Non-U.S. equities have underperformed their domestic counterparts for over a decade. We believe opportunities still exist if you’re willing to separate fact from sentiment.
Non-U.S. Equities: Separating Fact From Sentiment
Bob Huebscher: Good afternoon. Welcome to today’s webinar. non-U.S. equities separating fact from sentiment presented by Matt Burnett, Lee Rocky Wang and Charles Wilson of Thornberg Investment Management. My name is Bob Hooper. I am the founder and CEO of Advisor Perspectives, and I will be your host for today’s webinar. Your clients likely believe that U.S. securities are the only option they have when considering equities.
Who can blame them? non-U.S. equities have underperformed their domestic counterparts for more than ten years. However, opportunities exist if you’re willing to separate fact from fiction, a fact from sentiment. We have a polling question that will be on your screen momentarily. I’m going to read it to you. How will non-U.S. equities perform relative to U.S. equities? Over the next decade?
And you have five choices. You can say non-U.S. will outperform U.S. by more than 3%, by less than 3% will be about the same or non-U.S. will underperform by less than 3% or more than 3%. While you’re answering that, let me introduce our speakers. Matt, Bridget, is portfolio manager for Thornberg Investment Management. He joined the firm in 2015 as an associate portfolio manager and was promoted to portfolio manager in 2018.
Lee Rocky Wang is portfolio manager for Thornberg Investment Management. He joined Thornberg in 2004 as an associate portfolio manager and was promoted to portfolio manager in 2006. Charlie Wilson is portfolio manager for Thornberg and he joined the firm in 2012 as an associate portfolio manager and was promoted to portfolio manager in 2014 this presentation is approved for financial professionals only.
We will report your CEO credits on your behalf once your attendance has been verified. Please review the reporting instructions for CE credits which are being sent out through the Q&A window. If you don’t see those instructions in the Q&A window, use that tab to contact us. All right. Let’s take a look at the results of our poll and so it appears that we’re sort of evenly spread.
29% think non US will outperform by more than 3%. 22% will outperform by more than 3%. So that’s nearly half of almost 60% of the audience think that non US will outperform 15%. About the same non us who underperform is 24% and a small number think that they will underperform by more than 3% annually. Today’s webinar will consist of approximately 40 minutes of presentation by Matt Lee, and Charlie will then open it up to questions.
We’d love to hear from you during today’s presentation. To submit a question, please use the Q&A tab on your webinar console and if you encounter a problem with the audio, it appears the slide deck is not advancing. Please refresh your browser that typically resolves the problem. If you have any other technical problems, please use the dialog tab on your webinar console.
We’re going to start with my opening topic, which is one that has dominated headlines for several months now. The Russia Ukraine Conflict. The conflict continues with grave humanitarian costs, and it has created a lot of uncertainty and volatility within non-U.S. markets. Matt, let’s start with you. How has the investing landscape changed since the start of the conflict and the increased volatility and uncertainty that has permeated the markets?
Have you found any positive takeaways from an investment standpoint?
Matt Burdett: Thanks, Bob. You know, look, it’s obviously a very topical question and one that’s probably going to evolve over time as things develop. Obviously, a huge human toll here, which is going to change how things work. I mean, we have I think the latest data I’ve seen is about 6.6 million refugees leaving Ukraine, going to two neighboring countries. So, you know, and that will have longer-term developments of, you know, just kind of demography and whatnot.
Probably the biggest impact right now that that everyone is dealing with from an investment perspective is the energy security impact. You know Europe get gets about 40% of its natural gas from Russia so very high dependency on that Russian gas when that conflict broke out the risk premium comes in the gas markets the actual commodity markets went up dramatically. Let’s say the gas price which is a hub price in the Netherlands you can think of it as like a Henry hub price that price shot up to over €200 per megawatt hour and if you look back over history over many years, you know that that price was somewhere around ten to 15.
So it’s material impacts there. There’s a lot of a lot of concerns about where the energy security is going to come from as sanctions have been put in place. And Europe and the West, really the Western alliance is move away from using any Russian oil, oil and gas. You know, the positive the positive side of this is it you have, I think, greater Western alliances. You have a more unified Europe which means they can act together and make decisions together. And they’re better for the whole group, for the whole economic bloc and have less bickering that had kind of prevailed for the last 12 or 15 years or quite honestly, since the formation of the euro and from an investment perspective, you’re obviously going to have a lot of investment into energy security and defense, right?
I mean, right after the Ukraine invasion happened, Germany announced a €100 billion and defense budget right after having a very a very low level of, of security budget. So that was a material shift there. But you know, look, you’ll see a lot more investments around energy security in terms of LNG terminals, greater development of renewables into the entire continent.
And you’re likely to see that in other parts of the world as well. So I’ll go ahead and stop there.
Bob Huebscher: Rocky, what can you add in terms of what you’re seeing with valuations as we look ahead over the next year or so?
Rocky Wang: Thank you, Bob. Allow me to to some number here first. Last night, I checked leaders of that Asian multiples and I put it on the stock market index level and the US S&P 500 trading 16 times NASDAQ 20 time for P/E and the euro also the US Europe overall trading anything between ten time to 11 times Italy’s the cheapest one traded at 8x for multiple and the back to Asia Japan a little bit of a premium versus euro by the Stupak discount versus us 13 times for P/E what about Hong Kong China eight to nine time for the emerging market for most part is around the ten times and actually that’s pretty low end of the range for the past ten years so what’s I take away. #1 now the US market definitely trading quite a meaningful discount versus US stock market on the index and I will roughly between 35% to 40% the valuation discount and the emerging market even was trading around the safety percentages. I remember early part of my career like 18 years ago that time the emerging market traded premium versus us so was quite a different now.
