Alissa Howard: Hello everyone and thank you for joining us today. My name is Alyssa Howard. I am an Institutional portfolio manager at RBC Global Asset Management. I'm joined today by Phil Langham, our head of Emerging Market Equity, and our lead portfolio manager on our emerging market equity strategy. Today we're going to talk about some of the themes that we're seeing in emerging markets, both long term and a bit shorter term as well. So to get things started, Phil, thank you for joining us today. I think in general what we've seen from emerging markets over the past 10 plus years is it has been an asset class that's been relatively out of favour. What are you seeing as long-term drivers for the asset class, and do you feel like we could potentially be at a turning point for emerging market at performance going forward?

Phil Langham: Hi Alyssa and thank you all for joining. So, I'd say if you look at the relative performance of emerging markets compared to developed markets, and we go back 35 or 40 years. What's really interesting about that is that we tend to have extremely long cycles of either outperformance or underperformance going back over that period.

We've had two very long periods of outperformance for emerging markets and two very long periods of underperformance, including as you touch on the list over the last 12 years. If we look at the performance of emerging markets compared to developed markets year to date, we see that emerging markets have outperformed, emerging markets are up roughly 25% compared to developed markets, which are up about 15%.

So the question is, is this a start of a new long-term cycle of emerging market outperformance? Our feeling is that it very well could be. When we look at these longer cycles, what we see is that there are a number of important drivers for these cycles, but the two most important factors are, first of all, earnings growth, and secondly, the U.S. dollar.

Now looking at earnings growth, it's been relatively flat for most of the last 10 years, but we have started to see a pickup in earnings over the last two years. This year, earnings growth in emerging markets is expected to be around 20%, and next year, 15%. And what we've seen historically is the earnings growth tends to be supported by margin cycles.

And we very much feel that we're at the start of a new positive margin cycle, having been in a relatively poor margin cycle in emerging markets for several years. And if you look at margins, margins over long periods of time, whatever area you look at always tend to be mean reverting. The other factor that we would say is likely to be supportive or likely to be a very important driver for emerging markets relative to developed markets is the U.S. dollar.

And historically what we've seen is the emerging markets tend to do much better in a weaker U.S. dollar environment. That was the case between 2001 and 2010, but what we've seen in most of the last 12 years is that the dollar has been relatively strong. Generally, at the peaks and troughs the dollar either tends to be very overvalued at the peaks or very undervalued at the troughs as it was in 2009.

In addition to valuation, we would say that there are a few other factors that very much support the case for the dollar to weaken over the medium term. Those factors would be the very large and growing fiscal and current account deficits in the U.S. as well as the fact that it's very much Trump's policy to see the dollar weaken.

We've started to see the dollar weaken this year and that's been very supportive for emerging markets. And our view would be that this is the start of a longer-term trend. Finally, I think the final point that is worth mentioning when thinking about emerging markets compared to developed markets would be valuation.

So emerging markets having underperformed significantly over the last 10 years, are now looking extremely cheap now. Valuation doesn't tend to be a good short term driver of performance. If we look at valuation as a long-term driver, we see that it actually tends to be quite predictive, and particularly in a market like the U.S. where we would say that the very high current valuation levels might suggest some level of caution going forward.

Alissa Howard: Great, thanks. And, you know, you mentioned U.S. policy and I feel like it's impossible to talk about markets, emerging markets in general without thinking about tariffs and the implication of U.S. trade policy. Globally, how do you see tariff policy coming from the U.S. really impacting emerging markets?

Phil Langham: Yeah. I'd say that if you look at tariff policy, it was obviously quite confusing when the tariffs were first announced in March, we've now seen a lot more certainty in terms of what's likely to happen. And I'd say if you look at emerging markets overall, tariff deals have really been negotiated for all of the major emerging markets apart from India, China, and Brazil.

It seems as though we are likely to end up in emerging markets with tariff rates broadly between 15 and 20%, and that's roughly the same as we're likely to see in developed markets too. So for the U.S. overall, we're going to see tariff rates move from about 2.5%, to around about 17.5%.

In terms of the emerging market countries where tariffs have yet to be negotiated. So that's India, China, and Brazil. We have more recently seen more conciliatory remarks from Trump in terms of both India and China. And there's a strong possibility that Trump will meet the president of China at the end of this month.

