Hello and welcome all. My name is Alissa Howard, and I work alongside our Emerging Market Equity team here at RBC as a Product Specialist.

So, I want to first thank you all for joining us today on our webinar. We're going to talk about the risks, but more importantly, the opportunities that we're seeing in emerging markets today. We hope that you find today's discussion insightful. We're going to share our ideas that are really shaping the views on the asset class today.

Before I introduce our speaker, just a little bit of housekeeping. If you do have any questions or comments throughout the discussion today, please feel free to submit those questions using the functionality on your screen. We're going to do our best to try to weave in some of those questions throughout our discussion. But we also have a Q&A at the end.

Just to give you a little bit of a background on RBC Global Asset Management, just to give a little more information about our firm. We are a global asset manager with just over $400 billion in assets under management with specialist investment teams placed around the world. So, our Emerging Market Equity team that we're speaking with today is based in London. And they're really able to specialize in an asset class or a specific market segment, really allowing our clients to benefit from these really strong and deep perspectives in each asset class.

So, we'll bring in Phil now. But as you'll learn today, emerging markets is an area in which we have particularly deep knowledge and expertise in. The EM Equity team manages over $16 billion across our EM equity platform today. So, joining me from London is Phil Langham, who is our Head of Emerging Market Equity, our Lead Portfolio Manager of our flagship strategy. So, Phil comes to us with over 30 years of experience investing in the asset class. And Phil is particularly well-versed in the opportunities as well as the risks for investors when we're looking at the asset class today.

So, with that, good morning, Phil.

Good morning, Alissa. And thank you all very much for joining.

Well, great. So, I think we'll just dive right in. So, as the title of this webinar suggests, we do talk a lot about China when we think about emerging markets. And we're keenly aware that China's weakness continues to make these headlines. But outside of China, Phil, what are the other main emerging markets doing? How are they performing? What's really going on outside of China today?

Yes, that's absolutely right. So, China's made a lot of headlines and has really been instrumental, I would say in the last three years, in terms of driving overall emerging market performance down relative to developed markets.

But if we look at emerging markets outside of China, they broadly performed in line with developed markets. And lots of emerging markets outside of China actually have very strong stories. So, for example, Mexico is really benefiting from a friendshoring boom, which is really helping overall investment there. Taiwan and Korea are very much benefiting from improvements in the tech cycle. India continues to show extremely strong GDP growth. Markets such as those in the Middle East and other ones in Latin America are benefiting from strength in commodities and improvements overall in their macro environment.

And actually, if we turn to the next chart, one of the implications of the better performance outside of China is that if we look at the seven largest emerging markets outside of China and Hong Kong, what we can see in the blue bars is that, for the first time since 2006, 2007, these Next 7 in terms of market cap have overtaken China and Hong Kong. And this is really important because, clearly, three years ago when China got up to representing around 43%, 44% of the whole asset class, it could very much be argued that the asset class lacked diversity. That's starting to change with the relative underperformance of China in the last three years.

One final thing I think that's important to mention is really quite how important emerging markets are overall to global GDP growth. We can see here that 70% of GDP growth has actually come or actually is coming from emerging markets. The majority of that has been coming from China, but we're going to start seeing other emerging markets take the baton. And particularly, you can see in second place, India actually now contributes more to global GDP growth than the US.

And speaking of India, India has been the country that's really been making most of the positive headlines when we're looking at emerging markets.

So, for you, what is the case for India to do well going forward?

What we're seeing in India is India is very much following a very similar path to what we saw in China some 20 years ago and you can see from the chart here really quite how important this strong GDP growth is likely to make India going forward.

There are a number of factors that have really helped support this very strong growth in India. One of the key factors has been the reforms that we've seen under the current government under Modi. A few of the really important reforms have been a big focus on getting rid of bottlenecks, making ease of business dramatically improve, but also a huge focus on infrastructure.

And if we turn to the next slide, we can see really the dramatic growth in a number of different areas in infrastructure that we're seeing currently in India.