#2 I will say in my observation I think the US stock market is pretty much driven by a very few of the so-called high profile tech companies of some time and the margin and Charlie were joking about each others in the S&P500, so not really, but it is an S&P five versus S&P 495. But also the US stock market I would say is more diversified by industry by sectors. So you my thought you might thinking I think should be less vulnerable to the single stock risk which you me and had been watching or seeing this days on the US stock market.
#3 I would say takeaway is I think the U.S. stock market probably more vulnerable to the further of a flight high cycle from here in in my opinion fat is just so way behind the curve they should have done this last year but the behind but in the also the US actually for this round of off cycle many central banks outside the US are pretty much they’re preemptive and unstable.
And meanwhile you know the second largest economy like China these days in the panic and then in the panic mood kind of losing up all the kind of policy monetary and physical all on a level and that’s kind of interesting. And Japan, which is the third or fourth largest economy, they continue to do so called unlimited progress in terms of ten years purchase.
So also the US, the central bank is not that hawkish is not aggressive as you was sad. So the other three point I say I think also the US about Asian overlay the by interesting monetary dynamics sounds very interesting in my eyes.
Bob Huebscher: So the Russia-Ukraine conflict isn’t the only thing that’s creating uncertainty among non US equities. There’s a slowdown and lockdowns in China that has investors wondering what’s going on. Rocky, you were born and raised in China. You work in China’s central bank and have been covering China from an investment side at Thornburg for 18 years. As someone who has extensive knowledge about China, what would you tell investors who are wondering what to do?
Rocky Wang: Yeah, that’s, that’s great questions and I would say this year’s two surprise for me, just for me as investor as a stock master number one this the Ukraine Russia of the wall is pretty dramatic and I think is probably the worst global geopolitical crisis since World War Two but not a big surprise is Chinese for themselves kind of in a very severe lock down and the currently Nazis in Shanghai my home town but also in the capital city in Beijing.
And the my friends my family who live in Shanghai had been locked out. All you can see jailed at the little department apartment in Shanghai for the past a three month war. So I think there’s some misperception here I want to point out, interesting to to the audience here, you know, I live in the US for the past couple, last two years, we also have some lockdown, kind of put things on hold. But for the most part of the year of 19 on the 20 year me kind of still living in the house and there was still a lot of plays every day. We still had a job of a car to do the grocery, you know wearing a mask. But overall we’re pretty free to move around.
But that’s not the case for people living in Shanghai basically they are jailed, eating in a team apartment in the condo buildings and they had to leaving all the misleading of all the daily basis and if government didn’t do a good job, a certain family are starving. So that’s quite a dramatic difference between what’s happening in China. And the US. That means it’s a pretty severe consequences of of economic, but also in terms of global supply chain, basically they’re minimum. Oh, no production in Shanghai, no consumption in China. US stayed in Shanghai. Latest data is in April. There is no single car sold in Shanghai. That’s pretty severe, you know, for you and me living in this part of world, that impact through the through the supply chain disruption and don’t forget, Shanghai is one of the busiest port in the world.
And and don’t mention this, all those trucks and warehouse closures happen in the in Shanghai. So that definitely put a lot of thought. I just add more fuel to the fire of inflation. So people are leaving this part of across a Pacific. So I will say a Chinese politician these days are in the panic mode. And I ask myself why they do the things in a self such harsh way in terms of lockdown.
You know, I just look at some numbers like China actually is not young country as you may think close to 20% of the population are over 64 years old. You know this 1.2 to 1.3 billion people that’s equivalent of 250 million people are about 65 those demographic of they’re vulnerable to infection plus Chinese vaccine. It’s not just not that it’s active in doing this overall in the Barron’s so the Communist Party leader presidency you know he doesn’t want to have to assume 1% or 250 million people die as close to two 2 million people so and the presidency have a this coming reelection in October November it doesn’t want his legacy to be damage it doesn’t lie about what 2 million total of deaths on his one year looking for reelection. That’s part of the reason China do such a harsh way in terms of warranty people but you definitely people pay hefty economic price for doing that. So in the past few weeks the Chinese politician and had to be very aggressive in terms of using launching all kind of stimulus policies cut interest rate tax reform consumption coupon consumer coupon, low property buying herd, all kinds of things.
The magnitude of stimulus, in my opinion, trouble even bigger than they did during the global financial crisis took on 08 or 09. But you know what? That achieved very little outcome because people still under lockdown. How can people move out to do, to consume, to produce, to go back to work? So that’s a huge, huge attack. But another big haddock related to the China, even after there’s a pandemic lockdown, I think they realize, for example, Chinese export a pro realize fine art.
You know, when they come back to work, come back to negotiate a bargain with the consumers in the Western world. You know what’s customer is not just care about the volume, the price of these cars and the cheaper price. You know, there’s a third new variable ticking in the negotiation between Chinese exporters and American importers in this part. Well, you know what before is like price and volume, but now is a sort of variable about safety or reliability that’s more related to the common you know, this days, a lot of decolonization park why there were so dependent on China and the China is not such reliable origin from here for next decade. I think it’s not just price volume, but what are the reliability in terms of supply.
So that’s quite a new phenomenon. I think all the organizations should ask themselves and I think this is the debate of De-globalization problem likes to go. And in my opinion, Chinese definitely is not the benefit from this. So our pause here back to back.
