Jim Hayes - Emerging Opportunities

Ladies and gentlemen, welcome to the Business Brew. I'm your host, Bill Brewster. As always, wanted to give you all a big shout out. I got the Spotify or I guess creators wrapped recently and wanted to thank you all for listening. It was meaningful to me to see that collectively we have accounted for 763,000 minutes of listening time this year. That's crazy to me #1 show for 1600 fans, thank you so much. Top 10 for 9300 fans, thank you

so much. You know, this has been fun and I, I try to do this in order to give back and it's nice to know that it's appreciated and, you know, just meaningful to me to have the community that that has joined along with this journey. So with that in mind, this episode features Jim Hayes of Lucerna Global Capital Management. Jim and I discuss primarily emerging markets opportunities.

I realize that's on the back of another emerging slash foreign episode, not by design, just kind of how it happened, but actually sat down, met with Jim two nights ago and found him to be a really cool guy to sit down and chat with. So should you enjoy what you hear in this episode, please give him a call. I know he is looking forward to hearing from from people that like like the episode. So very real career, very real guy.

The views expressed by Jim are not necessarily those of Lucerna Global Capital. They are his own and do not constitute financial, investment or tax advice. The content is intended for educational and entertainment purposes only and Lucerna may hold positions in the securities mentioned. Nothing in this podcast should be construed as an offer to sell or the solicitation of an offer to purchase any investment product or security.

Listeners are strongly advised to perform their own due diligence and consult with a qualified financial professional before making investment decisions. Love the disclaimers. I know you do too. Do your own work. It's educational and informational purposes only. You know the drill, so I hope you enjoy the episode. Right after the sponsor read, we got a new sponsor. Shout out to Trata.

It is my version of reality is they are a transcript library that you can see analyst to analyst conversations. So I, I liked it. I was prepping, I was reading a Remitly transcript and it's labeled bull verse bull. The difference I think, between what I saw in the transcripts thus far that I've reviewed on Trotter versus transcripts that I've seen in other libraries is they're a little bit more math

focused from what I can tell. And you've got analysts that have already put in a decent amount of time. So the conversation is, is more informed is what I would say, as opposed to some of the background transcripts that you can get elsewhere. So additive to the process, the official read is if you're listening to the podcast, I know you'll like Trata. Trata is buy side to buy side conversations on individual stocks. Trata makes finding a bull or bear on any stock as easy as

clicking 2 buttons. Over 125 funds globally contribute that that collectively cover 2000 plus tickers and going up. Trata has raised over $3,000,000 coming out of Y Combinator and. I started prepping for pitching you by reading a number of transcripts between two funds, and like I said, I liked how it was data-driven and before you used to be able to track 13 FS. Now you can understand what the

funds are actually thinking. You can join as a lurker, or you can join as a contributor, and Trotta will pay you hundreds of dollars per call for a free trial. Go to tritrotta.com/brew. That's Tri trotta.com/brew TRYTRA ta.com/brewalso shout out to the OG sponsors Stratosphere. No, not stratosphere, Fiscal dot AI, fiscal dot AI. You know I hype them all the time. I'm using it everyday. It's part of my workflow.

Braden and the team are great. You can listen to the podcast that I did with him for the official pitch. If you listen to my podcast with just myself, the self pod, I shared screenshots and recently somebody reached out to me. They said, man, this data is very, very solid and you feel free to sign up using fiscal dot AI forward slash brew. You get 15% off any paid plans. I highly encourage you to check it out for yourself. The UI and UX are fantastic.

So check that out and also thank you for the positive feedback on the on the solo episode. I appreciate that. I kind of I will try to do some more. That particular episode had some rants that I could do that were what am I looking for like timely and I just felt like I could let it RIP. But I understand that some people want more of that. I will do my best to deliver it. Appreciate y'all hope you had a great Thanksgiving.

Enjoy the episode. All right, ladies and gentlemen, thrilled to be joined by Jim Hayes today. Jim, how you doing? I'm well, thanks for having me on. Yeah. Thanks for coming on. Your firm is Lucerna Capital, right? Did I say that correctly? Lucerna Global Capital. Right, all right, there you have it. You want to give people a little bit of your background and then we'll get into what you do. But I feel like giving people a sense of who they're listening to is a decent idea. Yeah, sure.

So I've been involved with the emerging markets asset class for about 30 years and started out of college as as a banker with Morgan Stanley in New York on their Latin American team. I was one of two professionals to move down to Mexico City in 1994 to open their office down there after Morgan Stanley spent time with Bain and a handful of their international offices, including Istanbul and Johannesburg.

Then was at a hedge fund in Brazil before going back to Business School after that in both the long short worlds and for 14 years of Fidelity investing in emerging markets. And then started my own firm list on the global capital about four years back. What was it like moving around that much when you were young? It was great. It was a great time to do it. It would be more difficult now with, you know, family and other conflicts. But it was a, it was a great period of life.

Yeah, no doubt. That'd be cool. What was your favorite place to live? Oh, I suppose different places for different reasons, but Rio de Janeiro always had a soft spot in my soft. Yeah, that makes sense. All right. Now I'm starting to understand some of the lat Am. Like, you know, you seem to like lat Am. I'm sure it's bottoms up but I I understand the comfort level right? Sometimes. It's good to contextualize why, why people are seeing things so.