The other key thing I'd say about India is that India is very much coming from a very low base. So, if we turn to the next chart we can see that in terms of urbanization, urbanization in India is still relatively low, certainly compared to other emerging markets, compared to China, Indonesia. There's a very strong link between urbanization and future GDP growth. And also, in terms of other areas, penetration still for India given the low base that it's at is much lower than it is in other emerging markets.

So, for example, if we look at more mortgage penetration as a percentage of GDP. In India, it's around 10%. Typically for most other emerging markets, it's between 20% and 30%. And in the developed world, it's generally around 80%. So, we're still very much at early stages of the boom that we expect in GDP growth in India.

And speaking of India, we know there's an election going on there right now, and actually a lot of major elections going on throughout the world this year. How significant could those elections be, be it in India or elsewhere in the world?

What we're seeing in the current Indian election – and actually in most of the elections that we've seen so far in emerging markets – is very much more of the same. So, for the most part, what we're seeing is that the current incumbents are likely to stay. And I'd say that that very much reflects the fact that populations generally, in emerging markets, are pretty happy with the status quo. That's certainly the case in India. It's the case in most of the other elections that we've seen so far and also those that we expect to see going forward. So, Mexico would be a good example.

One election coming up at the end of this month where again we do believe that the status quo is likely to remain is in South Africa. The ANC has been the ruling party for over 30 years. Certainly, there is a tail risk in South Africa that the ANC may, first of all, lose its majority but may be forced into a coalition with one of the left-leaning parties. We think it's relatively unlikely but it's a tail risk that can't be ignored. We'll clearly know at the end of this month when that South African election takes place and definitely something to keep an eye on.

And we're seeing these elections where the incumbent parties or the incumbent president and prime minister are likely to stay in. It may be a little bit more clear in emerging markets what's going to happen going forward but when we think about US elections, it's not clear yet. They are a little bit further away but what do the US elections – what sorts of implications could that have on emerging markets?

I'd say that ahead of the elections there's certainly a risk that we see more volatility, more noise. There's a good chance that we could see, in terms of policy on China perhaps, more of the same. And we've definitely seen an example this week where we've had tariffs being raised on Chinese exports. That's something that's very much been ongoing for the last few years and something, to be honest, that we would expect to continue.

The way we're seeing China broadly respond to that is that exports in China are actually remaining very strong. China is looking as far as possible to move up the value-added curve and to move away from pure manufacturing and more into areas like electric vehicles, renewables but also to move away from exporting to developed markets, to the US, and is increasingly exporting much more to emerging markets and those trends we would expect to continue.

In terms of the difference between Biden and Trump, assuming that it is Biden and Trump, broadly we would say that there isn't necessarily a huge difference between the two of them in terms of overall policy on emerging markets and on China. The key difference between the two would be that Biden is much more focused on national security and on really aiming to prevent China moving up the value-added curve and trying to limit access for China in terms of higher-end technology, whereas Trump is much more focused on trade. Our feeling would be that given the two choices for China moving up the value-added curve is much more important. So, probably for China, they would be more fearful or more negative on a continued Biden presidency rather than a Trump one.

That makes sense and I know we try to stay away from China and talk about the other opportunities in emerging markets but it's really impossible to talk about emerging markets without talking about China, so we can talk about the elephant in the room now. But clearly, as we talked earlier, China's been the drag on EM performance over the past three years, prior to that it was boosting markets. But really, how do you view China both in the short term as well as the longer term?

So, we've seen, as we showed earlier, substantial underperformance from China over the last three years. Although actually, in the last six or seven weeks, we've actually started to see a very strong rebound from China. From the lows, the Chinese market is actually up around 28%, 29% and that's really helped emerging markets over the last few weeks start to outperform developed markets.

Clearly, one of the important reasons why China has seen the bounce that it has from these lows was the extremely low valuation levels and we can see that on the left-hand chart. Also, in terms of risk premium, we can see that the risk premium in China was very much excessively high.

Thinking about the Chinese economy overall, we have started to see signs in many areas of a rebound. If we turn to the next chart – sorry, the next one after this one – what we can see here is that outside of the property sector, that exports and domestic consumption has actually been doing pretty well, starting to show some signs of recovery.

