Polar Capital’s Nøddekær on Economic Value Added

Now this year, we think it will be critical year for China, which still needs to continue to stimulate demand to stem off prolonged deflationary pressures for the broader em We do think that headwinds are rising. You know, we haven't more a less clear FED rate path and a stronger dollar which may post challenges for EM fun flow,

while the US tariff policy may impact global trade. So you know, we have Trump's inauguration inauguration later in January, and you know we're going to see if his tariff rhetoric, you know, turns into reality. So we think markets have a lot to contend with in the coming months, which can drive some volatility.

to study economics and finance. And then during that time I was actually backpacking doing my bachelor and my master degrees in Asia, you know, just post the Asian financial crisis, and again that whole way society and markets and economics was changing there.

the volatility they had there. And suddenly, when I was about to finish my master there was suddenly a smaller Danish Poutuguez, a manager called bank in West that had an analyst role for an Asian ecoity, aannalyst, and I just felt that job has to be mine, and I managed to get through the process and eventually managed to get the job.

be differentiated and beat the market. And I think that is really the differentiating point there, there's no kind of hooking the benchmark.

do a firm definition there. So it's literally about finding these companies that are really good at taking capital, really accept there is a cost associated with capital, identify attractive growth opportunities, then deploy their capital, and hopefully as they monetize these growth opportunities that then create a strong level of return investic capital and they get that so called

EVA spread and thereby they're really value creating companies. We all know that EPs numbers can be highly easily kind of manipulated and it doesn't really tell you about your value creation. But what we really believe tell something about your fundamental and value creation. That is literally that spread you can generate on your investing capital relative to the cost of capital.

capital appreciation. But what it also means if you're value creating companies and for some periods the market do not believe in the management team or there are other forms of risk measures that derail you from hitting your true fundamental valuation, then you can do share buy bags, or you are in a position where you can also do dividend with some of that excess capital.

the kind of alpha we try to identify. And you can say that isn't isn't part of that service for so called star companies is they have a strong delta in economic value added creation.

And then on the supply side, we want there to be some form of a rigid structure such that there are limited amount of companies that can supply into that favorable domain environment, and thereby there's a decent chance that these so called companies on the supply side they have a chance to generate access return over an investment cycle and then not get competed away right away. So there need to be some form of competitive edge, some form

of uniqueness. And that's also why you can say things where that you can call it barrass to entry or copycat products and on, or where your capacity is very easily added on, we do not tend to own a lot of companies in that area. So again take the classical example of telecom where it's very easily to add capacity whenever domains come up, or some other regulated industry where your edge is around understanding regulation, where bottom line is you probably hardly have.

some kind of economic financial background. We do, of course in Polar have people with a biotechnology background, but we would probably be a little bit lighter to put it easily on that side, because there's a little bit out of our comfort zone. As to say, when it comes to the likes of utility tile, it comes whatever. We don't really think we cannot build an edge then be differentiated.

So trying to find that combination where you think you can still be differentiated, but you with your toolbox have a chance to be a little bit more right in terms of direction and magnitude of these development versus the market, and you really try to put your effort in there. Acknowledging that finding alpha is dame heart these days, so that is where we try to find our niche areas and focused there.

there is more like a global dynamics. And then of course for the one where there is a more kind of domestic driver, then it's more into the nitty greedy of the domestic than it is a SOT at the regional level, if I can put it that way, because that is very much how I think the emergent market as a class has been developing over the last decade. That we still like to talk a little bit about

the regional blocks. And I'll be very frank and say, even our research structure is a little bit with analysts coming some region. But what we're also seeing there are increasingly huge differences whether you are in Asia and whether you talk India or you talk Korea. I mean the underlying dynamics there political growth wise, society wise, they are very, very different. And it's a bit the same with the

likes of Latin America. I mean, we have seen again the difference between the likes of Brazil and Mexico, and now even in Argentina suddenly also changing a lot. So I'd probably say we are probably more when we take our more top down head on, we're probably a bit more on the countryside then we actually think about regions

with it, if I can put it that way. We do though, also feel and I guess I'll be bad for I say, I do not have the hard evidence here, but my feeling is that we have over the years been getting a little bit more cheated by you can say, consensus growth numbers from cellside in Latin America. Then we

probably feel has been the case in Asia. Not saying you cannot get cheated in Asia if you do go and look at these numbers, but I think there's probably a little bit more you can say, a sygnical element and a little bit more swing in something like the

risk premiums that move there. So you can say from that perspective, smaller changes you can say let's my Marria can maybe looking slightly better than than Asia, that would to be framed not really at an early stage kind of be enough for us to think, oh, we really need to reassess the structure here.

