Welcome attendees. My name is Poppy Rui and program chair of CFA Ottawa Society. Today, joined by Laurence Bensafi, Portfolio Manager and Deputy Head of Emerging Market Equity at RBC Global Asset Management (UK) Limited, and Polina Kurdyavko, Head of BlueBay Emerging Markets and Senior Portfolio Manager at RBC Global Asset Management (UK) Limited. Together, they manage various emerging markets funds, in both the equities (Laurence) and fixed income (Polina) space, and manage approximately US26 billion in assets across their funds, as of July 31st.

Combined, they have 28.5 years of experience at RBC GAM. This panel is moderated by Julie Ducharme, Institutional Portfolio Manager, PH&N Institutional, and they’re here to talk all things emerging markets – the state of both emerging markets equities and fixed income, current themes/trends they are watching closely, and where they are seeing potential opportunities for the long-term investors.

Thank you, Poppy. Bonjour, Hi and Welcome, everyone. Thank you for joining us today. I really hope that you're going to get something out of the points and the insights that are shared today from emerging markets, both from the equity investor perspective as well as the fixed income investor’s perspective. So, I'm really happy to be joined by my two colleagues who are actually sitting on the same floor, ironically enough.

But for technology reasons, we have them on their own screens. We have Laurence on the Emerging Markets Equity team and Polina from the BlueBay Emerging Market Debt team. So thank you both for joining me. It's nice to be able to have this conversation with you and share it with our broader communities across the CFA societies in Canada. So welcome everyone.

If we look back in the rearview mirror at recent history, we've got rising rates (or record rates for some of us in our generation) and a very strong U.S. Dollar. Those are generally considered pretty strong headwinds for emerging markets; add to that the inflation story, although it is showing signs of cooling for some of us in developed markets, but ‘higher rates for longer’ is certainly a theme that's here to stay.

When we contrast that to what we're seeing in emerging markets, though, we have started to see lower rates, arguably, markets cutting them. And so we're seeing this really nice divergence between the two, and the complementarity between developed markets and emerging markets is really starting to jump off the page. And so what we want to do today is really highlight what's exciting about emerging markets.

Where are the possible cautionary points that we need to raise, where do we need to be careful and where is the complementarity to those of us who are well versed on developed markets? And so I'd like to set the stage for your general optimism and skepticism for your outlook in each of your respective markets.

And so if we allow ourselves to look at a scale from very negative, very bearish on a minus five to a plus five, which is your most optimistic outlook? We've got the last ten years, which was really tough for emerging markets. Looking forward on that scale to minus five or plus five, how are you feeling? Are you bullish or bearish?

So I’ll be curious of your thoughts. I'd like to start with you Laurence and get your thoughts on your outlook before we start getting into details.

Thanks. Thank you so much, Julie, for the introduction. Really happy to talk about emerging market equities today. So look, on a scale of minus five to plus five, I would say right now we're probably about plus three in emerging markets equity. As you mentioned, we are the long into a period of underperformance of equities. I mean, equities tend to move into long cycles.

So before this period of underperformance, which has been about ten to 12 years, we had a long period of really strong outperformance. And the reasons for the recent underperformance, as you mentioned, the two biggest headwinds, I guess, have been an unfavorable risk-adjusted gross profile for emerging market countries and a really strong US Dollar for many years that really increased the gap of performance between the developed and emerging markets. Now, we believe that we are at an inflection point, at the moment, for several reasons.

First, we start to see, as you mentioned, higher interest rates, probably for longer, higher inflation, and we believe emerging markets are better equipped to face this new environment. We have investors with low portfolio allocations to emerging markets, as well as very attractive valuations. When you look at emerging market countries, a lot are actually doing quite well.

If you look at big countries such as India, Indonesia, Brazil or Mexico, they've seen very strong reforms over the past few years that are really starting to pay off in terms of a better growth profile. And some of those countries are going to benefit massively from ‘China plus one’ or reentering or new entering or whatever you call it; a movement that we've seen since the end of COVID.

So really, we expect a better environment for this really underowned and undervalued asset class in the coming years.

Okay. Now, Polina, minus five to plus five, are you also on the optimistic end of the spectrum or as a debt investor,are you more cautionary? Give us your sense.

Thank you, Julie. Well, as you correctly pointed out, as debt investors, we always feel our risk-reward is asymmetric. So naturally, we have to start our discussion with carry and then think and frame it in the context of the spreads and default forecasts. Now, I would say when it comes to carry, we are at ten-year highs and that's quite an exciting development for a fixed income investor.

If at the same time, if we look at the spreads, particularly in the sovereign segment and remember when we talk about EM fixed income, we have over $23 trillion universe. Probably 80% of it is local currency, but the rest is in dollars and that dollar denominated part of fixed income is represented in the corporate sector as well as the sovereign sector.

So in particular, in the sovereigns, we have seen big dislocations in spreads and that also makes us quite excited, especially in the context of the default cycle, with the peak of the default cycle we believe being behind us in the sovereign space, having seen elevated defaults for the last five years. Now with that, and coming back to your question, where does it land when it comes to minus five to plus five scale for hard currency sovereign debt, we would be the plus three bucket, similar to Laurence.

