh, tended to reflect a very slow period of growth. Relatively speaking. Um, And what we saw in this time was that

Speaker 1:
one at a country level, there were a number of reforms which made the country more competitive, which improved the ease of doing business in these countries. But also at a company level and a consumer level, we saw a lot of deleveraging. So companies which had, uh, you know, taken on debt a decade ago, they spent this time when demand was weak and utilizations were low, using their cash flows to repay the debt and de leverage the balance sheets.

Speaker 1:
As demand post covid is coming back in these markets, we see these countries and companies in stronger positions than they were before and in this period. Over the last decade, they've also gained market share from the smaller unorganised competitors. So these companies, which hadn't exactly been the winners over the last decade, they are positioned to be much stronger performers in the years to come. On the other hand, you have a very large economy, like,

Speaker 1:
say, China, uh, which did very well over the last decade. But we do know that there have been some structural changes there, 11 significant example, is probably the property sector, um, which had been the driver of growth in China over the last many decades. Uh, given the size of the property sector relative to the economy, Um, expecting that that continues to be the driver of growth. Uh, is is,

Speaker 1:
uh, you know something that probably we will not agree with. And as a result of that, when that stops driving growth, the implications that that has on the broader economy. So when we think about smaller companies, a number of the sectors that supply to the property sector say, a paint or a pipe or a cement, Um, there's a much broader impact of the slowdown of that growth. It isn't limited to just just that 11 industry,

Speaker 1:
um, and that will create a headwind for some of these larger countries. So, I, I absolutely agree with you that the winners of the last decade and the winners of the coming decade will probably be very different. Uh, will be probably be very different. Thank

Speaker 0:
you. We're mentioning China feels unfair to ask James about that because it's not in his. It's not part of the portfolio, but just looking at that. I mean, what's when you're looking at the company level? How much time do you have to spend thinking about that broader GDP

Speaker 0:
backdrop? Um, you know which which she has been talking about. What? When would you agree with his thesis? That, uh, perhaps that the property market is overcooked and there will be consequences. And I suppose the other element that building is the demographics. I mean, China's demographics are beginning to turn against it pretty pretty sharply.

Speaker 0:
Yes, absolutely. And I think that we have probably for quite a time kind of been having the view that, yeah, do not expect high GDP growth in China. I mean,

Speaker 0:
probably even the kind of target now 55 and 5%. I mean that that seems, in our mind, extreme optimistic. When you really look at the labour market, the demographics, the historical productivity trends, um, and then literally see the investment level, they can put up even coming to 5.5 on a kind of more structural level. I think that's very optimistic. So in our case, it will not be long before you can say China at the 2 to 3% that will kind of be a good outcome.

Speaker 0:
So for us, China has always been about you can say a bottom up story And, uh, you can say that's maybe where we are still, uh, kind of a bit more optimistic that, uh, I think if you look at it in a kind of more broader historical perspective, China was for literally two decades an amazing GDP story. But let's be very frank in the equity market in a broad equity market, since it has been a very, very disappointing market.

Speaker 0:
Uh, of course, you still have some extreme success story like Tencent or Alibaba, seen since the IP O and and how they have been performing. But the broadband market has been disappointing, and one of the things is that on the supply side, China has been issuing significant amount of equities. And on the other side, a market like US, there have been a lot of share buybacks taking capital out. So your earnings per share growth has just been a lot stronger in the US market, with far from the same GDP story as China.

Speaker 0:
Our belief is that China are to some degree getting to a bit of an inflexion point where if they are not, you can say that capital depending any longer from a very heavy investment cycle and growing Maybe that supply side on the equity market actually start to get a bit better. And we have seen as a response to this kind of slowdown that some of the leading companies there they are now for the first time starting themselves, doing share buyback, really paying dividend.

Speaker 0:
So we are kind of hopefully at the bottom up level. The dynamics in China are starting to to change there. Uh, so that's a fair point. So I say GDP is not the issue. The issue is probably more, you can say, a risk premium

Speaker 0:
that Do we have the risk that China would always carry a little multiplier because of geo politics? Well, we just on that that you mentioned Alibaba, which is one of your top 10 holdings. So what do you like about it? Given whatever else I take your point about, you know, stocks can be, to a degree, the master of their own destiny, but the demographics aren't looking great. Um, I I'd say it certainly had some political

Speaker 0:
issues, uh, in terms of control. So what is it that makes you think that is a stock? Certainly. Now it's It's set fair for the medium term.