Bob Huebscher: Well, Charlie, maybe you’d like to jump in and talk about China and maybe some of the things that you’re excited about from an investment standpoint.
Charlie Wilson: Yeah. So maybe, maybe to step back on a longer-term perspective, you know, over over the last decade, I’ve learned a lot from from Rocky about investing in China. And one of the things that I think he has successfully done is always to look for the right side of policy. So to identify good investments that are aligned with government objectives and I think over the recent past, that had been a little bit more unclear, I think because of conflicting communications around the public policy or political field, as well as, you know, how they’re interacting with the private sector.
I think if you just go back and think about longer term retirement economies, ability of the economy and really understanding the credit, I think it will be monitored on the ground within the city where they’re due to be participating, maybe going back out to a large number of people, Kong fortunately, I think you know that thing for investors that it’s quite clear exactly how they’re going to achieve that goal and what sectors and where to find those good opportunities.
Historically, you would have expected the leading large cap technology companies to be part of that process. I mean, there’s some of the largest technology companies in the world with some of the largest user base is one of the longer term goals for China is to develop a technology industry both from the software and the hardware hardware perspective. And you would have expected those companies to be right in the middle of that.
So it’s been it’s definitely been much harder in the recent past to figure out exactly how to, you know, how to how to be involved in China from an investment perspective. I think, you know, the rocky history.
Bob Huebscher: Just jump in for a second here. It’s Bob. Your audio is breaking it up a little bit. I’m going to move on to the next question here and we’re going to troubleshoot your audio while we get someone else here into the conversation. But we’ll come back to you to get some more of your thoughts around China. Let’s talk about the flattening of the yield curve and the breakdown that it suggests that break-even rates on the yield curve suggests that we’re set for a slowdown in global growth combined with a decline in pricing power.
Matt, what are your thoughts on where investors should be diversifying?
Matt Burdett: Thanks. Thanks for the question. Look, you know, I think we have to put into perspective what the sovereign curves can tell us today versus what they would tell us in prior periods, simply because we have to consider all the quantitative easing that’s happened over the last decade plus, which has happened in many markets, not just the US so it doesn’t mean it doesn’t mean there’s no information in yield curves.
It just means that we need to think about how manipulated bond prices have been because of all the quantitative easing. And, you know, the real question around that is, is what is what is the medium term inflation rate going to be? Right. We are in an elevated level now, but we’re coming to a point now where the year over year comparisons will will start to be less meaningful just because of basic facts.
It depending where you are in the world, like for example, in Europe, inflation is almost two thirds energy which we talked about already with prices going up a lot. So that can that can come back down. I think the main the main takeaway though, is getting to the 2% target that many central banks use is probably going to be more difficult and not going to happen that quickly.
And having said all that growth is clearly slowing. We’ve come we’ve come through a period of very high growth. Right. About trend growth driven by the pandemic recovery. And also massive, massive stimulus is a huge demand for, that drove growth rates higher than above trend. And so now we’re slowing. So that’s it’s kind of a natural thing to think about and as we think about investing in international markets over long periods of time, you know, we want to have long duration investments.
You know, some of the things that we talked about already are still important, like energy security. Right. And finding investments today that that have long duration runways for cash flow growth. And I would I would call out some of the international oil companies in this camp where they have very durable businesses supported by the environment today. I would we would favor those that have more LNG exposure because LNG is going to replace the pipe gas going into Europe.
And LNG has become a global a global product. Right. It’s used heavily in Asia as well as as well as in Europe and other parts of the world. So that’s an area we think that that’s it’s worth looking at because the valuations still don’t reflect what’s attractive there. Another area around energy security would be in the renewables and grid network grid areas where there’s going to be an acceleration of the development there.
And, you know, there’s different ways to look for ideas there. There’s various European utilities which whose stock prices we don’t think reflect what the long duration growth run rate really is. And the fact of the matter is they’re a solution to the problem. They’re not the problem. So those are those are attractive areas. And then I think another big bigger area to consider you, Scott, probably long-duration dynamics with it would be around supply chain.
If you go back and think about what’s happened over the last five years or so, first started with with trade wars with China, OK? And that disrupted global supply chains in a way and it brought attention to too many nations the dependency that they had on China and quite frankly, if you think about Europe, they were kind of stuck in the middle of that of that kind of disagreement.
Right. And then you had Covid. OK, where where you’re literally shutting down parts of the economy and it became very apparent that many countries were not self-sufficient to be able to supply their economies and their people with items that they took for granted every day. So you have that. So you’re likely to have some near shoring or reassure of supply chains getting closer to centers of demand. This has already been happening. I’m sure Charlie can speak to it around Mexico. This is happening. And I think what I’m hearing a lot from companies is the replication of supply chains, right. Where you’re not just you don’t just have one supply chain, you’re going to you’re going to actually build a whole new one. Now, it remains to be seen when that happens, but, you know, that’s an opportunity where companies that manage supply chains, freight forwarders or various other service providers, you know, they might have a much larger market ahead of them than people think.
So I’ll go ahead and turn it back to you, Bob.
Bob Huebscher: Thank you, Matt. We’re going to come back to this question in a second about where these other opportunities are. But I’m going to try Charlie again. Hopefully, we’ve got his audio straightened out. And Charlie, maybe you can pick up on the point you’re making about China and then speak more broadly to the opportunities that you’re seeing in emerging markets.
Charlie Wilson: Sure. Can you hear me okay now?
Bob Huebscher: Sounds perfect.