many years. But there's no question in China is what you go call between a rock and a hard place. Right now, I think it's clear that you.

more than twenty years and there's no secret. At least up till two thousand and eighteen, take a gift emergent market and Asian investing. It was very very China biased. China heavy, I mean it, and you will see the benchmark wasting. China was so heavy, and yes that was also not only was there a lot of weight, a lot of companies, a lot of GDP growth, but there was also some quite amazing strong investment cases back there

again think Tents and Alibaba. These was kind of the absolutely big darling names and the heavy names in the benchmark, and that was kind of driving it. And I think from twenty eighteen, when you could call the real kind of trade war started to kick out, you clearly start to see a change there. And when we talk about a multipolar world, we think that is something that are really going to accelerate over the next years and that will really transformed the narrative for emergent market over the

coming decade. And put very simplistic, we do believe there's a very big you would call it negative delta to keep on using that word coming out of China in the form of FDI are not going into China, even Chinese own company are starting to invest outside of China, manufacturing capacity are moving and so on. And of course it's not China collapsing over night, but the direction of travel is very clear that that dominant manufacturing role is starting to come under pressure. And at the same time

the domestic domain picture is very very weak. But you would say that negative delta coming out of China that is not going back to US or to eurofrom that matter, as we're see in it, we do believe that a lot of these new manufacturing hobs, they will move to the likes of India, Vietnam, Indonesia and Mexico and so on, and particular in the four countries are mentioned here, but

particular the three as one. They coincide with already relative favorable demographics urbanization dynamics, and we do believe that create a pretty powerful kind of you can say, cocktail for

growth to come and be more spread out. So we think in a way it is in many way again we are stock piggers, and of course we are very biased in our view, no secret there, but we think actually this new multipolar world and the narrative we see for emergent market over the next decade is actually really really bullish because I think, let's be frank, we all and we're probably guilty of underappreciating the political risk in China that end up being too much capital allocated into China,

and suddenly that concentration risk, we suddenly saw the flip side of that. I think in a new multipolar world, besides, as stock piggers, we can hopefully find a lot of great return opportunities from these new manufacturing and consumption opportunities, but we can also spread our risks a lot better. We can diversify them on political system, on monetary cycles,

and on investment cycle. So think if you are international and investor, I actually think that this is it feels a bit painful now when you look at the index performance that we've been seeing the last few years. And again I acknowledge that twenty twenty five there's a lot

of moving parts. I'll be happy to elaborate on that, but I think if we allow ourself to keeck to look a few years ahead, I actually think the emergent market universe actually has a lot to offer and it will come in a much better repping, if I can use that word this time around, the way we can diversify and spread our risk. So for that reason, I do remain quite upbeat about the opportunities in emergent market

for this multipolar development. And as I say, we are significant underweight in China, and I think China's a role

in this new multipolar world. And let me be very frank, we are not forecast in the collapse in China anything like that, but it's clearly you can say these deflastionary trends, they are very strong and it could easily be some form of a Japanization kind of version of China we're witnessing now, though admittedly at a lot lower GDP level capita than what we saw equivalent of Japan back in

the late eighties or early nineties. But I think the future for China that is DRIMA as the exporter of capital goods and consumer goods to you can say, the rest of the emergent market. Yes, I think the export growth to the likes of viewers in Europe, we should not put our hopes too high there and if anything,

they'll probably deteriorate. But I mean it's not that long ago since I was traveling a lot around in Asia, as I do quite regular, and when you are around in places like Southeast Asia, you are really seeing these China products, whether it's mobile phones or its car and they are really being adopted by the consumer there. And

I think that is really the role. And in a way, I think that if you are producing iPhones at razor things margin versus you are exporting your own mobile phone brands where you control the IP and you get a lot higher margin that margin, uplift can actually come say

a lot of volume deslis. So I think that I still think that the strategy China are on it in a kind of makes sense to try to go more higher value added, really control the brand, and then really try to drive export markets outside the US and Europe. Will it be enough for China? And I guess that is the big question, and I do probably believe that it will not be fully enough. It can keep them afloat if I can use that ext question, But you do also need to get some form of domestic demand.