Speaker 0:
I think it's just an extraordinary cheap company. So yes, it will maybe be on the retail side. Uh, never be the old growth rate, but we still be able. It will be growing at a pretty decent level from here, and it's definitely not paid that way. And then I think we have been seeing a company like Alibaba really being engaged in what we would call a shareholder kind of return policy, that they have been very frank saying that, uh, something like, uh, they are big computer unit that will be distributed to shareholders as a form of special

Speaker 0:
dividend. So we think that you can say, looking at Alibaba as a sum of part valuation. We think they are a tremendous upside, and we do believe some of that value will be unlocked over the next 1 to 2 years. And we definitely want to be part of getting some of that valuation upside. Um, so I think it is a indication of you say, within our investment process where it's maybe not the highest growth. But it's definitely where the valuation gives very heavily support in terms. You're looking China. Um,

Speaker 0:
are there any parts of the world or companies that you see beginning to benefit from things like this restoring And, uh, you know, the the these big changes that are beginning to take place in some of the global supply chains?

Speaker 0:
Yes. Uh, so I guess the top of everyone's mind is probably Mexico, Uh, which is essentially, uh, a company that's benefited from outsourcing or near shoring for a long time. Well, over a decade, although it took a pause, Um, in the mid 20 teens, um, as a result of trump in the White House as well as, uh, the the president, we still have the president there.

Speaker 0:
Um, but now, reassessing, you know the risks within China, then more and more capital is coming back. Um, especially with, um with the IRA, um, in the US to incentivize more and more auto production in in the US. And China and Mexico should benefit from that where they already have a big, um, auto supply chain there. But are there any concerns? I mean one round the politics, because I again I'm not an expert on Mexican politics, but I think amlo is fairly, Um

Speaker 0:
well, maybe authoritarians too struggle with, But, I mean, there's a sense he's probably closer to the Orban camp than he is to the sort of Joe Biden camp of democracy. What happens if you play that forward? Uh, and secondly, I mean, Mexico has got quite a lot of social issues of its own hand. I mean, you know, on the one. I mean, I don't want to make out that you

Speaker 0:
and look at the country through the prism of, you know, uh, docu dramas on Netflix. But, I mean, it's clearly got issues around things like drug cartels and things does. Does that have an impact on what some of these companies can do? Is there a danger? It all looks great on the surface, but there's a lot more going on than an outside investor really understands. So, uh, the first one on the politics AMLO has been in charge now for five years. And while there was initially a lot of concern about what he might do and the policies he might implement and how that would affect capital markets.

Speaker 0:
Um, nothing really significant has happened, and everything has been rather watered down, and Congress and the Supreme Court has kept his policies in check. And so that is why there's been a re rating in Mexico, especially this year. Um, but we're still at valuations below the historic average on a price to book basis and then with respect to security, Um, that is an issue, but it's not significant enough to

Speaker 0:
to change anything significantly from a the way that Corporates run their business. So coming back then to your your main thesis that it's a good market for some of this on shoring or restoring, I mean, have you got an example of a stock that's in the portfolio that's benefiting from that? Uh, not necessarily, uh, directly. It's very difficult to actually find companies that listed companies of significant size, which you can, uh, get to that. And those that have benefited from that are now no longer screening as attractively valued.

Speaker 0:
Um, although I would highlight a, uh, a small cap bank, An SME bank called ion uh, which is in, uh, based in noon, which is one of the the territories in the north of Mexico, which is a a big trade hub, which will benefit, um, from more and more cross border trade.