And I would also say that there is a strong case to be made for local debt as well. You've mentioned that some of the emerging market sovereign players have been preemptive in a way in rate hikes and started almost two years earlier than the developed markets. And that resulted in a number of countries, in particular in South America, having double digit key rates.

And that's, if you will, the core rates or the policy rates set at double digits is something that we haven't seen for a good part of, I would say 15, if not 20 years. And that created a buffer for local currency as well, which explains why in the last couple of years, emerging market local currencies have been less volatile, if you will, and outperformed on average other fixed income products.

So bringing it all together, I do feel that the environment is quite exciting for us when we think about our potential returns, even if it comes from carry. In addition to that, we can have spread appreciation. What we have to be careful of is the volatility. Even if you look at the volatility of core rates, it is at an elevated level.

And naturally, when the risk-free asset is more volatile, other assets are also taking higher volatility. And that's what we hope we will navigate with our active management style going forward as well.

Thanks. So it’s a constructive outlook, both from an equity and a debt perspective, with some caution in there on volatility. I want to keep, however, the rearview mirror for one more question, because if we look back at the recent history, we've come off COVID lockdown and both of you being strapped to your respective cities, desks and homes for a few years, with now as emerging market equity and debt investors, our passports are open again.

You're traveling, you're on the ground. Can you talk about what it's like now, after a couple of years of being grounded, to be back in the field? What are those due diligence meetings feeling like, Polina, when you're out? And I do believe you've had quite a few stamps on your passport in the last 12 months, so give us a sense of that.

Thank you, Julie. You're absolutely right. We do tend to travel quite a lot. I said collectively as a team, we spend about 70% of our time on the ground in emerging markets. And let's not forget that in fixed income you have over 70 countries. So, it does provide an exhaustive list of potential destinations for us as investors.

And we're very pleased that we have the opportunity to come back and to travel almost in a similar fashion that we have done in the pre-pandemic, because I do think that, in particular situations where the growth outlook is so murky, for the lack of a better word, and we are going through quite a number of challenging macro trends, be it high inflation, be it more expensive liquidity with higher Fed rates, what is really important is to understand the domestic context. And that context doesn't only come from, if you will, assessing the policymakers and their inability or ability to deliver on what's required. It also comes with understanding better the domestic constraints. And I know I might sound, if you will, fatigued. What I'm about to say might sound obvious, but the truth of the matter is when things are tough, no one wants to be the bearer of bad news.

And what's important for us is when we go on the ground, due diligence, is to understand what is the link between policymakers and, for example, the presidential administration on the higher level; how much communication is flowing between those two camps, and whether domestically policymakers understand, if you will, the issues and are able to effectively deliver the importance of those issues higher up the chain. Of course, we also have to be able to recognize what it means in a global setting.

So I would perhaps reference my last trip recently to China, where this was a good example of a country which has the resources and the liquidity to provide support to its corporate sector, to the real estate sector, but actually chose not to provide that support because it's not aligned with the policy objectives. Understanding what the policy objectives are for the country and whether or not they're aligned with investors’ returns is really what our job is all about.

So, we feel right now it's crucial to use what we call ‘mosaic theory’ to put all those elements together. And I would also say that traveling together with Laurence, in fact, we did a trip to Turkey recently, where we looked at it both from the equity and debt perspective, we find very beneficial because we are putting different lenses, macro lens and the bottom-up lenses together and hopefully trying to identify best risk-adjusted return opportunities as a result of that.

And I want to build on that because you traveled together. I don't know how many asset managers have the debt and the equity teams co-existing from the emerging markets focus, but you travel together. So Laurence, I want to get your thoughts on what it's like to be back out on the road and what you get from being on the ground.

But then what's a trip like when you're traveling with Polina versus when you would book yourself? So maybe you can answer it in two forms?

Yeah, sure. I mean, look, it's been great. As you said, we for two years almost, we didn't see any of our countries, and three years for China actually, as it was closed for longer. And I would say we could obviously continue to manage our portfolio and introduce successfully new ideas into the portfolio, but I would say nothing really replaces being on the ground, meeting the companies, I would say what changes is the level of conviction and the speed you can build a conviction level, meaning adjusting your positions into the portfolio. I think when you cannot meet face-to-face, when you cannot meet, go and visit the facilities, the plants or the shops, it takes you longer to create this high-conviction level than going face-to-face in meetings.

So same as Polina’s team. I mean, we had a huge catch up and we went to all our countries over the past 12 months. So it's been really, really great and has been really adding a lot of value for us. You can do many virtual meetings and they have their value, of course, and we do offer interim courses with management.

But really nothing replaces the face-to-face feel, I would say. And when it comes to traveling with Polina’s team, it has been amazing for us because obviously the top down is important for us, but we tend to spend most of our time looking really at the companies and the stock specifics are very important for us.

And so traveling with Polina has really allowed us to meet different types of people and that has brought a complete different perspective to our work and helped us really to have a broader view. So it's been great and we've got other trips in the pipeline. Hopefully, we are busy, so agendas will align again very soon.

But yeah, really having a different perspective. That's why we really like being challenged on our view, and talking to different types of people has been great.