All right. So you worked at Fidelity for a long time, Yes. Correct. OK. And what was the product that you worked on there? So I was on a a handful of different products, but the largest was the Fidelity Series emerging markets Fund, which peaked at about $35 billion in assets. So it was one of the one of the bigger funds in the industry and it was a Co managed fund by sectors. So I managed to a handful of different sectors there. And which sectors were those?

So I did financial services, real estate, utilities, com services. It expanded a bit over time, but a handful of different sectors, as I say. OK, no, that makes sense. I'm just trying to so, so after Fidelity and I apologize, I know that we had a catch up call before this, but I'm just trying to figure out exactly your your trajectory to where you're at. So what did you do after

Fidelity? So after Fidelity, I formed Lucerna Global, brought on board Brent Badamini, who was also a 14 year veteran at Fidelity and he used to run the Latin Fund there and and we've been up and running for about four years. All right, good deal. Now, now I dig.

And what was, I mean, so what's what was the catalyst to sort of going out on your own? What was the opportunity that you saw or the reason for starting your own thing? Yeah. Look, Fidelity was a great platform. I think I felt like we got a great experience based there in terms of dealing with different styles of investment in terms of in terms of building a great network amongst the global emerging market community in the in the C-Suite, getting to know that they know the street, other

investors, etcetera. But I think there were two reasons that finally spurred me to spin off and do this. One was I thought it was a frankly this was a bit premature, but I thought it was entering a really interesting secular window for the asset class and emerging markets have under underperformed for most of 15 years. And you know, usually these things work in cycles. So I thought that was we were, we were approaching an interesting moment from that regard.

And then secondly, as I say, you know, the fun product that I was on had gotten quite large at 35 billion. And I felt like there were there was probably a a better mousetrap to to look at the industry through than than my old seed. Yeah, yeah, 35 billion if if size is the enemy of returns, you start to hit it, I would think at at that point or at least flexibility, right, if you're in a a big place and a big fund.

So, you know, it's funny, I sort of started paying a lot of attention to the markets when the bricks were like a very real thing and that was the trade everybody had to put on. And then we went through the GFC and it felt like quality was the only thing that people should touch US, quality specifically.

So I'm sure that some of what I just said is completely wrong, but I'm curious to hear your take on what the cycles have been and sort of the drivers behind what, what made the cycles what they were and what leads us to where we are today, let's call it over the last 20 years or so. Yeah. Look, I would say the last real bull phase in emerging markets was post the the last downturn

in in US or global tech. So coming out sort of O2 to O seven O 8 was the last real upswing and period of our performance for emerging markets.

And at the time it was driven by the fact that there was the perception of superior growth from a demographic and GDP perspective, GDP growth economic perspective, as well as from a, from an earnings perspective, a low penetration in many countries and many products and therefore a nice tailwind in terms of in terms of bottom up companies being able to grow over time. So that was the the perspective

back then. This time, at least thus far, big part of the rally has been driven by by AI semiconductors in places like Korea and Taiwan. But, you know, we think that it's a, it's a broader, more secular theme that's likely to

broaden out beyond that as well. I mean, I guess what drove sort of the underperformance of the last decade or so, because the reason that I'm asking that question is it seems to me like when you're looking at emerging versus developed markets, you're almost always going to have lower product penetration and consumer sort of type names and probably better demographics. Or is that sort of an assumption that's wrong? No, I think that's, I think that's right.

You know, in an AI world, the perception of whether or not demographics and large young populations as a positive or not is shifting. So that's a, you know, that's an open question. But no, I think your, I think your, your broader point is largely right. Look, if you, you know, if you look back over 60 or 70 years, the emerging markets versus developed markets periods of outperformance have tended to work in cycles. They've tended to be around 7 to 10 year cycles.

This one's been a little, little bit longer at 1314 years. And typically what happens is, you know, at the start of that period at the dollar is weak, US growth accelerates because of that export driven and otherwise companies grow faster, you get multiple expansion and the inverse happens any.

And then you know, eventually the dollar gets expensive and currencies get cheap and companies are better positioned from a competitive perspective and start to grow off a low base leading to faster growth, leading to multiple expansion of a, a, a virtual cycle coming out of a vicious cycle. And that's basically what we we think we're seeing now after. Under. 15 years, a very, very limited U.S. dollar earnings growth for emerging markets with, with FX having been a big

part of the tail headwind. Rather we're we're now moving into a window where FX becomes a tailwind and and earnings growth is going to be quite a bit better.

So how much are you monitoring trade deadlines and whether or not we're decoupling from China? And when you know what, what does that mean? I mean, how is that a lot of the job right now? Or am I sort of overstating its importance? It's a great question and obviously that it's a noisy period from a lot of perspectives. I think bigger picture and week, I'm sure we'll talk more about China.

I think bigger picture, most would agree that and the US and China are, are separating and drifting apart from an economic orbit perspective. And I don't think that's done. And you know, the various headlines and twists and turns don't, don't really threaten to change that narrative in my in my view, but that creates opportunities for, for other parts of the spectrum. And that's, that's a big part of

what we're trying to find. We're very bottoms up, but we're we're sector we look, we focus on a domestic consumption related sectors across the footprint and we're trying to find specific opportunities, good companies where they're trading at a displaced valuation and where things have either already begun to improve or they're poised to improve.

So we think that that's a powerful combination which we can find good companies right at right at the beginning of a period of our performance or or improvement, improvement and perception. We think that that's a formula. Yeah. I mean, that makes sense.