Speaker 0:
OK, thank you. Um, you know anything that that you've got just picking up on that Mexico and Latin America story? Anything that particularly stands out for you in in your portfolio in that, uh, generally, uh, to to to to add to a comment here, we we generally agree. We think that this is a relative big significant moment for for for Mexico. And this could be kind of the real one we have been waiting for. I think we were

Speaker 0:
a lot of people back there in in kind of almost like a decade ago believing now we really start to see changes happening in in Mexico, and it kind of died a bit out. But it does feel very different this time. And I think it is a combination with both US policies really supporting investment into Mexico and clearly this idea that supply chains need some form of risk, and then you need an alternative and and Mexico just, uh, end up by default, ticking a lot of boxes there. So

Speaker 0:
I think we can see a lot of developments there. I mean, we have been able to find, like, a a smaller industrial real estate player. Uh, but but to James Point, I mean, it's not like screaming, cheap, cheap, but you need to believe in the growth. Uh, but if you are willing to believe in the growth and and and the drive is coming through there, then I still believe you can be generating some some good returns there. But yeah, you need to look bit bit hard around. One can maybe say one of the

Speaker 0:
tricky point for Mexico is that it's not a particular last equity market, I guess, because banks were heavily involved in the early days, a lot of key industrial conglomerate. They had funding from the banks, so they never really needed an equity market. So if we have to on an EM context, be a little bit disappointed about Mexico is kind of lack of of investment opportunities from an equity market perspective.

Speaker 0:
But as I see the fixed income market and and the bond market has been, uh, quite strong in in in Mexico, So that's purely where the biggest upside has been, at least from a short term perspective. Thank you. Well, let's swing back from, uh, Latin America back back to Asia. And I want to pick up on the the the consumer. Uh, we've heard so much over the years about the rise of of the middle class of the Asian consumer. What? What's that, uh, story looking like at at the moment, Uh, how are you playing it?

Speaker 1:
Sure, um so, Mark, absolutely. In a number of markets, we find that, um, after a long period, consumer demand is inflecting,

Speaker 1:
um, particularly where per capita incomes are reaching the level where discretionary categories say the likes of air conditioners in India, where people are, uh, able to buy air conditioners and the infrastructure that supports something like that say electricity, uh, is more widely and easily and and available and is more affordable. Uh, so you have, uh, all the sort of infrastructure required you have the

Speaker 1:
which is allowing the category to grow much faster than it grew for a number of years. In the past, the opportunity is is phenomenon. So, um, if you compare to, say, China, which sells over 50 million air conditioners in a year. Uh, India in aggregate sells close to 7 million air conditioners in a year. Um, for a country that is equally large, uh, for a for a climate that

Speaker 1:
not too different. In fact, India tends to be hotter. Uh, there is no reason why over the next several decades, we should see the same growth, uh, that we have seen in some other large markets, uh, in in the likes of India and Indonesia as well similar to India. In Indonesia, we find a number of attractive consumer opportunities. Similarly, a very large population and a very young population

Speaker 1:
and where the desire and ability to to buy premium products is is increasing every year. Uh, so one of the largest holdings in the trust is Mitra Ali Perkasa or MAPI. Um So Ma is, uh, the exclusive franchise operator for a number of global brands in Indonesia. The likes of Starbucks, Zara subway, Sephora, uh, foot locker as well.

Speaker 1:
Um, post covid. They've seen a resurgence in demand, particularly because these are the more premium end at the more premium end of the market. And it is the higher income consumers that have come out of covid with with higher disposable incomes, their incomes are growing. They've been less affected, affected by inflation as well. Uh, unlike some of the lower income, uh, consumers and the products that they typically consume Uh, so a has been seeing very strong demand.

Speaker 1:
Um, what they've also done in this period is that they've become more efficient, uh, in their own operations. So as they're getting more more demand, uh, their economics of operating their stores are more attractive than they were pre. Uh, so they're be benefiting from operating leverage as well. So there are a number of examples across the large Asian markets where there are strong consumer businesses that are seeing a better growth than they did a few years ago.

Speaker 0:
But but how much of you when you buy into companies such as this, uh, air conditioning in India or or or this this this group that has the franchise rights in in Indonesia, how much of the story is predicated on the fact that there will be growing wealth in these regions? Um,

Speaker 0:
let's say there's There's less GDP growth less Welsh wealth creation than you hoped. Will they still be good investments. Is there still a big enough runway for growth, or do you get left with something that's, you know, a disaster in the portfolio? But it it it it's it's definitely not one of those 10 baggers that you'd you'd hope for when you first made the the investment. Put the thesis together.