If we go on to the next one, one of the key things about China is that a really important reason for the weakness that we've seen in the economy is that policy itself has not been aggressive. There is, without question, lots of room for policymakers in China to be a lot more aggressive than they have been. We can see on the right-hand chart that real interest rates are still very high, so plenty of scope to lower rates on the monetary side.

In terms of the fiscal side, really the key thing that people are looking for is fiscal support for the property sector particularly in terms of taking care of the very high inventories that exist. That hasn't happened yet. We have started to see some signs from the government that perhaps something more aggressive will occur later this year. There's a big plenum taking place in July and we often see very important policy announcements at around that time.

Now, one of the issues that China faces, thinking more about the long term, is the overall balance of its economy. If we turn to the next slide, what we can see if we look at China compared to other markets is that consumption as a percentage of GDP is extremely low. So, you can see that in the blue bars on the left-hand side. We are starting to see signs that consumption is picking up. Definitely, a key issue for policymakers in China over the long term is going to be trying to get that very low consumption as a percentage of GDP to a higher level. The main reason that consumption is so low is the very high savings rates that we see in China. That's largely as a result of a very poor social safety net.

So, one of the policy objectives that we expect to see in China over the coming years is to improve that social safety net and to aim to overall start to reduce the very high savings rate that we see. And if we turn to the next slide, we can see that there are actually some signs currently that savings have started to reduce going forward and that consumer confidence, from a very, very low base, is starting to pick up.

Overall, to summarize views, our feeling is that – given the very low valuation levels, the support that we see from the government for the economy and for the private sector, and really very low positioning for most investors – our feeling is that in the short term, there's a very strong chance that China can do much better, certainly over the next six to 12 months. Thinking about China longer term, there are clearly structural issues and our feeling would be that other emerging markets, over the next five or 10 years, are likely to do better than China.

Thanks, Phil. We talked a lot about countries and the more macro perspective when it comes to emerging markets but maybe if we shift gears and look more at sectors versus countries. So, what we've seen over the past maybe 10 or 20 years is a real evolution of the asset class, one that was much more dominated by commodities to one that's a little bit more tech-focused these days. And really, the tech sector has become increasingly more important not only in emerging markets but emerging markets are becoming increasingly more important in the tech global supply chain.

So, just looking at the asset class, what we've seen there, but also thinking about the implications of where we are in the tech cycle globally and what that could mean for emerging markets.

Alissa, you're quite right. I think people often associate emerging markets with commodities but as you say, what we've seen is that we've seen a real shift in the sectoral makeup of emerging markets overall. We can see in the yellow that if we look at sectors such as the commodity sectors and some other old economy ones such as telecoms, we've seen a dramatic decline since 2007. So, we've gone from about 60% weighting in those sectors down to around 25. Whereas the new economy, so IT and some of the more domestic sectors such as financials and consumer sectors now constitute the majority of the emerging market benchmark. And these sectors are much higher quality, much higher return on equity, much more stable. And actually, the commodity makeup of emerging markets is broadly similar to that of developed markets. So, that's been a really important change.

Now, in terms of the tech sector itself, it's tended to be pretty volatile. It broadly moves in line with the tech sector in developed markets, it has a lot of the same sorts of drivers. And what we saw was that, for emerging markets, it was the weaker sector in 2022 but over the last 18 months has very much been the strongest sector.

In terms of where we are in the cycle, if we turn to the next slide, what we find in terms of the cycle is that the cycle tends to move in emerging markets about nine months ahead of earnings. And when we look at a range of different measures, so when we look at valuation, where we are in terms of earnings revision, where we are in terms of the upgrade cycle, all of these measures, to us, would suggest that we are relatively late in this cycle and perhaps in something like the seventh to the ninth innings. We have started to see some signs of rotation out of tech. Knowing exactly when we've hit that peak is very difficult and the one danger of getting out too early is that the final parts of any move in the cycle can be very strong, but we definitely think that this cycle is getting relatively long in the tooth.