Yeah, thanks. And it's nice to read the ‘Notes from the road’ as the teams get out and share some of those observations on what it's like to be on the ground. I'd like to come back to China and let's start with some of the major hot topics in the space and then we'll build out from there.

We have concerns about China. Yes, GDP growth is high there, but it's definitely got a big question mark on it. A lot of concerns and dark clouds on the horizon, thanks to the property sector and the real estate sector. But both your teams have published recently on China. There are some green shoots, I would argue even the equity team’s piece, I think, was titled ‘Recovery delayed; not cancelled’.

So there are definitely opportunities there from an investment perspective. Maybe Laurence you could start on that lens and then we'll see what it looks like on the debt.

Yeah, of course. I mean, when I mentioned the outlook for EM equities overall, obviously one of the major drivers for better performance is China. And, clearly, China has been over the past few years. I mean, it was for a long time, a strong performer, and actually a good driver. But since COVID, it's been really more negative for China.

And I would say what happened over the past three years is that we've seen the sentiment towards China and Chinese equity worsening, and right now it is probably the worst we've ever seen, in terms of sentiment. And that's translated really into investors leaving the market, both foreign investors and also local investors. We've seen massive outflows from the asset class, with clearly some investors just deciding to divest completely from the asset class.

We've seen the emergence of some emerging market ex-China strategies, for instance. The sentiment within China for the population is also extremely weak. We’ve seen depressed consumption, depressed real estate sales. We've seen also these depressed corporates, hesitating really in investing in anything. And foreign investors, also, in terms of investment are also depressed. The FDI (“Foreign Direct Investment”) in China is at the lowest level in 20 years as well.

So it is depressed at every single level. And I would say the problem is maybe more confidence than anything. China is not really in a much worse situation that it was two or three years ago, or three years ago. But the sentiment has turned really negative. So both for consumers, the main worry, even if that doesn't happen, the worry is to lose their jobs and they already are big savers in China.

But the more they worry, the more money they save. And we've seen the savings rate since COVID really increasing again and people just not spending their money. Corporates are also worried because we've seen weak demand coming from Europe in particular, which is a big partner, and we've seen obviously changes from the government impacting some of the private companies.

So when you add up all of that, that's why we've seen this slowdown. That's surprised us as we thought the recovery would be faster in China. Now, when you think about it, a lot of that has been priced in first. I mean, the market is the cheapest it's ever been really. As I said, the outflows are massive, really close to capitulation level, so we think this is priced in already. And as you said, it's not cancelled, is delayed. The government needs to restore confidence. There are ways of doing it and they're trying quite a lot, but they're going to do it in a very measured way. There's quite a lot they can do, for instance, improving transfer to the population.

The transfer level from the government is very low in China compared to pretty much any country, even the U.S. So there are ways to really improve the sentiment in the country, but we believe it's not going to be really fast. But gradually we can see an improvement.

Economic growth is going to remain at a high level, 5%. I mean, this is great. This is a good number. And we should start to see confidence from investors also coming back in the coming months.

And Polina you were in China, I believe, in August. Is the weaker economic data that we're talking about here looking and feeling the same from your perspective, especially on the real estate side of things? I think you took a really hard look at that in the banking sector. What are your thoughts there?

Sure. Well, firstly, Julie, I would say that if you think about fixed income, China is one out of 70-plus countries, which means its weight in the index is actually very small. It's about 5%. So perhaps from a fixed income lens, it's not the main country when it comes to investment returns. However, it's obviously the country when it comes to the outlook on growth, outlook for funding for emerging markets and being the second largest economy in the world.

Looking at the China state of play today, having visited it recently, I do feel that again this is a conscious decision to opt out of stimulating the economy more, because the focus on deleveraging, the focus on affordable housing overrides the focus on providing liquidity support to the real estate sector, and that's the bet that is consciously taken by the government at the expense of creditors, at the expense of perhaps investors more broadly.

Now, with that said, firstly, we don't think that this is a systemic risk to the banking sector because again, as we know, the banks are, as well as a large SOE developer, state-owned, and ultimately we don't see the same path of value destruction and the systemic risk that we have seen, for example, in Japan during the real estate crisis.

So we do think that the crisis will be contained within the country’s real estate sector, with the focus on lower growth going forward. At the same time, I would say that China's role as the second largest economic power has not diminished with the slowdown in growth. And in particular, I want to reference that last week, for example, we organized a forum with the UK Foreign Office where we brought key players from the private sector and key players from emerging markets issuers, in particular from Global South and African countries and key multilateral players into the room, to discuss how we as private sector can help emerging markets economies going forward with funding, with providing expertise etc.

A very exciting forum. But one thing that I wanted to share from this forum was the fact that almost unanimously all the issuers that we invited from African countries were - and other frontier markets -were very clear that China is the key player in their countries and is there to stay, because they've been the ones that actually have provided consistently support and continue to do so.

What changes is the way they provide support, for example, going more away from that from leverage and creating more commercial interest free trade economic zones in order to balance the support and infrastructure that China is providing to those countries. So to us, we're definitely seeing China continue to be engaged with providing support globally to emerging market countries, and just slightly trying to move away from the debt-funded engagement to an engagement which can create commercial interest on both sides, which we think is quite exciting.