And that is very much in both countries' interest to reach a deal. We would say that there's a reasonably strong chance that will happen, and certainly that will be viewed very positively. The final market, Brazil, we would say it's probably just a matter of time. The fact that Trump has actually intervened in Brazil has really backfired and has actually made the left wing leader Lula much more popular, and that certainly wasn't Trump's intention.

In terms of the impact overall on emerging markets, we would say that for most emerging markets, U.S. trade as a percentage of GDP is relatively small. And there's only two or three emerging markets where U.S. trade as a percentage of GDP has more of than an impact of 10%. The most important market there would be Mexico, and Mexico has actually come out reasonably well.

In terms of tariffs, for a country like China, for example, U.S. trade as a percentage of GDP is less than 2.5%. And actually if you look at how China has negotiated or they've navigated the trade war ever since it started, what we see is that China's actually been able to increase exports overall, even though exports to the U.S. have come down and we've seen an increasing trend of emerging market exports within the whole region gradually increasing over the last 15 or 20 years. So we've seen EM exports go from about 20% of total exports to currently between 45 and 50%. And for a country like China, it's been very successful also at being able to move up the value added curve.

If you look at China's trade surplus ever since the trade war started, it's actually continued to do extremely well. So overall, our view would be that in terms of emerging markets the impacts of tariffs is likely to be relatively limited. Now, there is some debates over, you know, who will suffer in terms of the overall tariff rate going from two and a half percent to about 17.5%. In the U.S. Trump would argue that it's likely to be the exporters. Whereas I'd say that most economists seem to believe that it's actually going to be the U.S. consumer that bears the brunt of these tariffs, which are effectively tax hikes.

Alissa Howard: Great. Thanks Phil. And I think what's interesting too about emerging markets is really you get the diversification at the country level. You get the diversification at the sector level. It isn't the emerging markets that we had 20 years ago that was much more dominated by energy, materials, much more commodity oriented. We see an asset class with a lot higher quality sector is really dominating the index at this point. In particular, we've seen it on the rise in IT and tech ai, all of those themes are very popular globally. How do you see the IT sector in emerging markets, how it's implicated in global markets, and how you see kind of the valuations of that segment of the market today?

Phil Langham: Yeah, no, you're right Alyssa, over the last few years we've gone from commodities overall representing around 45% of the index to currently around about 10%. At the same time, much higher quality sectors. So sectors like the consumer sectors have continued to grow and it has probably been the fastest growing major sector in emerging markets in the last few years.

Overall the quality of IT stocks has significantly improved in emerging markets. It's been an area that has delivered very strong earnings growth, and we've seen emerging markets very much be part of the current trends of benefiting from AI spending. I'd say that in particular, a lot of the companies that we would regard as being the picks and shovels of AIi, so essentially the leading semiconductors are very much present in emerging markets and those companies have done extremely well.

If you look at developed market IT and compare it to emerging markets, what we see interestingly is that the valuation of emerging markets, it doesn't look particularly different to where it has been historically. Whereas if you look at developed market IT valuations there has been a very significant re-rating.

At the same time, if you look at earnings growth for emerging markets, it actually looks pretty robust currently. In terms of how we view the sector going forward, perhaps the most important development that we see at the moment is the huge amount of CapEx that is going into AI, largely by U.S. hyperscalers, but increasingly by more and more other companies.

One of the questions that markets are certainly starting to ask is what sort of returns are we likely to see on this huge amount of CapEx spend? When we saw Deepsea come out in January, so essentially China's version of an AI model, that's really started to question a lot of the huge CapEx that we were seeing, we started or we perhaps saw a glimpse of a market correction in it. Since then, it's clear that that CapEx is going to continue and markets have continued to very much support the whole IT trade. We do wonder whether going forward, as you know, perhaps, it becomes harder and harder to make very good returns on this huge amount of CapEx.

Whether we could well see a correction in it. Perhaps particularly worrying is the fact that until recently, most of its IT CapEx has been funded by companies with very strong balance sheets. But we are now starting to see leverage being used to support a lot of this CapEx.

So, our view would be perhaps to be a little bit cautious on this area and that the margins perhaps to think about moving money out of it and into other areas that may benefit from all this AI spending. So, areas such as software, internet or IT services.

Alissa Howard: All right. Thanks Phil. Thank you so much for answering all of the questions today.

Phil Langham: Thank you.