Charlie Wilson: All right. So I guess two, two years into the pandemic isn’t long enough to get all of these audio and technical difficulties worked out, but hopefully we don’t have any more from here. Yeah. So I think just to pick up on what I was saying is I think that in the recent past, Rocky alluded to this, but the government policy in China has been much more supportive to try to boost economic growth.
And and I think that we’re starting to see more clarity around some of the private sectors that I think that the government has specifically been targeting over the last year or so. You know, I listen to the Alibaba earnings call this morning, and their CFO on the call noted that they had been in discussions recently with the government and they recognized how much that regulatory crackdown has really hurt animal spirits in general in China.
And you’ve seen that reflected in consumer sentiment. And then when you combine that with the aggressive lockdowns that that Rocky talked about, it’s really not great for economic growth. And as I mentioned, economic growth is really the important, important aspect of stability for China. With the election year coming up. We’re more optimistic in China. And so the great news from our perspective is the starting point is really attractive.
You have great valuations on excellent companies. Expectations are very low. That’s a great combination. And frankly, we’re seeing that really from a broad base perspective. It’s, you know, almost every industry and sector has been impacted both directly by some of these regulations, but also just this broad-based slowdown, which is just hurt valuations. So, I mean, I hate to call out any area specifically, honestly, because we have probably close to 25 holdings in China today.
And they’re across a wide cross-section of the economy. And they all, you know, I, I love all of my, my Chinese stocks the same. So I mean, we’re pretty optimistic about the outlook for China from here.
Bob Huebscher: Thank you.
Charlie Wilson: Got you. On your second part of your question is, did you discussing em more broadly? Yeah.
Bob Huebscher: Yeah, EM more broadly, please.
Charlie Wilson: Yeah. So I think the really exciting part about about emerging markets is that there’s both short term tailwinds and longer term tailwinds. And I think just specifically on the short term tailwinds, a lot of emerging markets have suffered from basically a prolonged reopening cycle in many, many emerging markets didn’t receive COVID vaccines until the latter part of last year and into this year.
Vaccination rates have continued to climb. But but we’re really we’re opening reopening just now and many of that’s countries. And so economic growth is expected to accelerate across a lot of emerging markets. And specifically, I’m talking about Southeast Asia, Latin America, where I think valuations reflect this uncertain outlook or timing of that reopening trade. So that that gives us a really great a lot of great bottom ups, stock level opportunities across a variety of markets there.
The second piece that I would note is that, you know, emerging markets tend to be seen as higher risk because I think it’s really that that that the lagging image of emerging markets is being tied to global growth, fixed asset investment in commodities which I’ll talk about in just a second. But I think that that’s still stale view of emerging markets.
And it’s really outdated because a lot more of it’s driven by domestic consumption. But nevertheless, the global markets treat it as a risk off, you know, during risk off periods like what we’re experiencing currently. Emerging markets tend to be sold even if they’re already less expensive than their developed market counterparts. But the longer-term tailwinds I was talking about is the fact that this growth model in emerging markets has evolved really largely over the last decade.
Just to give you a couple of facts, the that the emerging market middle class has nearly tripled from 2009 to today and it’s expected to double again over the next decade. And during this period the emerging market economic growth model and it’s hard you know there’s so many different countries in emerging market I’m talking really in aggregate but it’s not quite that simple.
But but the bottom line is that that growth model has gone from being one driven by exports and commodities and fixed asset investment to one that’s now being driven more by consumption and that that story only gets stronger in the near future. And I know we’ve talked about the emerging market consumer for decades, but frankly, there wasn’t enough middle class consumers with enough money in their pockets really to drive that that growth engine.
And be able to withstand external shocks like what we experienced over the last couple of years. But I really think we’re reaching that point. And that’s what makes me really excited, is not only are we seeing a transition in the growth model, but we’re also seeing a broadening of the investment opportunity towards more sectors and really that gives us, you know, instead of focusing on the large cap banks and the and the commodity companies, we can start to look at more interesting consumer oriented business models.
Bob Huebscher: Thank you. Let’s follow up on what Matt was saying earlier about how investors should be diversifying. Rakhi do you want to comment on that question?
Rocky Wang: Yeah, actually, I just adding a different flavor from different angle on that. Talk about the stock sectors probably give you guys a little flavor in terms of countries and regions of in terms of regional diversification of benefits right. So, for example, I know we are living in a highly uncertain period usually for us base shareholders or investors, home buyers, typical or very strong that means you want to get money back home.
I’m sure that’s probably the reason it’s flying. The U.S. dollar has been very strong into this year, but as I mentioned, U.S. stock market, a relative more expensive, particularly, you know, facing off aggressive Fed hikes on the way. And but meanwhile, now U.S. stock markets are cheaper and more balanced in terms of growth style. And you know people looking back to the 1970s and look at that which region which mark is doing pretty well and in starting to the so called the dust of the history books trying to find the answer and the one countries that can stand up is Japan.
Japan had it been deep play by deflation finally OK we got inflation how are you guys doing. So definitely there’s some interesting opportunity in Japan in terms of country. Singapore is not interesting dynamic plays, you know giving all the missed out on Chinese politician on Hong Kong likely in my opinion you will see the financial hub position will be taken by by Singapore away from Hong Kong. So that could be interesting.
Australia, Canada could be interesting. You know, there’s a Russian Ukraine wall also kind of demonstrate the the value of hard assets. Right. And for economy like Australia, Canada, they have a hard assets hardness as a means, a copper and oil and agriculture. I think from here, people definitely will start in reassess for those value of those assets. Rather than just Internet software. So that’s something new new things could interesting from here. So this just a different flavor on this topic. Back to you about Well.