Speaker 1:
Yes. Um, so So, Mark, when If I if I tell you a little bit more about our investing philosophy um, for us, the growth comes at the numbers come at a later stage. It starts for us by determining the quality of the people that we are backing and the families that we are backing We we typically tend to like family owned businesses, particularly in regions like

Speaker 1:
like Asia, which have seen a number of disruptions over the years. Just since Scottish Oriental was founded in 1995 for example, we've seen the Asian financial crisis the the boom and bust, uh, with with the global, uh, Internet and telecom sector, we saw the global financial crisis uh, the paper tantrum in 2013. More recently COVID-19, um, and through all of those periods,

Speaker 1:
the companies that are the winners, uh, in the region.

Speaker 1:
These have been run conservatively by their families. Uh, that operate them, uh, in a way that they've survived through all these crises. And as a matter of fact, through each crisis, they've actually gained a stronger competitive position. So they're smaller, sort of unorganised or in

Speaker 1:
foreign sector competitors. They've fallen by the wayside with each crisis. And these companies have only come out stronger because they have stronger balance sheets. They don't take too much risk. They have better access to technology people and so on. So, yes, uh, if if GDP growth doesn't happen as expected, if per capita incomes don't grow,

Speaker 1:
that will mean that the rate of growth is slower, but typically in difficult periods. What we find with the market leaders is that they gain market share. So when growth comes back, as it has in countries like India and Indonesia, post covid um, what we've seen is that the market leaders have come out with a much larger share of the profit pool than they went in. And so they've just come out with with a stronger competitive position, with stronger bargaining power and so on. And then a lot of anti creation has happened since then.

Speaker 0:
Ok, well, I want to pick up on that idea about being a minority shareholder. As I guess you. You all are your portfolios in, um, and this idea of of family businesses. So, James, I mean, what's your thought on on that? I mean, what does it really come down to the family that you happen to be investing alongside? Oh, well, that's something that we definitely consider. But it's not a, um it's not something that we completely need to tick a box for us to have an investment in.

Speaker 0:
Um, so I guess we would look for the relative change of, uh, treatment of minorities, and we'd probably highlight, uh, Korea in that respect. Um, So the the trend that's been happening is that more and more money has been coming out of the property market in in Korea and into the equity market, and the Korean government is always of a mindset to try and protect the consumer.

Speaker 0:
And so, with more and more money coming into the capital market, they are looking for, uh, more and more protection for those for those consumers. And so a number of measures that they put in to protect minority shareholders. Um, would include things like, um, potentially, uh, making it mandatory

Speaker 0:
for, uh, cancelling Treasury shares rather than hoarding them on balance sheets, which Corporates had done in the past or, uh, tag along rights on, uh, on acquisitions or protection of shareholders as and when, uh, con conglomerate spins off a company in an IP O. So we think, um, they are good measures that could end up putting it on a a level pegging with some other, um, capital markets and potentially increase the, um, the valuation of

Speaker 0:
of Korean companies which had been experiencing a Korean discount, um, for a number of years. But the flip side is, if you've got a family that is very big in company, and some of Korea's most successful companies, I think, have had families behind them for several generations, I mean, you, you could argue that means they have a a real sense of taking a long term view. At any point in time, you might be a bit cross and wish they could speed things up, but fundamentally are thinking 2030 40 50 years out.

Speaker 0:
And if you're a long term investor. Your timeline is probably more aligned with that than, say, if someone said this is going to be the next 10 cent We put some private equity money behind it. Pop a bit of debt on and we'll be out in five years and we'll find some way of massaging the share price up. Just intuitively. Isn't the the the family long term approach more aligned to you as a as an investor than

Speaker 0:
perhaps the private equity? Possibly, uh, providing that the incentives are completely aligned. But then, uh, a counter example to that would be, uh, a large holding we have in in Mexico, which is Femsa. It's a family run business. Um, they are effectively a retail conglomerate. They own the biggest Coke bottler in the world by volume, and also, um, which is, like a convenience store, the biggest convenience store chain. They are certainly thinking in decades long view. Um, but