And so you talked about less contagion, more contagion, the effect of China within and outside. But let's talk about the contagion risk. I think what’s pretty important from a debt perspective, is Ukraine, Russia, maybe even more so from the debt perspective than the equity side. So I'd like to start with you, Polina. Where are we at with the war and its impact as an investor? Any predictions from your perspective?

Well, you know, unfortunately it is even more difficult to predict the end of the war than to predict the start. But nevertheless, you know, we try and we've had a pretty good track record on the former, or rather, on the latter. Thinking about the end of the war, our strategy still expects the war to end earlier than the market. We could even see a resolution potentially as early as the end of this year or the beginning of next year.

Now, if we are wrong on this assessment, we would have to wait to some degree for the US elections next year to decide how the outcome of those elections would impact the Russian-Ukrainian war. But with that said, while of course being half Iranian and half Ukrainian and born in Russia, I definitely feel this is an issue very close to my heart, which I would love to be resolved very soon.

From an investor perspective, I do feel that actually the ‘upside’ of the war will be really concentrated in three themes. One is perhaps normalization of wheat prices, in particular from Ukraine, which could help a lot of countries ; two, to some degree, a marginal normalization of broader commodity prices, although we don't expect a step change in the oil price as a result of the positive outcome of the war.

And three, the main beneficiaries from an investor perspective would be Ukrainian assets, because that's where we can see a relatively quick restructuring. That's where we can see focus on reconstruction efforts that we've been discussing for the good part of the last year. And so that's really the opportunity from my investment perspective. In a global sense, I don’t see big implications for the end of the war, purely because we don't see sanctions being removed as a result of the peace deal.

And really the current state of play is likely to remain the base case after the war ends.

Interesting. And given Russian and Ukrainian assets, although they don't feature in your investable universe, Laurence, the contagion impact from everything pulling and just shared, is there anything you'd highlight as something you're keeping an eye on?

I mean, on the equity side, you know, Russia used to be one of the biggest countries in emerging market equities for quite some years, but that has decreased massively over the past few years – even before the war started. And Russia and the rest of Eastern Europe was a tiny, tiny part of our benchmark. Now, Russia has been excluded and probably as Polina mentioned, I don't see any investment sanctions being lifted for many, many years.

And for sure, we will need a change of leadership before that was going to happen. And then the rest, we have a tiny exposure to some Eastern Europe countries. But for us it's all about Asia. And I would say the impact, the influence or the impact of change in the situation in the Russia/Ukraine conflict would be quite positive for sentiment everywhere, obviously, but I don't think it would be necessarily like a game changer for our success.

Yeah, thanks. Thanks. We've gotten the hot topics out of the way. Let's start talking about maybe some rosier territories, maybe some regions that you're more excited about that we have not put the lens on yet. So let's start with equities. Laurence, where are you seeing growth? Where is the team most excited about opportunities for investment going forward?

I mentioned at this time we're quite excited with a huge majority of our countries because we mentioned about China – it has been a disaster, but we feel like we're very close to capitulation. So the potential for a rebound is quite high. We have some exposure and we're quite happy with that. A lot of the countries Polina mentioned also earlier, are starting to cut interest rates, but we're going to remain in an environment where interest rate probably would be relatively high.

That's going to benefit quite a lot of our countries as well, if you compare with developed markets. I would say two other countries that are quite attractive at the moment are Taiwan and Korea. They really benefit in the recovery of the consumer electronics market and the continuation of the AI theme, we are very big on those two.

Latin America countries - lots of reforms over the past few years in the ones that we invest in in equity, which again are different from the debt market. We've seen a big swing. We had a lot of populist governments and we've seen a swing back recently towards more business-friendly policies or even changes in government. So that’s been quite positive and one country in Latin America where we feel very positive about is definitely Mexico.

They have had the highest FDI in a very, very long time, in the country. They're really benefiting from the near onshoring process. And that's really a country we’ve got excited about. And finally, Southeast Asia is also in the same situation really, this ‘China plus one’ model. Countries such as Vietnam and Indonesia are really going to benefit from that theme as well.

So really a lot of interesting areas in our market and as I mentioned before, with good valuations at the moment, so the upside is quite large.

Yeah. Thanks, Laurence. And that was the first time we've gone to Latin America on this call. Polina, you just came back I think from Chile, Peru, Argentina. Not all countries are as prudent with their money and their spending habits. So I think not all regions are created equal. So where would you comment that you're most excited and concerned about across the different regions, maybe starting with Latin America, but I'll let you go where you'd like.

Sure. Thanks, Julie. I guess our thesis really for the last couple of years has been simple. Let's focus on the countries that are commodity oriented, because the highest conviction that we had is that the commodity prices in general would remain elevated and those countries are seeing improvement in their current account deficits or surpluses as a result of the higher commodity prices.

Let's say in the countries where we've seen the most orthodox monetary policy mix, that that will be a tailwind for those governments. And let's try to build a barbell between the countries that do not need the money, as investors love to lend to those ones. And the countries that have already gone through default and they don't have much debt to pay.