Bob Huebscher: Charlie, let me get your thoughts on this question about diversifying and how investors should be approaching this issue.
Charlie Wilson: Yes. So, you know, one of the I think one of the things that gets lost when you have such a strong period of U.S. market outperformance is the importance of having international stocks within a diversified portfolio. One of the things I point out quite frequently to U.S. based investors is the period of emerging market outperformance during the 2000.
So if you look at the period from, say, 2004 through 2008, even the early part of 2008 emerging market stocks and particularly value stocks within emerging markets, substantially outperformed in an environment where U.S. interest rates were rising. And we saw high you know higher commodity prices. Sounds vaguely familiar to the current environment and during that period if you hadn’t held international stocks you would have significantly underperform.
That was basically a lost decade for the S&P coming off a very high valuation level in the late nineties. So I think that, you know, there’s a lot of things that seem similar in this in this case, not only do you get the benefit of having emerging markets zig when developed markets are zagging or, you know, when they’re when one is underperforming, the other is outperforming but you also just get the, you know, the benefit of not trying to time these cycles because it’s it’s very hard to do that.
You know, obviously, we’ve given you a lot of reasons to believe that that developed, you know, international developed and emerging markets can outperform from here. But you know, the exact timing that’s very hard to call. And I think that what tends to happen is that, you know, investors especially within emerging markets, tend to miss that bottom and so their through cycle ride is not as attractive as overall index returns might suggest
Bob Huebscher: Thank you.
At this point, we’re going to transition and ask some questions from the audience. There’s one more polling question that I put up on the screen that I’m not going to take the time to read, but we would greatly appreciate if everyone would take the time to answer. Matt, I’m going to start with the first question here, which is for you, the conflict between Russia and Ukraine highlights the risks of geopolitics and de-globalization How do you factor those into your assessment of risk.
Matt Burdett: Yeah, thanks, Bob. Yeah, look, I mean, these types of risks are kind of always present you know, but I can also turn around and say there can be political risks within the US, right? Investing in the US. Take health care, for example, where depending who’s running for president, you can you can see dramatic impacts to health care, stock performance versus the rest of the market. From a you know, I think what the Russia Ukraine situation has taught us is is really that, you know, you got to have a wider range of outcomes when you think about risk.
I think we all naturally want to live in a world where the range of outcomes is quite narrow. But the reality is that the real world has a very wide range of what can happen and in particular to the downside also the upside that, you know, you’re worrying more worried about the downside. You know, for us, what we really try and do to manage this when investing in international markets is, you know, have engagement with the companies kind of understand what the board structure is like and what their incentives and motivations are.
You’re never going to fully remove geopolitical risk. But what you can do is have dialog with companies, know the companies, understand the industry value chains that they may compete in to help you assess what’s the upside and downside scenario for a particular company. So you know, it really can boil down to a bottom-up approach. You know, where you can help guide your risk assessment by by checking off all the things that you think would be important.
But you can’t always get rid of it. In some cases, you can you can hedge currency risk just hedge it back, back to dollar to take that risk off the table and we do that at some periods of time. But you’re not going to fully remove it. So I’ll stop there and give it back to you, Bob.
Bob Huebscher: Thanks The next question someone asks, Can the panelists address dollar strength and how long they foresee a stronger dollar Charlie, I’m going to start with you on this and then Rocky, if you want to chime in, you certainly can.
Charlie Wilson: Yeah. So first of all, I don’t want to give you the impression that that we’re trying to call currencies. I think what we’re trying to do is, is make assessments that the companies that we hold will generate earnings growth in dollar terms. And that can come from a variety of ways. You know, some of our companies are dollar earners.
You know, they’re operating in commodity industries for example, you know, they benefit from stronger dollars at the top line. And then local currencies are actually generally and I think the costs are actually in local currencies. So they benefit from dollar strength. So that’s 1 angle that we can manage this risk. Secondly, you know, I think Rocky alluded to this earlier, but central banks in emerging markets have seen this movie before, and they’re trying to make sure that they get ahead of the Fed to maintain currency stability. Real rates, so that the the differential between nominal interest rates and minus inflation, are actually positive across most emerging markets today versus our, you know, significantly negative real rates here in the US. So that’s actually a driver for flows into some of these countries. And you’ve actually seen across some Latin American currency stability and even strengthening of currencies this year despite the Fed moves. So I think that we’re in a different position today where Central banks are more sophisticated. They understand some of the pressures that can come during periods like this.
And that’s given us some comfort to move into those markets. We know, as Matt said, as Matt mentioned in his last comments, we do incorporate these considerations into our valuation framework because we are dollar based investors and we want to make sure that we deliver attractive returns in dollar terms for our companies. But we did this on a bottom asking our customers, we do this on a bottoms up basis, though.
I mean, this is really part of our forecasting and valuing companies in dollar terms. And so we really try to be thoughtful about this on a on a company by company level. I think the broad the broad thing is, is that the dollar may strengthen versus other developed market currencies, as you know, as Rocky mentioned, Japan and Europe are still more hesitant about being aggressive on reducing support for their economies from a monetary perspective.
But emerging markets don’t have that luxury and they really have to be more aggressive during this period.
Bob Huebscher: Thank you. Rocky or Mat, anything you want to add to that.
Rocky Wang: I’m good. Only thing I want to add is maybe a little more long term structural issues regarding the dollar position of the reserve currency. I think that during the Russia Ukraine conflicts, I think the U.S. put the Russia kicking out of the SWIFT system. Right. As a global clearing system. And I think Russia deserve it. Right. It’s their job, I think got punished.