And I only really see the domestic domain story comeback when you start to get some comfort back into the Chinese society, and that goes around mister Shei and his policies, and it's clearly also go particular in connection with that

what the China US relationship will be. As saying, if you are a Chinese consumer and you know there is not a big social network catching you, and you are agent, and your young child that was supposed to really take care of you when they grow up and get education fighting with really getting a good job, then your propensity to consume is clearly pretty low, and it will remain so in particularly if you have a feeling that you're about to get a trade war or other form of

of tension that can cost the job and so on. So I think until we get some form of clarity on policies, I think that the consumption will still be pretty suppressed in China. But I definitely think again if once you try to say what is really the task there? In my view, it is really for the leadership in China to get some form of really clear deal and agreement with yous about the role and then you can

actually go back and start to fix your economy. I find it hard to believe you can fix your economy before there's some clarity on the international scene. Even China is in many ways a big domestic economy, it is still manufacturing heavy, and a lot of that manufacturing is linked with the international environment, and that's why I think it is quite essential that China get that part fixed and create some kind of comfort with the outlook, and

I think that would then bring the consumer back. You can say saving rates are unbelievable high in China at this point, so that there is opportunity for penned up demaind there is opportunity for structural higher level of consumption versus investment level and so on. But right now you are I guess if you are in the like the Austrian school of economics believing in that form of economic theory.

I guess they call it the second order depression is literally where no matter what's happened, you will just tend to save more simply because you are uncertain about the future.

in in India I ADMD. If you go a few years back, we had a significant overweight in India and again there would be something like the eight nine percent overweight along these lines. It has come down and part of it has also been because we have been allocating slightly more back into technology seemiconductors and so on over the last few years. But to your point is it's

definitely always been driven by valuation. We had a number of cases where we have been taking our profit and when we have been taking profit in some specific names due to reaching our target price, we did find it difficult to redeploy that capital back into India giving kind of the valuation level. So we will absolutely acknowledging that

it is an expensive market within an EM context. However, if you do put the engine market on a comparison to like the S and P five hundred, I think it's only Marktel more expensive and more less trading line at least last time we did that kind of calculation.

So my point is also that you maybe have one of the best long term growth story anywhere on the globe in India, and you're more or less paying the same as you're paying for the broad US market, and you get structurally much higher growth, and you, if I remember correctly, even also get slight a higher kind of

return profile. So I think in a global context, I think you could you can justify it for sure without any trouble at allocating capital there as you seem to be not too different from what you're already most investors are willing to pile into. As I say, yeah, in an EM context, it is clearly a bit more on the expensive side. But clearly, as I say, genly, I find most management team being of high quality. They have

over significant amount of volatile cycles, be it economically, politically regulatory. Again, a lot of them have proved they can really navigate these environments and they are generally still able to generate a relative good which on their capital. So we do find it a structurally quite attractive margam, but no question, we try to be very selective and for ages we are not been owning a single you can say, classic engine consumer company, as we simply find them way too expensive.

The same again, like these days, there are some amazing small cap industrial companies, but they are unbelievable expensive, so again we are not investing there. So it's trying to nap on the a and find the unique stock picks and then when you find them, kind of back them. And at least that has been working well for us

over the last many years. But I will say that if you take our portion of Indian companies in our portfolio versus I think a lot of peers, I do believe we are quite differentiated on quite a number of companies we own. It in India as we do really try to be still valuation aware when it comes to investing in India.

but we still believe you'll get it longer term. We are also a long only manager and we are aware that in ninety nine of one hundred cases with a client, we are part of a larger as a location framework and we are playing some form of a risk structure

we need to be aware of. So what we normally say when it comes to that understanding about the portfolio structure and construction, We aim for having something like an informature ratio around point five to zero point six, And you say, how do we get to that kind of informator ratio? What is our excess return targets? What is

our kind of excess risk level? And we are aiming to do three to four hundred basis point average excess return and I acknowledge that we are not being able to do that the last few years, but again, we have a fourteen years track with this strategy, and if you look at it from that perspective, we have actually been able to deliver will in that range. So we feel comfortable that will also be the case going forward.

And we're gearly being able to deliver that level of every excess return over the longer term with a tracking era as a measure for excess return around five to say seven percent on an x ender level. And I guess if you put these two together, then you roughly

get that kind of level of informature ratio. And the point is that we think if you can deliver that level of an informator ratio, then you are a credible partner for a larger sl locator and you can be that building block, which is really our ambition level that we can within a decent wisk framework still deliver a decent level of alpha there so, and sorry that was slightly drifting a little bit on your questions to say,

how do we then handle that on consecration. Normally, what we say that we have an active share roughly around eighty percent, take a give and as I say, but still able to keep that tracking era within that kind

of five to seven percent from an exender perspective. So typically what we do is that we can go up to four hundred basis point overweight a relative to the benchmark on our highest conviction stock ideas, and we will generally not own something where we are you can say underweight or not as least minimum seventy five basis point.