And in other words, that barbell creates a very interesting asymmetry as a result of the returns. And be cautious on, if you will, the frontier markets with a single B rating. Now with that portfolio construct, which worked well for us over the last few years, we still like countries in Latin America today. You know, Mexico is one of our biggest exposure.

Colombia as well, we like. We see the countries again, they're in that better quality camp. They're benefiting from the commodity prices and they've been penalized in their spreads either because of the challenging governments or because of the issuance. But these are the technical factors that we are happy to take advantage of and invest. Now, on the same theme to a large degree applies to Middle Eastern countries that we have again; as a region they've benefited the most from high commodity prices, but also which in a number of countries are doing reforms, you know, Oman would be one of our favorite exposures.

It still is where we feel that the progress in reform has really been impressive, despite the fact that the commodity prices have stayed elevated. So those countries form the bulk of our safe gap. Now, on the other side, we do still have some exposure to the countries that have gone through a default, even though we've trimmed our exposure more recently.

And in Latin America, it would be to a much lesser extent countries like Argentina, where again we've taken most of the profit on the positions but ahead of the elections. We still think challenges are big but let's not forget that these countries trade at $0.25, $0.35 on the dollar. These recoveries back to par. And coming back to my starting remark on the symmetry, that's the only time when the symmetry changes potentially in favor of fixed income investors.

And as those frontier markets are going through the restructuring and we think that most of them will be finalized over the coming months, we're starting to find this space a little bit more attractive. Again, similar to the context that I've just described earlier. But I think risk management is key. So our exposure to that cap is a fraction of our exposure to better quality names.

Yeah, and I suspect that there's a nice complementarity between some of the sectoral exposures you're leaning on, on the debt perspective versus equities. So, it's nice to hear and compare and contrast the thoughts. Okay, so event-packed geography, let's look at sectors and I want to bring us in to obviously the most obvious one. AI is going to clearly drive one of the next big wage productivity growth, but there's a lot of hype for both platforms right now.

And so whether you're an enabler to a AI or you're actually a distributor of AI, where do you play that? Where does it factor in as an investor’s opportunity set? Laurence, the team has published a pretty heavy duty thought piece that summarizes the evolution of AI and its functionality from an equity investor perspective. So I will start with you.

Where are you playing this theme or does it even feature?

You’re right. I think the focus has been a lot on the US and some of the big companies involving AI, but actually that's an quite interesting theme as well in emerging markets, which we've been involved with over the past two years. We did also study a piece a couple of years ago on the tech infrastructure because we felt, as you mentioned, first you need to build the infrastructure for AI and then you're going to monetize it.

So in terms of the tech infrastructure, we really are some of the biggest suppliers in emerging markets, more specifically in Asia, in Korea and Taiwan, big players that are really benefiting from that trend. We also are, on the other hand, some of the giant internet companies in China that are also looking at ways of monetizing, and have been investing for a long time.

It's been a focus of them. It's not always easy to understand whether the monetization is going to come from, but for sure they're spending a lot of effort and money also on that theme. So we've got really two ways of investing in emerging markets, the tech infrastructure and then the internet giants that are going to monetize. So it's quite an exciting theme we see also in our market.

And what is really important as well is that when you compare the valuations in emerging markets, you get this exposure for a fraction of what you get compared to U.S. equity stock. They've been doing extremely well and where the valuations are much, much higher.

And Polina, are you going to be monetizing this theme for sale or is it going to be manifested in other forms?

I would say generally, as you picked up just earlier, the beauty of our universe is they're very complementary. And in a way, what we fund as fixed income are longer-term multi-year CapEx budgets for countries or corporates that generate dollar liquidity and are reliant on that cashflow to continue to generate cashflow. And therefore, if I think about our universes, the AI sector is represented in our universe in the Asian region, but I guess I would say it's much less of a theme from a credit perspective because these are the companies that tend to trade.

At very, very tight spreads. And again, coming back to my point, those are the companies that really need the money and they often they can become cash cows. And so in that sense, our universes are complementary. With that said, the secondary impact is what we're seeing in our businesses as a result of AI and we are seeing reduction in costs given the AI, we are seeing perhaps some nearshoring facilitation as a result of a AI.

And I think one point which is always very important is regulation. And I think to some degree we could see great improvements on the AI theme. But really the regulation makes a big difference when it comes to our ability of investors to capitalize on those themes. So for me, I would say that in simple terms, the fixed income universe still mostly relies on physical labor.

However, we are also seeing some of those themes manifesting itself, mostly through improved efficiency in the companies that we monitor.

Yeah, and you talk about physical labor and it just underscores so strongly how different our developed market economies are from emerging markets still today. We expect a lot of growth, but we're still at such a different point. And we talk about this complementarity between the debt and the equity universe, but let's do it for the developed market investor who maybe hasn't been in emerging markets or just hasn't been in it for a long time, what do we get from being in EM that we're not getting from DM, let's just bring that back to everybody's current thinking.

Laurence, what would you say are the real advantages to being in emerging markets from an equity perspective? And then we’ll pass it over to Polina.