But that’s from a financial market perspective that’s also opened the door. People really thinking the reliability dollar as a global last resort of reserve currency to park their wealth. I think that’s something we need to be mind open. I think that will probably have some damage to the dollar and reserve currency, wealth preserve currency in the long term.
So this is a deal different flavor from on that perspective.
Bob Huebscher: Thanks. All right. The next questions also for you. What do you think about investing in foreign equity via alternative currencies?
Rocky Wang: Yeah, you know, again, Charlie, Imad and I were stock picker. We’re not a trading currency. We’re not the currency, if you will. Thinking great fundamental company trying to help you guys build the diversified portfolio, not just the U.S., not just U.S. dollar, but also a participate of the off sides of benefits, diversification, investment in non-U.S. company, which always had a different dynamic, different flavor or different behavior versus U.S. stock.
So we’re a stock picking, what? Not a current picker, but you can argue for the retail investor, you can argue when I just buy the currency rather than of other rather than just individual stock, individual portfolio. My answer is, you know, currency is a dangerous game and is influenced by so many things, interest of parity, interest rate, differential purchase of parity, but also sentiment, emotion. And that’s not our game. Our game is go back to the fundamental company trying to do a solid seasonal proof a portfolio for you. You’re making money from stock, from participating. The gross a great company next Alibaba next year, the next great companies outside the US rather than kind of a single currency bets so let’s kind of my perspective in terms of stock investment versus currency.
Bob Huebscher: Thank you. Next question what is the Chinese perspective and attitude toward COVID vaccines? Charlie, you want to start with that Well.
Charlie Wilson: Actually, I think Rocky’s probably probably more more capable of answering that question, given his background Yeah, I’d throw that back to you.
Rocky Wang: Thank you. Yeah. You know, I’m not with Charlie other Steve, but but, you know, I’m I’m probably same as you. But I will say the Chinese vaccines are not effective. And so far and the latest data is the Chinese are working very far in terms of improving from an annual mRNA perspective.
But so far, mRNA have been more reliable, more affordable on the global basis. So Chinese really for the Chinese, that’s how small it is. Why do they still keep that national pride to have some Chinese made in China vaccine or they just buy from Pfizer or mRNA, from Moderna overseas? But at this moment, sounds like they’re kind of using too lax.
I think that there are they’re busy likely. But end of this year, you will have the Chinese versions mRNA available for cheap, cheaper. And that’s a typical thing. But meanwhile, they started importing some high funds vaccine from Pfizer’s already for the emergency hospital purpose. But overall, China effects in Chinese local vaccine are not effective.
Bob Huebscher: All right. Next question. Due to the supply chain congestion from lockdowns in China, which has slowed global growth prospects. Are there other regions that are capable of filling the gaps that that is creating? Charlie, you want to start with that and then Rocky I’ll come back to you.
Charlie Wilson: Yeah. Yeah. So, I mean, this is this is actually something that’s very you know, it’s developing quite rapidly within emerging markets and Nat alluded to this earlier, but we’re seeing sort of two angles to this. One is, is that near shoring or reducing the complexity of the overall supply chain, which also gives you the added benefit of having dual sourcing in some cases.
So, you know, for example, we own a Mexican bank and they’ve been, you know, very happy to see an increase in investment in some of the industrial corridors within Mexico, as companies have learned through the pandemic that their supply chains weren’t as resilient as they needed to be. And so they wanted to, you know, have other methods of recurring and Mexico is a beneficiary of that.
I think you would probably say the same of Eastern Europe during this period, while that’s been a long term, you know, supplier for a lot of industrial goods into Western Europe. You know, I think that that’s probably becoming an increased focal point. The other thing that I would say is that this is not a trend that just started during COVID or even under the prior U.S. administration during the trade wars.
What I would say is that this is actually a trend that’s been ongoing for quite some time. And the reason being is that wage growth in China has been growing double digits, even mid-teens, for over two decades now. And at some point, the labor cost arbitrage that was available is no longer as attractive. Even though Chinese workers are some of the most productive in the world and the export infrastructure is amazing and really makes our facilitates that manufacturing base to deliver goods the rest of the world, the you know, the cost advantage is not quite the same as it was several decades ago.
And what we’ve seen, you know, for example, we hold a company called Shen Xue International, and they’re the largest textile manufacturer in the world. They supplied Adidas and Nike and Puma and others, Lululemon, Uniqlo, et cetera. Over the last seven, eight years have been shifting their production base, which was 100% China in, say, 2014, more towards Southeast Asia, Cambodia and Vietnam.
And what they’ve said is even though the workers in Cambodia and Vietnam are significantly less productive, the wages are half. And even though they have to invest more in infrastructure in those markets, it’s worth it over time to diversify that just to hedge themselves from a labor cost perspective. So this is a dynamic that I think has been happening, you know, for quite some time.
But it’s I would say it’s probably been accelerated during the last few years as we saw that our supply chains weren’t quite as resilient as they needed to be.
Bob Huebscher: Thank you. Matt, there’s a question here for you. Turkey, Saudi Arabia, Brazil and some other countries are looking at moving away from the dollar so ultimately, how would that affect U.S. investments.
Matt Burdett: Yeah, I mean, it’s a good question. And I think it would be something that would develop over a very long period of time. Look, there’s huge value in having the reserve currency status, right? Huge value is very hard to kind of quantify. It but it’s material, right. And, you know, from what I have seen, I haven’t seen all of the discussions, but the one I was most close to was Saudi Arabia looking to sell oil to China in R&D and getting away from the dollar. You know, this is just my personal view.