Yeah. Yeah. Well, so one of the reasons that I was, I was going through your old writing and well, not old about a month or two ago, but one of the things that I think that you said is like Brazil has the potential to, I don't want to say solve that might be overstating it, but mitigate some of the rare earth earth risk that the US sort of has encountered from China. I, I believe that's what you said. If I, if I didn't pray, if you didn't, please correct me.

But it just, it gets me thinking about how much geopolitics creates the top down that the bottom up sort of benefits from, if that makes any sense. Yeah, no, that's absolutely right. So, so we like the Brazilian market and the, and the Latin American region from a, from a

number of perspectives. It's, you know, that for for the much of the last 15 years, the, the regions had a fairly non business friendly political backdrop and regulatory backdrop from a, you know, tax policy perspective, etcetera. And that's, that seems to be shifting. It started with Argentina a couple years back. Chile has an election this fall, which it looks like will will involve a shift to the center right, followed by Columbia in the spring. And then the big one is, is

Brazil next fall. And you know, we think it's a we think it's a real trend. It echoes trends we're seeing across other parts of the world in terms of, in terms of anti incumbent and the rest of it. But we think it's going to be a really a very powerful driver in Latin America given the starting point and valuations. And then given the starting point in terms of investment cycles. You know, Brazil right now, the entire market trades at 8 times

forward earnings. And and the last time it was as cheap was in 2002, the first time that Lula was in power, came to power and the market proceeded to go up 700% in dollar terms in five years. Now there are differences this time. At the time it was being pulled along by China and commodities and their, and their, their property bubble or the early stages of their property bubble. So that's different this time around.

And we don't think the market's going to go up 700% in five years, but we do think that the market's going to do very well over the next several years if we're right on the electoral outcome. And then a different angle, which is the one you were asking about is the geopolitical angle. And, and Brazil is the largest unaligned producer of rarest.

And so we, you know, we think that there's a reason that the current administration in the US is focused on Argentina and Latin America and Brazil in terms of improving the relationships and improving the sourcing of, of, of those materials. Yeah, I mean it makes it makes some sense from a NS perspective, right. I mean it's forming your own sort of hemisphere or not hemisphere, but side, you know, whatever NS trade bloc.

What so like when you, I guess when you are identifying ideas, what is your process look like a little bit? Are you focusing on a country and then saying, OK, I think this country is going to get better and therefore I'm going to start digging around for bottom UPS ideas there? Or are you, you know, do you use a lot of screens? Like how does that work? Yeah. So I refer to pieces of this, but I'll but I'll back up.

And we're very much bottoms up stock pickers having spent 14 years each at Fidelity and before that I was in the the Tiger cub world on the hedge fund side. And so we're very much company specific finding individual opportunities from that perspective. We do have a a sector filter that we use. I talked about domestic consumption. So that tends to be financials, real estate, consumer, Internet π T And that's because we think that that's where the best

compounders are found. Those are the sectors where over time the best compounders have emerged. And also because those are the sectors that are dependent upon domestic demand and drivers and where we think we've built our our sustainable edge and knowledge base over time. Now that all of that said, you know emerging markets are dispersed and emerging markets, you can't divorce the process

from the macro. You need to understand the macro in order to both gauge upside potential or help gauge upside potential as well as to be able to help gauge downside risk, right. So what we do part of our investment process is before any idea gets into the portfolios, we have a very detailed spreadsheet that we work through starting with various risk dynamics.

So starting with the macro, the politics, the fiscal, the reserve ratio, etcetera, leading to if it's a regulated industry, leading to the regulatory backdrop, competitive backdrop.

And then company specific, whether it's the balance sheet and whether it's earnings outlook, whether it's governance, which is I think a very important topic in in all markets, but a particularly important topic in emerging markets where there's a little bit less visibility than what you have in in the US and in developed markets. Oh, interesting. Do you mind like double clicking on how you think about those a little bit like how, you know,

building out the spreadsheet? I mean, I assume the politics goes from like where the country is to where it's going. How do you do you think through the implications of like if a country is drifting more, I guess more socialist would obviously not be positive, more sort of center right would be more positive. But just kind of curious how you think about each of those metrics and then and then if you stack rank things, you know, just kind of talking about your

process a little bit. Yeah, sure. So, so to be clear that the spreadsheet and and the investment checklist process is company specific as opposed to country specific. So we're, you know, we're digging in, but an important part of that first part of the risk analysis is understanding where the company is based and what that means from a effects perspective, right, from a macro perspective, which can feed into FX weakness or strength.

From a political perspective, which can feed into investment or can feed into regulatory backdrops. So it's, you know, these are things that that we try to kick through and there is some interplay between the country dynamics and the and the company dynamics or the sector dynamics. You know, it's funny when when I was a young and I would have told you, you know, Oh well, Republicans are better for oil,

right? This just kind of a, you know, the US centric, but then you look at the returns and it's actually that usually when left-leaning administrations are in, they sort of enact a little bit more supply discipline and the returns of the stocks are actually better under what you might think would be a hostile administration, which is kind of an interesting way the world works. Yeah. I don't know if you can generalize in the same way in emerging markets, but it is an

interesting it, isn't it? Yeah. So what are, I mean, what are some of the themes that you're most most excited about or, or what makes you, you know, excited about the portfolio today versus, you know, other times in history or or just generally today?

Well, as I say, we, you know, we, we start with a bottom up company specific focus. And I, I think the most exciting thing for us about the current backdrop is just the opportunities that we see from up from a bottom up company specific perspective, right after 15 years of underperformance, there's some really good companies that traded really cheap valuations where we think there is the, you know, ability to sustainably compound for many years to come.