Yeah, I think you're right, I think because the performance has been weak for a long time. I mean relatively in absolute terms it hasn't been too bad. But you know, developed markets have been so strong, mainly due to the dollar that people see emerging markets as an asset class that is constantly underperforming.

And I think people have lost track of really the fact that with emerging markets you really access high growth countries with a very low level of development. So if you carefully pick really excellent companies, some of them can really generate sustainable level of growth and strong equity returns, you generally have to be quite selective in emerging markets, but you can get those kind of returns.

And you know, there's so many growth themes in emerging markets.…banking penetration with good countries, where less than half of the population has a banking account in a lot of emerging market countries. We're talking about Mexico. That's one of those countries. Consumption growth, huge investment in green infrastructure, healthcare, technology. I mean, the potential of growth is huge in those countries.

So that's what you get access to by emerging markets for this growth potential, which has been sub-par over the past decade, but we believe it is being unlocked at the moment through reforms and a better environment, notably through higher commodity prices, as Polina mentioned. And if you add in a lower U.S. dollar going forward, you are still arguing for a different environment and a much more positive environment for the asset class.

Yeah, a lower U.S. dollar going forward would be good for more than just emerging markets. But okay, we're Canadian bond investors here, Polina. This is a very dynamic bond market. I'm saying that sarcastically. Remind our audience what we get from expanding our opportunity set into the emerging markets debt space. What are we getting as an investor that's complementary to what we have here?

And sure. Well, firstly, even though it's a cliche, I do think that the cliche word means a lot, in the current market context. You are getting diversification across 70 plus economic cycles. And as we noted and as we started this debate, not all emerging markets moved in sync with developed markets and we've seen big return differentiation as a result of the differences where these countries find themselves when it comes to economic cycles. Not only are we talking about economic cycle diversification, as we discussed just earlier, but you can choose how much exposure you want to have through emerging market fixed income.

On the currency side, you have two sub asset classes which each are larger than U.S. high yield markets that are just exclusively denominated in U.S. dollars. So, you're not taking currency risk. Equally, you have almost $17, $18 trillion universe of local currency debt that you can choose to invest in with the rates which in some countries have been the highest in the last 20 years.

So in other words, you have a very interesting double digit carry to those kind of entities which support the currency performance going forward. So you have plenty of optionality across emerging markets. And I'm also not stating the obvious. You can choose where you want to be with sovereign debt or corporate debt or both. And I would argue that the sovereign issuers are a bit ahead in the cycle compared to the global corporates.

And therefore, again, depending on your level of risk tolerance, you can peak across the entire spectrum. But ultimately, you're still getting fixed income asset class with a fixed income-like volatility. When we look at the volatility of emerging markets, fixed income is comparable to developed markets.

However, the carry and yield profile is higher. For every emerging market corporate, the sovereign, you'll get any spread and the yield pickup compared to similar rate of corporate in developed markets.

And last but not least, I would say when we think about the growth differential, we always know and think about emerging markets as the countries that grow at a faster pace than the developed world. But I think there's another very interesting prism, and that's a geopolitical prism today. And this is not necessarily a negative / a risk because with China taking its own path and US-China relationship to some degree deteriorating, U.S. as a country needs as many allies as they can have, and emerging markets are becoming those allies.

And we're seeing trade deals being revised. Look at the G20 forum that was hosted by India. The amount of leverage that India managed to extract from the forum is unprecedented. And that creates in that high cost of capital environment, competition for capital to provide capital to emerging markets be it from the U.S., you know, even with the World Bank, if you look at after the new leadership expanding their program substantially to provide new funding resources for emerging markets, bids from China, which is the traditional source of funding on the bilateral basis, that has not gone away, just reinvented the way they do business.

So ultimately, we do think that you will have more opportunities to pick and choose the stories be it on the sovereign and corporate level that will benefit from the current environment, about it being globally a low growth environment, which is quite challenging.

So the challenge for our audience members is, you know, you look at your portfolio today, if you have a Canadian bond exposure, one that introduces exposure to 70, arguably up to 70 plus different bond markets, hard currency, local currencies is that more diversified than what you have on the equity side? If you have a developed market portfolio and you add an emerging market equity exposure, adding complementary countries, is that more diversified than what you have?

That's the question for you as something to think about. But I do also want to finish on maybe a cautionary tale it and ask you each to maybe highlight, are there areas of concerns, possible hurdles out there that you do want to highlight for audience members, things that you were keeping a close eye on before we open it up for questions. Laurence, do you like to start?

Yeah, I think over the short term or medium term, I feel that we made a strong case and I think there's a disconnect between the valuation and the fundamentals in a lot of emerging market countries. We have a lot of really good success stories in our countries. I must say China is really the big question mark, longer term.

As I said, I feel like we can add this recovery. I think Polina mentioned it as well. I think the government is well equipped. They can really go through that period, it is more dictating the speed or the agenda. But going forward, looking at the longer term, obviously China faces some challenges.

And I would say there's a question mark on the ability of the leadership to really go through that transition. So, China went from an amazing 20 years of GDP growth, coming from a very poor country to needing a kind of level of development. And in order to go to the next level, which is the ambition of the country to become a rich country, you need a lot more reform, I would say.