Speaker 0:
some of the investments that they make are not necessarily, uh to the benefit of minorities they were doing. They were going out of their comfort zone into new, uh, different sectors. And the market definitely didn't like that. And they have addressed that, um, in the last six months with a strategic review, which has massively, um, improved their valuation in the market. So there was a discrepancy between an investor, maybe on a 3 to 5 year horizon who want an exposure in Mexico to a family who's thinking decade and wants more

Speaker 0:
money in, uh, in the US, for example. Thank you. Can I get your thoughts on that? And also, if I think back to Japan, when Japan was booming, everyone was very keen on its market. But then, after that boom was over in the bust, everyone said, he said, Oh my goodness,

Speaker 0:
it's a terribly efficient, inefficient market. The Japanese just don't understand an equity the way we do. We're we're We're always pushing them to try and get them to take some of that cash off the balance sheet and get rid of cash holders. And all of a sudden it went from being a virtue to a vice. So how again? How do you think about that? Particularly in volatile markets, you know, when the share price is going up,

Speaker 0:
Probably a lot of, uh, is there a danger that you think

Speaker 0:
absolutely fine behaviour because everything's going up. And, uh, when markets are less liquid, um, and are moving against you. You think? Oh, my God, this is a structural problem.

Speaker 0:
Then say on on on the first one, we do have a pretty big bias. Also, what we call a family or a founder business model. As I say, we do generally believe somebody who has, uh, again the key there. That is that incentive structure. I mean, one of the things we really learn when it comes to corporate governance in Asia, we want to make very sure that they are not kind of too many funny cross holdings, uh, different kind of incentive structure. So if you can find a company where

Speaker 0:
that manager found us, uh, you can say incentive and wealth creation is very aligned with us as minority shareholder. Then we think that is kind of the tick in the box. And we are willing to back that. Of course, assuming the business model is is fine and so on. So that is kind of definitely what we want. We will definitely want to be able to own what we call professional manage businesses. Uh, but again, It's not to say that's a safe one. You can also have all the usual agency problems and so on, running in a in in a fully kind of more professional, manage business model.

Speaker 0:
So generally we do like the kind of longer term view. And and we generally, I think, agree with the view that over the longer term, families has been more better at allocating capital for for the longer term and and investing it, Um,

Speaker 0:
but I still agree there's a long way. I think we have definitely seen Japan being relative. You can say first mover in a more kind of firm governance structure. And we're now seeing, uh, James for mentioned kind of Korea kind of start to follow, Uh, and I think it's definitely a very positive move. I mean, we think there's a big Delta. I think both Japan and Korea has still a bit of bit of way to go, but at least it's a good beginning. And yes, there's a lot of value unlocking potential. Absolutely no question about that.

Speaker 0:
Um,

Speaker 0:
but on that, certainly with unlocking value. And you talked to her about things like, uh, Treasury shares, but certainly but is is there a danger that if you're a Korean company, So I says, Oh, people turn up from the other side of the world and be more efficient. Give cash back to shareholders. You you Actually, there's a bit of thinking. Hang on a second. You've just arrived off an aeroplane. We've made this money.

Speaker 0:
It's our money. Why you you buy a share and why? Why? Why do we suddenly give it all back to you? Um, no. We we we we'll find something. You know, this is this is national capital. We'll find something more useful to do with it than just hand it over to you.

Speaker 0:
Is there a tension there? Uh, yeah, There's There's definitely a tension. And I think, um, the the mindset in Korea and other places in Asia is to keep investing for the future. And I think we're totally OK with that. We just want a A balance. So, you know, if you're the likes of Samsung or TS MC and you have a significant amount of Capex to spend. Um but you still got lots and lots of cash on the balance sheet. You know,

Speaker 0:
between 10 and 50% of your market cap, and there's probably room to be sharing some of that with with shareholders, and it increases your returns as well. It makes your balance sheet more, but is there any danger that they some of these companies might have a misallocation of capital? Because they think we've got to get off the balance sheet and invest in something. But again, a little bit like the example you gave in Mexico, um, doesn't necessarily mean the best decisions going to be made.