Charlie and Rocky may have others. I think, given the recent lockdowns in China, and the disruptions that it’s caused. And I can tell you, I listened to a call with the European Chamber of Commerce representative in China about the lockdowns. And it’s a you know, it’s a material disruption to the companies that depend on that supply chain. Right.
And because of this, I think it’s going to make you know, companies around the world which are going to be ultimately the ones making the decision will along with their governments about which, you know, to switch out of the dollar. I think it would make them think twice about, you know, with all of our problems in the U.S., we probably still have the most stable, you know, financial framework for how businesses can act.
So I would say it would be negative for U.S. if the dollar were to be displaced in some way. But I see it right now as a low risk for me personally. Back to you, Bob.
Bob Huebscher: Thanks. Charlie, There are lots of risks in emerging African markets. Are there any bright spots in that region?
Charlie Wilson: I’ll answer that question. I just want to add on one thing to Matt, to Matt’s comments, because I do think that the recent events with Russia and Ukraine have perhaps accelerated the move that he was talking about away from the dollar, because it really highlighted how much influence both the U.S. has over the global banking system because the dollar is the primary currency for that system.
And and while I don’t think this is going to happen overnight, I just think it’s caused many countries like Saudi Arabia or other major commodity exporters to think twice about, you know, how much control do we have of our own outcome. And I think that’s something that will be an ongoing long term process, but potentially a headwind for the dollar Rocky mentioned.
Going back to Africa, you know, so really from an emerging market mandate perspective. And this is, you know, talking about the product that I manage it’s there’s really only two countries that are, you know, as part of that universe, South Africa and Egypt, the bulk of the bulk of of the investable market cap in those two countries are in the financials or there’s you know, and in South Africa, there’s Naspers, which is the you know, the conglomerate that holds several technology companies.
So overall, the landscape of available opportunities that have enough liquidity and interesting runway in front of them is really not that great. And I think a big part of that is the fact that there’s just not a lot of wealth in Africa. So there’s the you haven’t you haven’t created that that ecosystem of companies providing consumer goods and services that provide, you know, better investment opportunities. Despite the fact that, you know, the penetration runway for many basic goods and services is very attractive. It still doesn’t get over the fact that there’s just not a lot of buying power there. And so I think it makes it very difficult to, you know, from a prominent from a, you know, kind of near-term perspective to find good investment opportunities. With that said, I think that, you know, you’re starting to see innovative business models pop up across the region.
I think Safaricom is a good example. They’ve helped develop a M-Pesa, which is a payments platform that’s now gone in Africa at it’s all mobile based. So it’s enabling payments to happen for people that are unbanked in general. And so it’s driving financial inclusion. So you’re starting to see innovation drive new opportunities there.
But they’re still early and liquidity is very tight. And it’s so it’s generally pretty hard to access those investment opportunities.
Bob Huebscher: Thank you. Rocky, someone is asking you to comment on the impact of China’s declining population and labor force participation numbers. How long before this becomes impactful on its capital markets? If you had to give a forecast and to what extent?
Rocky Wang: That’s probably one of the very few questions. I had a very pessimistic answer. I think that China had a serious population problem from here. I was born in 1970s, so I was the last generation in China during that period of time. There’s no birth control policy is of my generation the one child policy introduced. And that’s a severe consequence of that country as a nation.
So in the recent couple of years, I think the CCP, Chinese Party realize as a big problem, as a time bomb problem for the survivability is not that serious, serious, but it’s a big problem. So they kind of losing opportunity. Now you had the two kids or three kids in certain provinces like a golden province in China is no limit.
But the problem is the young couple refuse to have more kids right because they had to pay higher property price They had to leave on huge uncertainty. If you’re working for Tens and Alibaba these days as a code breakers or code writers, you probably worry about your job, your financial security of family rather than worry about how many kids you have.
So I would say that’s a serious a time bomb problem for China, and there will be long term ramifications for China, capital market and asset price. But having said that, always trying to be positive as well because our identify there’s a search loss spot and China can improve, for example, improve productivity because a lot of the Chinese productivity is stifled by the very harsh regulation, very harsh regime, on so many things. Right.
So if a lot of people have of freedom, have an animal scampering back and have an easy to move around, have a better medical insurance coverage, I think that people will working hard working more to make earning new trouble had a reason to have more kids. But you know, as we see for the past two years and the current administration sounds like is pretty harsh internal regulation, I think that’s very stifling in terms of a productivity improvement.
So that’s just to further exemplary the problem of the population problem here, China. So I’m pessimistic. I’m hopeful of the Chinese policymakers kind of wake up and they give them more freedom more freedom to make economic decision to make life decision to the Chinese citizen. So, therefore, contend if comfortable, they feel calm. So they probably have a kind of have a more like a probability to reproduce themselves more rather than otherwise is a serious problem for Chinese long term.
Bob Huebscher: Thank you. Rocky, can you give an example of a company that’s insulated from the macro conditions that we find ourselves in?
Rocky Wang: Thank you, Bob. You know, that’s another questions I feel very hestitant to answer because of all the compliance reasons. You know, I’m, I think, very hesitant to tell the individuals stock. Guys, listen, you know, I have a three principals man and I talk a lot. Hello this year all from here, interns how to picking stock and the picking stock, I just said could be isolated from the macro headache we’re facing now.