I mentioned it earlier, you really need to stimulate consumption. You need to stimulate innovation, continue to move up the value chain in terms of manufacturing products, etc. And at the moment, I would say there's is a question mark if this is going to happen or not. The leadership is more concentrated than it used to be.

Some people can see the relatively positive because things can happen more quickly maybe, reforms, but it also can mean sometimes, you know, challenge and then you end up making decisions that really hurts yourself and the other countries around that. We’ve seen it in countries such as Russia and Turkey. So I would say that's going to be one of the main challenge.

But we don't think this is something that's going to be really crucial over the next few years. It's more like five, ten years down the line. It'll be interesting to see how China evolves and that would be important for us, of course.

Yeah. And Polina, who are the borrowers that are going to be challenged on your outlook?

For us, it's a very challenging environment because in the last 20 plus years we haven't seen this combination of low growth and global higher inflation. It really takes us to the mid eighties. Now, you could argue that emerging markets have a lot more tools to deal with this because domestic issues dominate, as we mentioned, fixed income as an asset class, which is great because it means that there's less vulnerability that comes to those emerging market countries, like in mid eighties where most of the borrowing was done in dollars.

But it doesn't mean these countries are immune. And I think in particular there's a very high price to pay when you need to access dollar or even domestic liquidity. And you are not doing, using Mario Draghi phrase, whatever it takes to address investors’ concerns all at the same time, I think investors have very little patience to wait for the reforms to come through, at this juncture.

I think issuers who think that just because they nominate a central bank governor as a market friendly candidate or a new minister of finance, investors would take it as a good enough sign, a mistake, and it's not good enough. You have to see action. And so far, for me, the biggest concern is that the issuers in some of the bigger countries that are still within the frontier markets have not taken enough notice of what needs to be delivered in a very short period of time for investors to keep confidence in their competence in the investments they've made.

So I guess you have a lot of work to do to keep communicating that to them.

Absolutely. Hence, the forum I mentioned is the first in the history forum of that magnitude because I think it's needed.

I look forward to seeing more of those. I think it's fascinating. You were able to get all those people in a room and organize that. Wonderful. Thank you. So I'm going to pass it over to our other hosts for this event, the CFA Calgary Society. Julian, do you want to open up to the Q&A part of it? I'll hand over the floor to you.

Yes Julie, thanks so much for the informative discussion thus far, everyone. I want to transition to Q&A. So we do have a Q&A box. There are several in there already. If you have more, put them in there, I'll get to the first one here. What is the biggest risk to EME or EMD performance in your medium-term outlook?

I can start on EME. I think on EME, clearly one of the big issues has been more geopolitics and in particular the relationship between the US and China has really hurt us. It does I mean, China is still more than 30% of our asset class, right? So when China underperformed like it has been this year, this year China equities is down 5%.

It's really tricky for emerging market equity, due to our performance in that environment. And part of that, as I mentioned, obviously a lot of it has been delayed recovery, but I believe also a large part has been investors divesting from the country, mainly due to geopolitical issues and wondering if China is going to be isolated.

You can paint a pretty bad picture. So I think that's really one of the risks. Having said that, I feel like, you know, it’s the kind of situation that is lose-lose. The interests of both countries is to try to work together the same way China. China and the US have disagreed for a very long time on many topics, but for many administrations on both sides, they kind of agree to disagree and work together.

It's been more recently that's been more difficult and hopefully they'll find some kind of middle ground which will benefit both countries. But I would say that that's one of the risks we see. Another risk I would say the US dollar that everyone has been waiting to start to see a little bit of weakening and that happened and then it went back up again.

So if really the dollar remains very strong for a longer period of time, that has implications for emerging market equity for sure.

I would say from EMD perspective, Julian, my biggest concern would be lack of urgency, that multiple groups of lenders, when combined, looking at emerging markets and they need to continue funding and help those countries reinvigorate growth. We have a lot more complex financial architecture today than we've had in the mid-eighties when we had the big emerging market crises which created the emerging market fixed income as an asset class.

You have multi-laterals, you have private creditors, you have individual bilateral creditors like China, like India. And this is the time when everyone has to come together and coordinate the policy response. And what we have seen up until recently is that countries have their own agendas that perhaps supersede this agenda. And so to me, if no one feels the sense of urgency, we can potentially lose value across the asset class over years to come.

I'm not talking about the 2008-2010 crisis. I'm just talking about how long it will take some of those countries to go through a very challenging environment that we all live in today. And so that's hence the high sense of urgency that we have. We feel it's our duty as investors to almost reinvigorate what used to be called the London Club, alongside Paris Club, which was the official lenders, to provide a coordinated response and assistance to emerging markets.

And what are some of the technical factors at play that may or may not provide support for EM (supply/demand, liquidity, new issuance, etc.)?

On equity, really one of the main factors I think would be an increase in demand. The positioning in emerging markets equity is probably the lowest we've seen for a very long time, since the asset class really started. We've seen a large drop over the past two years.

So it means that when the sentiment improves and investors decide to go back to the asset class, that would be a lot of liquidity coming back into those markets. So I would say that would be one of the main driver. Also for recovery is that this very, very low positioning.