of EVA creation ow and investment title. So we try in our evaluation work to focus a lot on that distribution curve and then will say, the more favorable that risk reward look in terms of what is the upside versus a downside risk, the higher the conviction label we will build up to that four hundred basis point overweight. We will then make some adjustment for liquidity because we still want a liquid portfolio so we can move around, and of course we also want to provide liquidity for

our clients. And then the third pillar in that portfolio construction, that is you can say microeconomic and bigger industry kind of risk management trends. And that is precisely when you can say cases like yeah, we can maybe find some interesting cases in China, but we will still feel more comfortable running a big underweight in China, and that means we will scale some of our weighting in the China companies a bit down to make sure we get a

little bit more comfortable level and again lugging cases. And let's maybe use the example again on the likes of India and Taiwan, where we say we are pretty bullish

and positive right now. Again we feel comfortable adding a little bit more waiting into some of these companies to make sure that that top down view is also to a last degree reflected at the portfolio level, though admitting that the driving factor is the sock selection, but of course if you can have them go hand in hand, so the stock picking will also get well reflected in a top down view. That is, of course, what we're really into to do, and I think we've been able.

go in contact with them. So I think we have gently been trying to be pretty pragmatic when it comes to forecasting couruncies, at least in the short So again we try to take that relative simplistic approach within emergent market that if you are well sold out growing economy and you can even drive an export sector, then the likelord of having some stability in your currency is probably

relative high. We're on the other hand, if you have a very weak political system, or you really have weakness on your balance of payments, then we probably assume that also massively we should factor in some depreciation on a

kind of pretty constant going basis. So we say it's a relative simple, kind of a microeconomic approach to doing it, and they can say, then we try to then keep that in mind when we look at the specific companies, and you can say, if we take some example, yes, I think we have definitely also been aware that the strong dollar was a trend, and you can say, in many way we have been navigating around that with literally a lot of our technology companies in Korea and Taiwan,

as their revenue line is literally or last degree in dollars, and again their local cost base is in local you can say currencies, and I think they have not really been having that hard hit, where clearly some of the more weaker economies we have generally been fully avoiding them. And there's no question if you look over the last many many years, we have had literally no exposure to the likes of Turkey or South Africa, or been pretty

courses around Brazil and so on. So some of these countries that typically have some of these structural issue we try to be very aware about that that underlying risk. When that is said, I do think that like most emergent market managers, I may be software from a little bit of a buyers and think that the dollar just look remarkable strong and probably also too strong, and that the underlying currency are extremely undervalued.

blown on the back of your mind. But you have to pay for a mediocre hotel, and when you see that what that equivalent money will give you somewhere else in emergent market that they're.

level in in a gayo political uncertain world. So you can say, looking into next year, I do think fundamentally the dollar look very strong, but I'll definitely say I'm not building a strong thesis around that they will get a collapse in the dollar or anything like that, So I would probably have also been the point. I find it hard to see the dollar further rerating from here on, But again I do not see the dollar collapse more from the point that there's literally no really alternative to

take all that that that capital. I think that again, if I have to be a little bit political, and I will stake out my neck, I'll say one of the reasons that we have this kind of teen effect, and there's no alternative to you, is that is you can say, I think a lot of the dollar has been driving by this idea that you could pile a lot of capital into the market, and not only into the likes of the treasury market, but also into the

equity market. And we all know the stories that even the Switch National Bank are buying into US equities and so on as this kind of way of relocating capital. And you do that because lesbi frank it has been the only pure capitalist market with breadth and depth over

the last long period. I think what's happening with Trump now, I think that it's maybe too early to say that it's going downhill, but we are seeing I'll say, the first element of what you could call chrony capitalism, where you can say the way all kind of a big tech leaders have to show up at mar Laka and

literally donate money into a fund and so on. And I guess if that had happened in an emergent market country, I can assure you the headline would have been everything about a corruption, bribery, uninvestible, and here in this case in US, the money just keep piling in on the back of that. And of course, as an emergent market manager, I can only sit there and say this smells like what we see when it's bad in the emergent market, and you literally get a slap over your on that one.