And I think that that's a harder argument to make in some of the developed markets. So, so the example I I sometimes give is across big chunks of Brazil or Indonesia or other markets, you can find 15% growers that are expanding their margins, have good balance sheets and and large Tams over time that traded 891011 times earnings. Whereas in the US you often find 4% growers at peak margins that trade at 35 times earnings. And eventually we think the math gets pretty powerful in favor of.

Emerging markets now, OK. So when you're talking about that, are are you referring to, I just want to make sure that the comp is apples to apples because I, I noticed like a lot of a lot of your portfolio seems skewed financials. But within financials there's a ton of different, you know,

companies that could exist. But when when we're talking about like a mid teens grower or or even a high single digit grower, is that a bank or is this a consumer, you know, staple type company that that you're talking about? Yeah. So it's a it's a very good question and good point in the context that different sectors, you know, trade differently and and have have different valuation multiples and ranges and should.

And so yeah, we're not comparing when I say that I'm not comparing an emerging market bank to A to AUS based staples company. But if you know you can find emerging market based consumer slash staple companies that have that profile that I described where they're growing in the teens and traded that kind of multiple and we think that

that's really compelling. Yeah. What is, I mean, what's is it just a general apathy that's creating that opportunity or is it, is it capital is flown to the US and it's 1 so often like what do you attribute the difference in opportunity sets to? Yeah, I think it's, it's a number of things. You know one to be fair when you look backwards as emerging markets as I had referred to earlier have not grown dollar based earnings over most of the last decade and 1/2 right.

And so the US driven by technology, but other things, you know, share buybacks, financial engineering, etcetera, have grown earnings and so therefore have attracted capital

and seen multiple expansion. And, and the, you know, it hasn't and there have been numbers, there have been a number of false starts for emerging markets over the last 15 years, right, where people have gotten briefly sucked in and then and then had their hearts broken again and again and again, right, as always works with these cycles. And so there are people that have stopped believing and I get

that, that makes sense. But eventually, you know, the US companies that have grown for this period of time have played through some of the drivers of that growth and they find it more difficult to grow going forward. I think that that's going to be true in this current window, right? We're having such large investment. I mean, it's unclear how we're

going to monetize those. I think that the forward profile for earnings growth in the in the US and and in big parts of developed markets is a little bit more murky than what it usually is. Whereas whereas big chunks of emerging markets are growing off of a lower base, they have falling interest rates, they don't have the same fiscal mismatches that are developed across across developed markets.

And so we think that as the cycle turns and as earnings growth in emerging markets accelerates, catching up with developed market earnings growth, which is less likely to accelerate and may in fact decelerate, we think that's going to that's going to help drive the RE rating that we

anticipate. Yeah. It seems to me that from your writing the some of the thesis is a little bit of the development. The developing markets have been better managed fiscally and have a little bit more dry powder to stimulate relative to what we may experience here. Is that fair or is that not correct? Well, I think that is correct. If you look at the US fiscal situation and policies, we're blessed to have the global reserve currency.

But if we didn't and if the world looked at the US like an emerging market, it would be a vulnerable emerging market. In that context, we haven't, we haven't been managing our house from a fiscal perspective in a very responsible manner. So how far do you think that we can push and use our position to continue to extract good results or are we at the end or close to the ends of sort of a, a large cycle for for US assets? I know this is an impossible question to answer, but I do

think it matters. Yeah. Look, it's an important question, maybe the most important question. And, and, and views will vary. So I have a biased view in that, in that I'm focused on emerging markets and there I'm sure there will be people amongst your audience that will disagree with me. But I would say the following. I think it's difficult to time these things exactly, but excesses have developed in both

directions, right. the US is have grown nicely and is trading or developed markets have grown nicely and are trading towards the top end of their historical valuation range. the US and US growth sectors in particular and emerging markets remain, although they've had a better year this year, near the bottom end of their historic valuation ranges.

And so without saying it's now or within three months or whatever, because again these things are very difficult to time, I think that the risk reward over the medium term has shifted very firmly in favor of emerging markets from my perspective. Yeah, it's always, it's a tough conversation to have when like sometimes I, I talk to friends about what's the market doing and I say, you know, if you're talking about the headline stocks, they're doing great.

But under the surface the breath is, is not great right now. And really like anything, well, I shouldn't speak in such generalities, but interest rate, consumer interest rate sensitive consumer names, things that are tangential to building, you know, I mean boat manufacturers, just consumer discretionary restaurants, those are not trading at rosy valuation. So it's, it's an interesting bifurcation that we have here.

And sometimes I I don't have a good sense of how good the comp is when I read emerging markets trade at X versus the US trades at Yi just don't have a good sense of the composition and whether or not it's apples to apples. Yeah. And again, there are there are some distortions based on the fact that you know, the US has a higher percentage of its mix towards growth and technology.

And therefore structurally there is an argument for a higher multiple for the market than there would be for a market that's mostly financials are mostly mining, right. So that that's all true. But again, even within sectors, I think that there's there's a pretty wide gap in terms of the valuation ranges that are being applied to U.S. companies versus those and most of the rest of the world.

Yeah, Yeah. Well, the other thing that's always interesting to think about is what is the market capitalization to current earnings and then how much reinvestment is, is possible, right? Because a high market cap implies you got to be able to reinvest profitably for a long time in order to create some sort of reasonable return on your investment, right? And it seems like in certain spots we may have gotten a little bit outside of the realm of what can be reasonable.