Speaker 0:
Yeah, that's, uh, that's that's common, I think, across all markets and something we're very mindful of. I wouldn't necessarily, uh, highlight any any particular country or industry for being, uh, for doing that. But it's Yeah, it's definitely a risk and something we consider, you know, the track record of, um, capital allocation for before we take an investment decision. OK, well, I wanted to move on to, uh we we talked a little bit about that, and we mentioned tech. Um,

Speaker 0:
can I bring you that is is that, uh, is is that technology a theme that you can play in small cap? Or is that really something you have to scale up and be investing in the likes of TS, MC or Samsung to to to really get exposure to

Speaker 1:
so so there wouldn't be an NVIDIA.

Speaker 0:
But there could be a very young NVIDIA that you could get your hands on.

Speaker 1:
Yes, but, uh, there are a lot of the picks and shovels,

Speaker 1:
uh, to all of these, um so whether it is a number of companies say, say, testing companies in Taiwan or companies that provide very niche components where they have, you know, dominant global market shares because of the technology that they have developed over decades in, say, Korea with supply to the likes of Samsung, PS, MC, Micro and others. Um so there definitely are opportunities like that, or there are opportunities in terms of technology service providers

Speaker 1:
say, for example, the software, uh, services companies out of, say, India or Vietnam, which have also been phenomenal businesses over time to invest in, uh, because they've they have access to a large pool of very qualified, high quality labour. Um, and they're able to, uh, solve problems for large global businesses and keep the show on the road. Um, you know, especially through a time like covid. And as technological intensity only increases the need for such businesses. Also,

Speaker 1:
reasons they tend to be asset like businesses as well. So very cash generative on very high returns on capital. Um, so they have built strong track records over decades of delivering good value to shareholders. So there are a number of ways it doesn't have to be the sort of traditional TSM CS or the N videos of the world. Uh, but a number of the picks and shovels providers, uh, to these industries that can be smaller, that are smaller companies and can provide good opportunities.

Speaker 0:
But if you have companies like that, are are they able to stay

Speaker 0:
independent, keep grow and and and keep growing? Or is is you getting to a point now in the cycle where the big companies just want to own the whole of the value chain and you've got a great investment? You get offered a premium for the share price, but you know it's gonna go, and part of you thinks great. You know, we got upside to the portfolio, but there's a bit of you thinking God, if they hadn't done that, this this thing will just keep on delivering year in, year out for my investors.

Speaker 1:
Uh, so So, Mark. What we typically see is that for the companies that have succeeded, say, the likes of TS MC, uh, they understand what they're the best at and what they want to focus on,

Speaker 1:
um, and and what they want other high quality suppliers and members of the ecosystem to develop for them. Um, and they're willing to pay a fair price for that. Now it all comes down to whether the company that we're invested in has a real mode in terms of what they're making. Uh, and is there a or, you know, is it just one relationship, uh, that that the entire franchise is based on? If it's one relationship, then it's the customer that has all the bargaining power. They determine the margins that you operate at. They determine

Speaker 1:
you know you're working capital and you end up with low returns on capital employed. Whereas if you do have some some age that could be cost, that could be technology. Uh, it could be a different way of doing things, uh, or, you know, very good service. Very large number of SKU S. Um, that allows you some bargaining power with even large customers. Then you have a very strong reason to stay in business and earn high returns on capital.

Speaker 1:
Um, and those businesses tend to do well, and not a lot of them get acquired because the skills to run that kind of business may be very different from the kind of skills that ES MC has developed for all time.

Speaker 0:
OK, thank you. Um, just on TS MC II. I know James, and it's both. Last time I looked at you fact, she was both the largest holding each your portfolio. So you, you at all worried that everybody likes TS MC. It's a bit of a consensus play. So as an active manager, what's the value

Speaker 0:
you're adding by holding the same stock somewhere in the top 10 that lots of Asian emerging markets managers are holding? Oh, I think if you look at the gilling concentration in, let's say the 30 40 most liquid names, there will be a lot of overlap between a number of of the you can say managers.

