Q: After two strong years for emerging-market equities, what’s different this time?
Sammy Suzuki: I believe EM equities are likely to continue to do well relative to the developed markets.
EM is up mainly because the US dollar started to weaken and I expect that to continue. There are many themes that are going to be driving EM equity returns in the future. You have corporate governance reform in Korea, you have AI related names in Taiwan, you have friendshoring in Mexico. And there are many, many things that will drive the returns going forward.
I also think the backdrop is really positive because EM has been out of favor for so long, the valuations are still very attractive.
Q: Where does EM stand in the AI value chain? Are there opportunities there?
Sammy: There are actually a surprising number of AI beneficiaries in the emerging markets and people might not really think of that. We call this backdoor AI. Many of the manufacturers of the products that support AI are based in Asia. So not only the semiconductors, but all of the components that go around that are mostly made in Asia and many of them are world leaders in their own right.
Even things like power supply, limiting the thermal loss in your power supply is becoming an important design. Limiting considerations for data centers. So that’s another backdoor AI play. Another constraint is energy or power. We don’t have enough power for the data centers to run. Producers of energy as well as all of the supporting actors for the energy value chain could be distant AI plays as well.
Q: Does AI pose risks to EM investors?
I think the largest risk that investors face today is really this question about whether there’s an AI bubble. And that’s true for investors investing in the United States as well as those investing in the emerging markets as well. And therefore I believe it is really important to not put your eggs into seven stocks or a handful of stocks and that you want a portfolio that can benefit from for many different reasons.
Q: US Fed rate cuts and a softer dollar have historically boosted EM inflows. How will US monetary policy and dollar weakness shape EM’s interest rate and markets?
I think this is a really important point. The US dollar has strengthened for quite some time and most investors around the world are overweight US dollar assets. Typically, a weakening dollar is highly correlated with emerging markets performing well. And I expect that to continue.
These cycles are not one or two years, they tend to last five to 10 years. So I do expect a longer-term benefit to the emerging markets in the future.
Q: What do you think about China?
I don’t think the Chinese economy is likely to suddenly grow at an accelerated rate. But even in the environment of a muted macro economy, there are lots of ideas and opportunities within China.
The great thing about China is there are many companies that I can invest in and the question is, are there good investment, good companies in China? We think there are lots of ideas. The exporters are doing surprisingly well. There are market share gainers within. So for example, sportswear or energy drinks or fintech there are many areas that are growing, even though the broader economy may not be growing fast.
Corporate governance reform is also becoming very important and so some of the state-owned enterprises are potentially good investments as well.
Q: Why should equity investors consider EM now, after a decade of disappointing returns?
EM returns have been poor for a decade, but that’s exactly why investors should be considering EM today. Valuations are cheap, good companies are being overlooked. And we’re here at this juncture with corporate earnings are pointing up. So there are many reasons why EM should continue to do well.