Yeah, I think that's right. That's that's a version of the of a famous old Buffett indicator, which recently has has triggered more more cautionary levels. Yeah. Do you are, is there anything like do you look at that relative to sort of do you apply the same lens to different emerging market countries like on a country to country basis or is that not really something that you worry about, it's more just bottoms up?

It's more bottoms up and in most of the markets it really isn't a consideration, but there are some where it can be a driver, you know, where the, where the deepening or the development of the capital markets can be a driver. So India is an example where you know, really they've, they've developed a domestic investment culture over the last decade or so, which is, which has led to sustainable inflows and savings

rates being boosted over time. And, and, and it's a, it's a very healthy dynamic that hopefully will spread across other parts of the emerging markets footprint.

I hope you're enjoying the conversation. I am interrupting the program to remind you that this show is brought to you by fiscal dot AI as well as Trata. You can go to fiscal dot AI forward slash brew for a 15% off all paid plans offering physical dot AI, super clean data, super good UI and UX. If you want to be the best analyst you can be, you need fiscal AI. If you don't like yourself and you don't care about your profession, don't sign up. That's fine.

But if you care about yourself and you love yourself, sign up for fiscal dot AAI forward slash brew. Get yourself a trial and see what everyone is raving about. And by everyone, I mean me. Secondly, Trata TRATA, try trata.com/brew. Check it out. Analyst to analyst transcripts. These people have done the work. You're not going to read through a bunch of fluff and a bunch of narrative and a bunch of background information.

You're going to get the analyst to analyst conversations labeled bull, bull, bull, bull bear, bear, bear, bull skeptic, yadda yadda. End of the day, this is high value for time. That's what they're going for. They're trying to build the most useful transcript library that you can find. So try trotta.com/brew.

Check it out. There are other examples, but that's a. That's a more recent example of of development. Your strategy is X China, am I correct? So we have a few different strategies. Are we launched with a sort of a mid net pan emerging market or flex net pan emerging markets long short fund, which does include China. We have an SMA only low net X China long short products.

So those are both hedge funds and then at the end of the year we we intend to launch a long only ex China concentrated product as well. OK, so the OK, so let's go the first one. If I was a 5 year old and didn't understand what you were saying, explain that product to me once more. Yeah, sure. The terms do get a little a little confusing. So Pentium means everywhere including China and that's a difference with the other two products.

And then mid net or flex net means that it's a little bit more of a opportunistic type risk profile where, you know, for example, in 22 when, when, when the world was complicated and most companies were, were were missing numbers, etcetera. We could have a, you know, risk profile or we could have a, an exposure profile which is quite low and that exposure profile which is quite low and, and a better time. So we can have a net exposure which is higher.

Low net in our context means ±20% net exposure. And so that's the, the ex China hedge fund product that I, that I described. It's an SMA forum. SMA is a separately managed account. We can go into that, but I'll, I'll, I'll leave that hanging for now and then and then long only the final product that I described is Ex China concentrated. Concentrated means 15 to 25 names. And the idea there is, is finding compounders and letting them compound at a tax efficient basis over time.

With the with the low net product, what would your gross exposure be? So the range is ±20%. We've averaged over time in the in the mid teens positive. And that is so big, but if it's you get into low net, what are you, you're like 120 long and 70 short or 80 short? Oh, I'm sorry, did I mishear your question? What was the gross exposure you asked?

OK. So, yeah, so yeah, so the gross typically there has has been more like 150 a 160% and that typically would be, you know, maybe 80 by 80 by 70 or 90 by 90 by 70 as examples. Yeah, interesting. So what are some of your, what are, what are the markets that that you're jazzed about like as a listener if they say, OK, well, you know what, what should, why should I call Jim? What's what's some things that have you excited that you're

looking at? Look, I, I'd say I'll break that into a, a, a couple pieces. I talked about from a, from a specific to regions perspective. I talked about Latin America, which is a region that we like structurally, not necessarily always, but we think this is a particular window where you know it's the cheapest emerging market region and you do have this catalyst for change which we think is going to play out.

Southeast Asia has been a laggard and you know the storm talking about Indonesia and the Philippines in particular are two markets that we like a lot. They're trading towards the low end of their historic ranges. They are in rate cutting cycles and should benefit from that. Typically they would have performed better. I think they've been left behind partly because of the AI thematic, but they're both very large markets in terms of in terms of populations.

They're both very small markets in terms of, in terms of capital market penetration, market cap. And we think that, you know, they're, I was going to say sort of earlier stage India type stories that haven't yet been discovered.

I think that that's oversimplified because they're they're big differences, but I think that they are markets that have been that have been ignored and that as they get discovered, you're going to see a nice combination of deepening financial penetration, more activity, more interest and, and, and expanding valuations. So those are two markets that we

like a lot as well. And then across some, yeah, it's harder from a top down perspective to to pick examples of backdrops which we where we're putting the table, but we do find a lot of bottom up company specific opportunities. So me as you know, Central, Central and Eastern Europe, Africa, Middle East, etcetera. Yeah. So I mean, what kind of businesses are you looking for when you're thinking about compounders?

I mean, in, in some of these countries that are, you know, I mean, are we looking at companies that are making washing machines locally? You know, the, the economy is starting to, to turn over and people are starting to get things like basic electricity and what not. Like what it what is the portfolio?