Speaker 0:
I think we always try to make sure very sure we only have overweight position So the point is, if we do end up owning a large cap name in this example, like MC, we want to make sure we are quite significant overweight. So our view was normally be. Yes, we are maybe not significantly differentiated on the name, but

Speaker 0:
can definitely be differentiated our conviction. So if we are right on the thesis, then it will bring not only absolute but also relative to poor performance to our investors. And again, by the end of the day, we are long only manager up against the benchmark. It is about being that benchmark. That is what our clients want us to do. And that's why we say we very much about managing the active share in a company. And that's what we try to do when it comes to some of these last kept names, where we are aware that there will be a lot of people being aware of the name

Speaker 0:
and then you can say, roughly speaking, half of our portfolio is then typically small cap mid cap off benchmark position where we feel we can be very differentiated on the actual name and and be differentiated there. But on the last kept names is more on the sizing where we feel we are differentiated, James. So for you, if you're in one of these large cap stocks you want to be, you know, you've got to have an overweight benchmark position against it.

Speaker 0:
Yes, I think so. Yeah, very similar approach to what? And what happened. Because you you've got a portfolio where you've got a benchmark. That's China. What does that do to something like TS MC? Is that now a much larger component of the index at China And does that ever cause I mean, is it getting up near I don't know, say 10% of the benchmark or anything like that, but it does that cause

Speaker 0:
issues with how you take risk against the benchmark or yes, that's, uh that's definitely one way of looking at it. So, um, we've got the likes of TS MC and Samsung Electronics that we have to worry about in that regard with the removal of China, then both of those go to north of 8%. And so, if you like, uh, those types of stories or the types of trends that they are linked to, then um in order to, you know, stay below the 10% limit. Then you might look elsewhere within Taiwan or Korea,

Speaker 0:
uh, to find similar exposures, which is exactly what the fund has done with the likes of, uh, which, uh, manufacture servers for the for, uh, Microsoft, Uh, meta and Amazon. And more broadly, when you take a an emerging markets China benchmark, How how does that differ from emerging markets, including or were they fairly similar flavour? So the removal of China, um,

Speaker 0:
increases the cyclical exposure at least by an industry, Uh, at an industry level. So you get more financials, you get more technology, Uh, you get more energy and you get more materials and you get less Internet because essentially, you're taking out the China Internet sector, which is significant. OK, well, talking to Taiwan, um, I think you you did a trip to Taiwan recently. Is that Is that right or sort of what? What? What was what were your impressions of, uh, of the state of the economy there and sort of

Speaker 0:
sense of positivity or around around, uh, sort of business And the outlook?

Speaker 1:
Yes. Um, So So, yes, Mark, I was there. A couple of weeks ago, Uh, visiting companies. We met about 15 companies over three days. Um, the sense is that sort of more broadly, given that a large majority of the listed investment universe in in Taiwan, uh comprises sort of companies that are exporters and participating in the global technology value chain, whether it's semiconductors or other parts of the technology value chain,

Speaker 1:
um, they have after a period where they saw exceptional demand, uh, after covid. Um, since then, they've faced a a period of sort of weakening demand where in some cases, the inventory in the channel is quite high and their customers are dealing with that inventory. And so they've slowed down their orders. And at the same time, the companies are finding ways to deal with their own inventory. Um, so so that is one issue

Speaker 1:
issue that the entire sort of listed universe, or a large part of it is, is dealing with. And so, for many companies, uh, for this year, 2023 particularly, uh, after many years of strong growth, they will see a decline likely in earnings. Uh, however, uh, on the other side, uh, it was interesting to note that the market was actually looking through that, um and everyone is quite excited. And a large reason why everyone is excited is

Speaker 1:
that, uh, sort of generate a I and the opportunities that that brings for for categories like servers, which was mentioned earlier. Um, and a lot of the Taiwanese companies, uh, who have a reasonably good position in these whilst while these categories remain very small, today could become bigger in the future. And some of these companies could maintain a stronger position there. Um, another thing that I did notice was that, um,

Speaker 1:
these the companies themselves previously had a very, uh, concentrated supply chain, Uh, particularly in North Asia. And a number of them, because of demands from their customers, are actually diversifying their supply chain in some cases moving back from China to Taiwan, Or in many cases, uh, because of the demands of their customers moving to countries in ASEAN or moving to India

Speaker 1:
and so on. Uh, another reason for that is, uh, again, the availability of skilled talent. Uh, you know, Taiwan has an ageing population, Uh, you know, limited labour force, uh, high quality labour force, uh, is facing constraints and as these companies grow, they want to find other large markets. So part of their growth will also accrue, uh, benefits to ASEAN or India or or other such markets.