So three principles. First one, focus on company boring, company B O R I N G Boring company earnings company had a visable predictable cash flow and I’m willing to pay certain premium, okay. Valuation for that certainty. But that business could be very boring, boring company. So then the thinking style principle is pricing company pricing contravenes pricing power company, right. They have a pricing power.
They have the capacity, their capability to pass on the price to pass on cost inflation to the buyer and thereby it cost them. I have no choice but to pay for it. For example, like a garbage collecting business. Right? You, me had to pay the garbage on the weekly basis, a monthly basis, regardless whether you garbage parks or fulfill is empty.
Right. So meanwhile, they can pass on the CPI as part of our agreement. So that’s a pricing power company. The third and we think about it is called Rereading Come to the reading means certain companies so harshly punished by the fear of interest raise, the fears of a girl’s value rotation so and have been so punished. That’s not part of the penalty superlative, but the underlying business model.
And Charlie and I mentioned early still very solid still very strong as to where have a better creditable management with very credible long term cover strategy. But their stocks have to be punished in that way. So they probably have so-called reason opportunity. One of the we have led the package of CPI lately, but it’s a less hawkish of fact.
I think that those companies are doing great for the second half of this year or the next couple of months. So boring company pricing, power company and the third pricing raising company I think for the rule three principles, probably you guys find buy the stock then I guess hopefully. Thank you.
Bob Huebscher: You’re welcome. We’re running up close to the end of the hour. So I’m going to turn to the final question and I’m going to pose it to each of you. And the question is this, can you give me three reasons why our listeners should consider investing in non-U.S. equities? Matt, let’s start with you.
Matt Burdett: Thanks. Look, I think as Charlie pointed out earlier, when you want to have a diversified portfolio, it’s good to consider international equities in that portfolio. And now you you have to remember that, that the performance, regional performance can drift widely and it can take very long. Right. We all know that for more than ten years, U.S. has massively outperformed.
And a lot of that is valuation, actually. So if I give you some stats here, if I go back to December 31st, 2010, so I try to think about things in a decade increment. Right. And if you think about the forward PE multiple of the US market and I’m using the MSCI US here, it was 14.9 times. OK, fast forward to yesterday and it’s 18 times so that multiple is higher and it came down obviously with the correction we’ve seen but in the international market and I’m using the ACWI ex U.S. as the index 13 and a half times back in 2010 and it’s 12.7 today so it’s actually cheaper by 6% emerging markets even more dramatic 13 and a half times to 11.3 times now. So you have markets that are materially cheaper you have some developments that are happening that we kind of talked about with more growth you kind of have self reliance on energy and supply chains which should drive growth. So you know, it’s been it’s been tough for people to be in international markets, but you know, the next the next decade it’s tough to predict.
But when you have valuations the starting point as we do. That’s a pretty good place to start. So I’ll stop there.
Bob Huebscher: Great. Charlie.
Charlie Wilson: Yeah. So I think I’ll frame it this way. I mean, obviously the diversification benefits we talked about a couple of times, the fact that it’s hard to call periods of outperformance in that they can be quite substantial over just a quite, quite a small time window like what we saw in the 2000. But specifically on emerging markets why we’re really excited, so go back to the 1940s post-World War Two in the US and you saw a boom in the middle class during that period.
Wage growth was quite rapid. You saw GDP growth consistently high over the next 40 really 50 to 60 years. So take that concept and then go to the 1980s when we had very high interest rates in the US but then over the next 40 years they consistently fell and you saw rapid expansion of consumer credit growth. You saw homeownership rise, you saw, you know, consumption really drive the economy during that period.
Now put those 2 tailwinds together and that’s what you’re seeing across many emerging markets today. The reason why interest rates are falling is not only because developed market rates are lower than they have been in the past, but also because institutions in emerging markets have learned a lot over the last 30 years, whether it be the Asia crisis or COVID or the global financial crisis about how to how to had strength and resiliency to their economies. And so that gives them confidence and ability to keep interest rates lower than in the past. They’ve also learned to manage inflation better, to put all those things together, declining interest rates, a new consumer that’s ready to get their first car, their first home, their first life insurance product and so quite a powerful combination. And we’re just getting started and we thought we were going to be getting started in 19 and then COVID hit and today you have an even more attractive entry point with what I would say a tailwind that’s even getting stronger so that’s my that’s my excitement about emerging markets and and why, you know, I’m really bullish about the medium term there.
Bob Huebscher: Thank you. Rocky, can we get your take on this?
Rocky Wang: Yeah, sure. I think my two colleagues, a man, Charlie Cook, a very thoughtful answer to that. I think around that thought, that wisdom, I think that they give you all. But I just look at the things from a different angle, right. Our in our life, you have a job. You have a career. I think that end of the day is about balance, right?
I’m not arguing, US versus Non-US. Sounds like competing with each other. No, I don’t really feel that way. I think life job investment is all ours. Why ours? You need a balance, something you think you know versus something you don’t know. Right. So from my perspective, I think we need a balance. Don’t be taken away by polarized opinion on either side.
Feel the balance. Have a healthy life. Have a healthy future. That’s my kind of conclusion on this topic.
Bob Huebscher: Well, Rocky, I think that’s great advice for us to end on. We do still have a lot of questions that are in the queue. The folks from Thornburg will respond to you individually, either via an email or a phone call. And at the end of this webinar, a feedback survey will appear. We gratefully appreciate your filling that out for clarity. A rating of ten means you like to have an R rating of one means you did not. I want to thank our presenters once again, and I want to thank everyone for attending. Have a great day.