And I know it's hard to generalize, but but just kind of like what's I know banking Bank of Columbia or I guess the parent company now was, was something that that you've held, but like what kind of businesses are you looking at?

Yeah. So one big picture point I'd make that I think surprises many folks is that emerging markets is obviously a dispersed asset class and there are nearly twice as many stocks listed in emerging markets and there are in the US Now the US has been shrinking due to private equity taking private etcetera, M&A. And so it's a, it's an asset class that's got a, you know, well, big. It's a big playground is the starting point.

One of the, as you say, it's difficult to generalize, but one theme that's worked out nicely for us is digital banking. And we've had a digital bank in Brazil that I won't, I won't go into specific names, but we do think that that's a market where you've got reasonably high financial penetration, but digital penetration is lower. There's a name that's known and followed called New Bank. And this was the one that we have focused on is a much smaller and much cheaper version

of that. But it's got similar growth rates. It's growing the top line at 25 to 30%. At the time we bought it, it was trading on 1.4 times forward book versus new bank on 6 times forward book with a lot faster Roe expansion off of a lower base given operating leverage. So that's been a great name for us. Another name that that I think is differentiated that you won't find in a lot of emerging market portfolios is a is the largest Pan African tower company.

It reminds me a lot of American Tower, which I first started following in the Tiger Cup world back in in 2000 to 2 1/2 billion market cap at the time delevering quickly and it went on to become a hundred bagger. American Tower did and there's some very similar dynamics here. It's a reasonably recent IPO that came out of the point when interest rates were starting the spike that hit the results, it hit their perception. They got quite cheap, but they are now delevering very quickly.

And at the same time they're expanding they're they're they're accelerating their top line growth and it's trading at a very compelling forward valuation still. So it's you know it's trading at six times forward EVD EBITDA growing the top line in the teen in the mid teens and we think it's got lots of room to to grow. Interesting. So, yeah, I mean, I listened to somebody talk about the American Tower pitch back when it was a

$2 billion company. If only I could go back in time, but I wouldn't have been smart enough to see it. So it doesn't matter if I could go back in time. But boy, what a win that was. So if you can recreate it, that's a good thing to just hold on to. Well, and that can be the beauty in emerging markets is that, you know, there aren't, there aren't too many wireless tower companies and some of the domestic investor bases, you know, haven't, aren't as familiar with the story of what

happened with American tower. And so, so at least initially, that gives you the opportunity to sometimes buy these things at a displaced valuation. And then as the, it's, it is a very powerful business model. And so as the results start to come through and they and they should and they're it's a predictable business model, you get both the growth in that multiple expansion that I described.

So something that's going on here is any time an active manager is pitched, people say, well, why not just have an ETF? Because you can't beat the index anyway. What is that? Is that similar in emerging markets? Are there ETFs that can sort of, I don't want to say do what you do because I don't think anybody can be displaced necessarily by an ETF.

But on average, do you it? Does active management stand a chance against the ETFs in the OR are they going to eat everybody's lunch over there too? Yeah, great question. You know, a couple of things. One, emerging market ETFs are still quite a bit more expensive than developed market ETF. So the largest is EEM as the largest ETF in the emerging market industry or asset class and its cost ratio is 72 basis points, right. So it, it gives you a bigger gap than what you typically see on

the US side. And and at least for us, we're trying tend to set starting AUM levels or starting AUM rates which aren't too far off from that. So that's the starting point. But then the second thing I would say echoes what I was saying before, it's it's an asset class that's very dispersed or many more names and there are across even developed markets as a whole. And it's less well covered by a margin as well because it's an asset class that's been in the wilderness or in a bear market

for 15 years. So there are a lot fewer analysts covering on the sell side or on the buy side covering even the largest names, but in particular the the midcap names. And so, you know, we think that's a real opportunity over time and justifies active management over time. How big's your team now? There are four of us and the idea is over time to to continue to expand and to add sector specific analysts as we continue to grow. And are you on the road a lot or is it primarily done reading and

via Zoom? You know, it's a question I get a lot about access and travel and and I would say that's one of the, you know, angles. It's been surprising and nice in terms of, in terms of launching in a, in a post COVID era. I think that emerging market management teams would have gotten over the hump eventually in terms of terms of Zoom and and and virtual interaction, but it happened a lot more quickly.

But that's been a nice, that's been a nice spur for us in terms of, in terms of our ability to get in front of our stay in front of management teams. And we're on the call, we're on calls several nights a week with Asia. It's frankly more efficient way than the old days when we used to go to Jakarta and C4 companies and spend the rest of the day in traffic, an hour and a half between each company. But we also do still travel quite a bit as well and and have

boots on the ground. Yeah, I would think one of the tough things is just making sure that you you get a sleep schedule that can work. But I mean it would you'd be jet lag if you were flying over there. So not, not really that different. But the time time changes must be an interesting thing to navigate at times. It can be. Yeah. Huh.