Speaker 1:
OK, thank you.

Speaker 0:
Now we are almost out of time. We only got a couple of minutes left, so I wanted to finish by just getting a thought final thought from from each of you, um, one thing to leave us with when it comes to investing in emerging markets. Uh, James, can I come to you on that first? Yeah, sure. So, uh, valuations right now look pretty attractive. As I said earlier, with the, um, price to book at well below, uh, levels of in developed markets and we expect a a rebounding earnings next year and the,

Speaker 0:
uh, higher interest rates that we've seen globally. Uh, emerging markets have a long history of dealing with those better, and that the rate of change is not as steep in emerging markets. Well, one thing none of you have mentioned the dreaded R word recession. So, James, you you confident? Do you think there's one? Sorry. It's always a very unfair to ask someone with a very big question. like that. But did you get a sense that there is likely to be one coming or Asia Asia will avoid that.

Speaker 0:
So, um, we don't necessarily think about it in terms of that way, because if we think about some of the key sectors that were already invested in tech has been mentioned a lot, that's already in a recession. And so we feel like that. A lot of that has been priced in and we're confident about the long term outlook. OK, thank you. So valuations, um, from your side key key key final thought

Speaker 0:
Definitely be to James Point. Yes, I think valuations are generally very, very supportive, but I think the other thing that are, uh are very key. To really point out here with the emerging market is actually how well this economy has actually been able to deal with all the disruption from covid supply side. They're still pretty decent. You can say growth

Speaker 0:
level and that have been under a very tight monetary and physical regimes. And we actually have one of the few places where you actually have really well maintained physical discipline and still places with real interest rate. So we do believe we will, from a global perspective, soon be at a pivot point where we will need to start to see you can say monetary cycle turning,

Speaker 0:
and we think they will actually leave a very, very big delta for a lot of the emerging market. You can say countries to really start to ease their their monetary tightness. And I think then you will really start to see a quite significant growth differential between emerging market and developed market. And you have that at a very big discount and you have it a pretty strong you can say, well maintained physical discipline. And we think that is a pretty powerful cocktail for emerging market to perform well in that environment. And I think a very key point.

Speaker 0:
Yes, we are all equity investors here. I mean, we would like to see equity market going on, but I think when we've been sitting here and discussing whether technology are putting out or China getting too cheap or what the risk premium is

Speaker 0:
in the meantime, the countries that have actually been very disciplined on the physical side. If you look through the fixed income market, we have seen a massive, massive outperform on you can say fixed income markets like Indonesia, India in the Asian space Mexico, Brazil, the outperforming there versus developed market US Germany,

Speaker 0:
Japan It has been massive. And I think this is the beginning of recently that the market is saying there is something structurally changing here between this emerging market discipline and what we're seeing in developed market. And I do believe they will also eventually spread into the market. So for that reason, we do remain quite upbeat and optimistic on the emerging market as a class. Thank you. Uh, final thought from you,

Speaker 1:
Mark, I will just come back to actually something that you mentioned about the winners of the past and the winners of the future. And I think going back to what jury said, uh, given some of the changes that have taken place over the last few years in some of these markets, they remain deeply under penetrated. The opportunity Size is large, but they've become a lot more disciplined. Companies in these markets have become have seen a year, uh,

Speaker 1:
a decade of slow growth when they have become more efficient. They've gained market share, particularly the leaders And so, as as sort of growth comes back, uh, things are looking better. Uh, over time, uh, these companies should just become stronger, um, and capture the vast majority of that growth. So we are as bottom up investors. We're very excited about that opportunity. And and as as the others mentioned, valuations do look quite reasonable.

Speaker 0:
We have to leave it there. Thank you so much for watching Do stay with us. So we've got a bit of information coming up in just a second on how you could potentially use this as part of your structured learning. Just reminds me to thank our fantastic panellists today. James Mcdermot of Invest Yo No of Polar Capital and Sri Awal of Scottish Oriental Smaller companies Investment trust from all of us here.

Speaker 0:
Goodbye for now.