But somehow US seem to be getting getting away with it. But the point I want to make is that when we start to see these development, whether we are saying is this the beginning of chrony capitalism and so on moving in, I think it is where you probably start to see rich to us from a longer term perspective, because as there's one thing that is sure, the second you really get chrony capitalism, I think it's start to

impact your productivity, your return, your risk profile. And again, don't get me wrong here, I'm not saying that US is changing overnight or anything like that, but it's just saying it is. In my mind again, been looking at and investing for more than twenty years, it's probably one of the most significant changes I have been witnessing in my investment career this way. The political system in US are changing these days, and I think there is down

the line at risk if this trend continue. And I guess in in many ways, at least on a relative level, some key emergent market countries again like Indians on actually starts to look a little bit more safe on a relative level versus what we're seeing in US. So hopefully it can help drive this NARTI around a new multipolar

world that deserves some capital still early days. I absolutely acknowledged that and hopefully we do not go down that that that route, but it is just something that is worth mentioning.

into software and AI services UH have picked up. You know, do you do you think chip them in is still solid going into next year or or is it kind of time to move to the next phase of AI album or because I think this question is you know, kind of important for emerging markets going forward.

also trim some of our memory exposure down. I'll also be very frank and say part of that reduced exposure there was also disappointment on Samsung Electronics and their execution skills and just generally what's going on there. So I think it was not purely a memory story. There was also there was an internal Samsung story that was making us a bit vary, and to be frank, we've been

a little bit disappointed there. So we did take some capital away there for sure, But I'll say where we still believe there is a quite excitement story then, and that's you can say even before you have the Las Vegas a big event and Nvidia as a rockstar boss suddenly saying we are now moving beyond the data center we're going to computers and laptops and mobile devices, and we can really spread around which by the way, should

be the pullus. And we've actually seen quite good performance in in Asian take the last two days on these kind of leak stories, but you can say going back to you can say, pre the last two days fast, the key story has must been on what you call EESIC. So these application specific integrated circus where you can say clearly this idea that if you want to run an ailgorithm, this idea to do a bit like a chat GPT where you literally take put very simplistic all the information in the world and try.

run with a very clean balance sheet. So again in an em context, if you kind of do like a three dimensional structure between the turn on basic capital, sharing that total turn capital and then also still have a strong balance sheet, a lot of these Taiwanese companies they are really tacking the box there and do come out as some of the best allocators of capital at the same time as they can run extreme clean balance sheet.

So that is clearly also what we are attracted to, and we believe they can keep doing that in the foreseable future. As I say, we still believe we're in

a pretty big structural op trend. From a technology perspective, We still think the way the world will look like five years from now in terms of aidops in data center, faster connectivity, etc. There is a long runway there, and we do actually this time around, we're not claiming for a second that you still not have some of the leading companies in the form of the likes of Nvidia or the software side, the big kind of the superscalar

companies in US. But when it comes to that IC design manufacturing side, a key component side, this time around, we actually believe that a number of these Asian companies actually have a very key role to play and they are clearly shifting to that you can say you as supply chain side, and we think it will give them

a very good lift in the years to come. So for that reason, we do actually remain quity upbeat going into twenty twenty five, and we acknowledge that maybe first half is a little bit on the soft side, at least for a few selected names, but we are probably already now seeing that the second half should be pretty

pretty okay and going into twenty twenty six. The interesting thing about some of this ESSEIC or some of these design project is that you actually have some form of visibility because you can say the manufacturing capacity with the likes of TSMC, in particular their cod capacity for advanced packaging that is very very tight, so you literally need

to book your capacity way ahead. And again we've seen the likes of of Amazon literally already having booked a project with al Chip for their data center chips with the YEA I have tape out in twenty twenty six, so we do actually have some pretty decent visibility for a number of companies. So when we look the next two years ahead, we actually think that not saying we cannot get a little bit of disappointment quarter here and there, but we think the structural trend is actually pretty compelling

and giving. We had quite a bit sell off in takeover the summer, and I think it was also one of the months here in the later half of the year we also saw a bit of weakness. Valuation level still pretty pretty fair and attractive, so it's not like this is super high valuation. So I still think that valuation versus growth is pretty compelling, for particular the Taiwanese cases. Korea is also very very cheap, but I guess the issue of course with Korea is you are often getting

a bit cheated by that. You can say that the sechnicality in the market that is for memory or is some of the equipment makers, and they are not totally a bit more signical. And then of course you have to bear the governance risk, and of course lately we could even add the political risk. Even when that is said, I think that in a way and in a rational way, the TIC sector has not been reacting particular as significant to all the political noise in Korea, which I actually

also think is correct. I think that there will not be big changes in their outlog or operational environment, giving what's happening on the political scene. But yeah, of course on the margin, is not helpful that you have all this noise going on in Korea.