What? What? What else should I ask you? I don't know what else to ask. Yeah. Well, you know what one topic we get a lot is China. And you know, as you've heard me say, we we do have a product that that that looks at China, but we also have a couple of products that that don't. And so I I get the question for for why and, and what our views are in China. And I would say to be honest, we remain that that is one part of the footprint where we remain

more cautious, right. So there's a, there's a stat that I like to share with people, but you know, over the last 10 years, the MSCI China index has has returned 3.4% with, with 24 plus percent annual volatility. Whereas the emerging market X China index has at a higher return of 4.8% with lower volatility of 17 1/2% during that same period. And we think parts of that are

structural. So China had an epic historic property bubble, I think the biggest in the history of the recorded financial world and that's Lakeland persist for longer. In terms of the deflationary impact of that is 1 concern that we have demographic headwinds. The population is now shrinking, but also we also putting a higher burden on the working portion of the population that has to support the elderly portion of the population. And then geopolitical pressures, which we think are more

structural than temporary. So, you know, there are often the pushback we get is there, there's lots of innovation there and there's a more compelling AI story out of China than there is across most of the rest of emerging markets. And I get that. But my question is, you know, in a economic structure which emphasizes utility and social good over a monopoly profits or excess profits, I don't know how much of that the shareholder base is going to see over time.

And so that's a market where we tend to be structurally more cautious in favor of some of the rest of the emerging market footprint that I described before. Well, I don't know that you can answer how much the I think a couple things can be true. I think it can be true that there can be a return on AI spend. I think it can also be true that it's hard to handicap who's going to win and that you have to have your eyes wide open to

the game that you're playing. And it is an interesting world that we're living in with such high spends of capital for what it what is definitively a very widely quickly, widely used, quickly adapted product. But it seems to me that that anyone that's highly confident in the end state economics is

kind of kidding themselves. And not to say that that the tools cannot drive a lot of efficiency through other organizations that could benefit without necessarily owning the software or the model itself, though maybe that's a dumb thought. I don't know.

So you know, you'll, you'll speak to people in this in this forum and and elsewhere that spend more time on AI specifically than I do. But, but, but I would just highlight the differences between the model and, and what the US is trying to do and, and what China is trying to do. So the US is, you know, try often and this the, you see this replicated in other industries and industry structures, but you know, the big, the big wins and the big gets bigger.

And so that's why everyone's racing to make sure that they have the best chips and the best and the best product in order to be able to amortize those profits as they gain dominant market share over time. Whereas in China, what they're really trying to create is they're, they're trying to make AIA commodity and they're throwing lots of state resources at it in order to, in order to spread out the development.

But they're trying to do a low investment version of it, which can then be replicated and sent out across the rest of the world at a cheaper at a in order to help perpetrate their footprint or their technological road map over ours. And which again, I think it's going to have implications in terms of what the ultimate profitability of their AI economic ecosystem is going to have.

What's I mean, what's the end state of all that? Who knows, But you kind of wonder if if they get if they get the AI. Yeah, I don't know. Be interesting to see. Hopefully we wins for no other reason than I I'm on our side as a matter of birth, but it's it's this is kind of a scary time. I feel like to have the the US and China hit a road sort of a block.

I mean, I, I sort of, I can't help but think at times as an, as AUS citizen, do I have risk if I own Chinese, you know, companies in the same way that we had Russia risk And I, I think that's real, but maybe it's not. I echo a lot of what you've just said. I, I too, certainly hope that we, we prevail in terms of our pace of innovation and technological road map. And then we, we win in the AI contest.

I do think, look, I, I hope we don't get to a point where, you know, Chinese stocks are frozen and, and mark to zero in the way that Russian stocks were. But I do think it's a risk more so than it is with, with any other idiosyncratic emerging

market. And, and, and even without that playing out in a, you know, in the worst scenarios, I do think that we've already seen and, and we're likely to see more regulatory pressure, which encourages first state pension funds and the like, but but eventually more broadly, which discourages US based capital from from being invested in China. Yeah, yeah.

The other thing that I, that is interesting when I, I read your comments on the China returns versus the standard deviation of returns, which it's not a great ratio. But the other thing that I find interesting is people that have been to China, I have not tell me how competitive and how quickly changing it is. And that can lead to like not great returns, right? I mean, capitalism is brutal. And if it's, if it's brutal there, maybe it's not the best

place for your money. Maybe, maybe ex China is a good place just simply because it's less competitive. I don't know. I would, I would encourage people to go because it's a fascinating place in a lot of ways. But but I agree with you.

I think that their economic structure is, is such that you've got a distorted cost of capital and therefore inherently very competitive business structures or, or, or industry structures, and that makes it difficult to generate predictable growing earnings and returns. You know, that's a, that's a backward looking comment.

But we think that despite some noises towards anti evolution and, and, and getting rid of excess capacity, they have other, other pressures, including high unemployment rates and high youth unemployment that's going to, that's going to restrict them from being too stringent in that direction. And so I think that a lot of the backward looking pressures we've seen on earnings growth in China remain forward-looking pressures as well.

When you said, I believe you said a distorted cost of capital, right? I did. So I think people would argue that we have a distorted cost of capital in America just based on the reserve currency and what we can do with interest rates. How how is it different there versus here? I guess to the extent that emerging markets, other emerging markets don't have that distortion, does it make their fundamental economy a little bit

more unstable footing? So the way you know, the way it typically works in in China is you have, you know, let's take EVs, electric vehicles, right? It's a private sector for the most part, but you have heavy state investment at both the state and the federal level and subsidies which which enabled it to get off the ground. And that's fine on one level.

And that it did in fact enable it to get off the ground and it made great strides there and are likely to have, you know, a better market share across the world in the in the electric vehicle the world than they have in the, in the pre electric vehicle world. But it also means you get a lot of capacity because everyone in every state wants to have their own wants to be in the race, wants to have their their their

foot in the game. And So what that leads to is state backed sources of capital that lead to over investment, that lead to wasted capital, wasted investment. And the need to export things to other countries that below other countries cost of capital, right? Exactly right. Yeah. And then and then, OK, so here we have the reserve currency and the blunt tool of interest rates.