Very similar actually on the credit side, we've seen one of the lightest positions in the fixed income over the last, I would say ten years, in particular in local currency debt. I would say the consensus has been in almost an overwhelming underweight in that segment, which means that should we have a supportive narrative, we're likely to see this asset class continue to outperform, like it has done over the last couple of years, with every other EM fixed income asset class.

And also in terms of the issuance, you know, the issuance has dropped dramatically, and we are at best at 40% of the issues that we've had pre-pandemic. And so that creates pretty supportive technicals. Once the fundamental narrative turns.

That makes sense. Now, a tricky one is currency. What's your outlook on the currency aspect – hard versus local currency – and why?

Perhaps I’ll kick it off by just saying that if I were to be asked which currency would outperform, in other words, local currency debt, or hard currency debt, I would say local currency debt. And yet if I were to ask which one was going to be more volatile, I would also say local currency debt. The reason why I think it would outperform is because you have the double digit carry that you haven't had for a long time, and that fundamentally changes the way investors use emerging markets.

In the old days when Mexican rates were close to zero, and if you look at the screens and you think that the risk is not doing very well, the first thing investors would do is buy dollar Mex. In other words, express it through a negative view of the Mexican peso. You can't do it when you have to pay double digits to short that currency.

And so I think that creates a very different technical for the asset class. With that said, you know, this is a push factor. You know, on the pull factor, we have to continue to see improvements in the current account dynamic. I think we have to see continued improvement in delivery of the orthodox monetary policy and we have to see growth as well.

And so that's that these are the reasons which would dictate a positive performance of FX or just flat performance of FX.

I would say, I mean quickly on our countries in equity side, most of the currency looks really undervalued at the moment, especially the dollar looks quite overvalued. And as Polina mentioned, when you consider that the cheaper than they used to be, where most of those countries have really improved their fundamentals, mainly the current account deficits for quite a few countries that have not moved into surpluses.

So there's really a good reason for an appreciation of the currency going forward. But again, it all depends on, you know, its on the other side, on the US dollar side, that we need to see a weakening, really to see an appreciation of those currencies. Because again, in a country coverage, we're seeing the majority, not all of them, but the majority of those countries that work hard to really improve the fundamentals.

So a couple of more question. One is on fund allocations. So do you start by identifying countries, sectors or is it more bottom-up just focusing on companies.

Maybe more relevant for me. Look, it's a bit of both. I would say the most important is the companies. We are stock pickers, so we look at identifying really strong companies, as in not necessarily the highest growth, but like really sustainable, very profitable growth and great management operating in an area where barriers to entry are high so that they can generate high returns for a long time.

And companies that are exposed to secular growth and I mentioned some of them, you know, increasing banking penetration, consumer consumption, green infrastructure, etc. Having said that, because it's emerging markets, the country's got importance as well. So we add up the top-down view and we prefer obviously investing in countries that are improving, strong, that put in place reforms, strong institutions, strong outlook for economic growth.

So it's a combination really on both the top down and the bottom up.

And I think for us, I would give a very similar answer to Laurence. We are bottom-up credit pickers because at the end of the day, what is top down and bottom up when you invest in an EM country? For example, what we always focus on is the fact that all our due diligence that happens on the ground is really the base for forming the fundamental view based on the mosaic theory analysis and that really underpins our bottom-up due diligence process.

But of course, we have to take top-down factors into account, be it the Fed, be it the US dollar, be it the global growth environment and all the other variables that contribute.

You know, with respect to top-down factors, we had a question regarding demographics. Do those have any effect on your investment thesis? The attendee here flagged China in particular as having unfavorable demographics on a go forward basis.

Yeah, I know that's something that comes back quite often in discussion about China. I would say this is not our main concern. Obviously, that has repercussions. You are the countries that have been generating quite a strong growth for some time without necessarily a huge population growth. I think China growth will come if properly managed by the government, will come from domestic consumption increase.

From quite a low level and as I said, really high level of savings. So it's really getting this money back into the economy and you can create really 20 or 30 years of really big consumption boom in the country. So I would not say this is not important but as long as the government faces this new environment and focuses on other levels of growth, I think this is completely manageable for China.

And on the fixed income side, I would add by saying demographics create structurally the path for growth, but they don't define whether coupons are going to be paid or not. And therefore, it's something that we take into account, but not the main arguments or factor that influences our decision making.

All right. Thank you for those answers. That's all the time we have allotted for questions today. So thank you for the attendees who submitted questions. I'll now pass it over to Amar for closing remarks.

Thank you. And thank you, Laurence and Polina, for that informative discussion. There was lots of interesting and compelling in there, and thank you to you, Julie, as well for moderating.

After listening to the discussion, I think my key takeaways are it sounds like there's reasons to be optimistic about emerging markets and both equities and debt with attractive valuations, after a period of underperformance, sentiment bottoming and selective opportunities in various geographies.

A link to the session recording will be forwarded along with an event survey. We would appreciate any feedback when you have a moment to share with us.

On behalf of the CFA societies of Calgary, Ottawa and Vancouver, we would like to thank our sponsors for the event. RBC Global Asset Management and PH&N Institutional. Thank you very much. And have a great day.