So like an economy, I'm part of my ignorance on this, but does Brazil have anything that they can do or are they at more at the mercy of what, what the world around it is doing? And are they on more solid footing in a weird way, because they're they might have to react more and, and that may make their system a little bit more robust. Does that make any sense? Yeah, I know.

I understand what you're asking. You know, I would say not just Brazil, but, but many emerging markets, you know, they are constrained by financial markets and, and, and, and that does constrain the politics in terms of how much they can spend. And otherwise, if they, if they let their fiscal balance blow out, the markets will punish them and their currencies will weaken. And you know, it will have knock on effects because, because it becomes a vicious cycle.

As the currency weakens, it drives up inflation, which drives up interest rates. And so, you know, governments for the most part try to try to avoid that type of that type of vicious cycle. You know, Brazil is an interesting case because right now it's got the highest real rates in the world in terms of in terms of larger economies, they've got 15% interest rates and inflation is low single digits. And so normally that's unusual.

Normally those rates would have would have already been falling. But you've got a political backdrop and a lack of fiscal trust, which has prevented that from happening thus far. And so it's going to be an interesting situation because, you know, I described an election that's happening next October. And it's going to be a bit binary where if the current party, the PT under Lula wins, it's going to have one set of outcomes where rates stay higher

for longer. And if, if the opposition wins, which we think is more likely, it's going to have a different outcome. It's going to mean that rates can fall faster, leading to the type of virtuous cycle that I've described in a couple different ways in the call.

Interesting. Why does Lula want or why does the party want higher rates? Everybody seems want lower rates. No, they don't know. It's just, it's just imposed on them. I'll be a little careful about how I describe it because, you know, it's politics and people, some of you are differently. His party is believes in handouts and, and trying to subsidize at the lower levels of society.

And in order to do that, they tend to, they didn't have a ton of fiscal room to begin with because Brazil's spent beyond its means for a while. And so they push the envelope a bit. And because they push the envelope a bit, there's distrust amongst the financial community. And then it's been a tug of war back and forth.

Interesting. Yeah. Where the museum, the opposition, the theory is, and I think it's, it's, it's largely accurate that if the opposition were to come to power, there's there's a lot of pent up investment that's been waiting for falling rates and waiting for a more business friendly regulatory and investment backdrop. And they would put that money to work at the same time as rates would fall.

And it could create that sort of sort of virtuous cycle I keep referring to. Yeah, well, maybe foreign bonds aren't a terrible idea. Who knows what are what are some other sort of questions that you get that I've I've omitted or, you know, failed to ask. I don't mean to put you on the spot. I just want to make sure that I.

Think that's fine. I think we've I think we've covered a lot of it. Maybe one other thing I would say is that there are a lot of emerging market products out there that you know own very similar 25 to 30 names, but they tend to be the the mega cap growth darlings, whether that's the TSM, CS of the world, the Samsung's, the $0.10 etcetera. And, and there are many, there are fewer what we consider pure stock picking bottom up products out there.

And so we think that's a real opportunity because, because it's such a dispersed wide asset class with with such a wide, wide sandbox and so much it's not well picked over. So you know, as people, I would encourage people to take a look at the asset class if they hadn't for a while. And as people take a look, you know, try to scrap that, scratch that second, second layer below the surface and, and, and see

where the opportunity lies. Because while, while there are some great companies that I, that I referred to upfront, they're pretty well understood. They're pretty well covered. They're pretty well priced. And we think there's a really interesting layer beneath that. So that might be 11 nudge that I give to folks. Well, it would make sense that after 15 years or whatever of the, I mean, even though the breath in the S&P stinks, the S&P keeps going up, right?

And I mean, I know, I know that as that happens, it becomes more and more of a concentrated bet on a few names. But it is hard to tell the average person, here's a financial product that goes up with drawdowns that are kind of pretty small. You should be looking around for other things that haven't worked as much. Financial markets tend not to have one product that wins forever. But maybe, maybe they have invented one. Who knows.

But it seems to me like there's probably a a spot where the more enterprising investor has a decent forward outcome. But that could be a bias that I have. My listeners probably have that bias too, to be fair. Look, I, you know, again, I won't try to, I won't try to time an asset class shift specifically. It's possible that the US market just treads water for a long period of time as opposed to going down dramatically, right?

And at the, and at the same time international markets or emerging markets start to outperform. So it could happen in a lot of different ways, but I, I would just reiterate my my thought from earlier that regardless of timing, but from both the top down perspective, at least given our view on on the dollar and where we are on that cycle.

And from a bottom up perspective, given the opportunity set that we see it really compelling valuations on the emerging market side of the spectrum versus versus a lack thereof that we see on the developed market side of the spectrum. I just think it's a really good a good time to be kicking the tires and taking a closer look.

All right. Well, I, I, I guess maybe the way that I would say it is, I suspect there's a lot of portfolios that are overweight US and it might make sense to look at total portfolio allocations. So if somebody does that and likes what you had to say, how, how should they contact you? So I'm easy to find on on bloombergorlinkedinortheybestemailformeisjayhayes@lucernaglobal.com. YES and yeah, please do, Please do reach out. Happy to happy. All right. Well, thank you very much.

I appreciate you stopping by and I hope you have a great day. Thank you, enjoyed it.