One of the important things to think about in terms of this cycle is what has really driven this cycle. What we find is that the key driver by far has been AI. If we turn to the next slide, one of the things that makes us slightly cautious is that outside of AI – so essentially the dark blue bars here, which is really everything outside of AI – those areas have not been doing very well and not seeing any incremental demand and are overall really struggling. And this whole cycle essentially has been driven by AI which broadly represents something like 10% to 15% of the overall IT sector. So, we do have concerns that that 10% to 15% is not going to be enough to continue to drive this whole sector higher.

Thanks and we've gotten this question come through on the Q&A but it's something that we wanted to talk about in general but maybe taking a step back from countries and sectors and just looking at emerging markets as a whole. There does seem to be some concern around emerging market relative performance versus developed markets particularly as we continue to see US equities seeing new highs. But really, do you think we've reached some sort of inflection point? What are the sorts of dynamics that are going to allow for EM outperformance going forward?

So, what we've seen historically is that the patterns of emerging market performance relative to developed market performance tend to last for a very long time.

So, here we've got a chart going back to 1989 and we can see that, essentially in the last 36 years, we've seen two very strong up cycles of emerging market performance and two very strong down cycles. Broadly, over that period, emerging markets has performed pretty much in line with developed markets. Obviously, we've just come through a very long period of emerging market underperformance in the last 12 years.

Now, in terms of what we found that tends to drive these cycles, there's a number of different factors but by far the two most important have been earnings and the US dollar.

So, starting with earnings, so if we turn to the next slide, what we can see going back again over the same period is that in the two periods where emerging markets did very well, earnings growth in emerging markets was strong. So, that first period, 13.1% a year, and the second period, 13.9% a year. Whereas the two periods where EM did poorly, we can see that earnings was relatively weak, so minus 2.7% a year, and in the last 12 years, minus 0.9% a year.

Now, what we find that tends to drive these earnings cycles is margins. So, when earnings were doing very well, margins were rising and when earnings have done poorly, margins have been falling. The interesting thing about margins is that over very long periods of time, margins always tend to be mean reverting. So, looking at series, it doesn't matter which market you look at – going back over a hundred years – margins have always tended to have a few good years followed by a few bad years. What happens after a few good years such as what we had in emerging markets between 2001 and 2009 is that it tends to attract a lot of investment, lead to a lot of overcapacity, and then ultimately lead to a period of lower margins.

So, we feel – in terms of where we are in margins currently in emerging markets – we've just come through a very long period of cyclical weakness and we are starting to see signs of margins picking up, of earnings growth in emerging markets starting to pick up relative to developed markets.

The other factor that's really important in terms of driving emerging market relative performance is the US dollar. Generally, a weak US dollar is supportive of strong relative emerging market performance and vice versa. A strong US dollar tends to be a headwind for emerging market performance. What we can see in this chart is that between 2001 and 2010, when emerging markets was very strong, the dollar was weakening. Whereas in the last 11 or 12 years, the dollar has been strengthening and that's been the headwind for EM performance. Generally, what we see is that at the peaks and troughs of the dollar cycles, the dollar either tends to be either very overvalued at the peaks or very undervalued at the troughs.

So, if we turn to the next slide we can see that in 2009, the dollar looked extremely cheap. Whereas at the end of last year, the dollar looked very expensive. And going back to 1973, there was only one occasion when the dollar looked as expensive as it did at the end of last year and that was in that 1984, 1985 period. So, not only does the dollar look very expensive but other factors that we would say would be supportive of a weaker US dollar going forward would be the ballooning current account and fiscal deficit that we see in the US as well as generally much stronger fundamentals in most emerging markets, generally current account surpluses high real rates, much better economic management.

In terms of the timing, always very difficult, but I would say that one of the things that has caused the dollar to hang on perhaps much longer than people would have expected has been the interest rate cycle that we've seen in the US where rates have stayed much higher for much longer than people expected. Certainly, a key catalyst for the dollar to start to weaken would be if we were to start to see signs of rates coming down in the US.

Well, I have one more question for you before we get to some of the audience questions. But I think you've done a great job of highlighting some of the issues and concerns of emerging markets but also there are a lot of really good opportunities out there. So, if we think about investors in the U.S., how do you think we should be approaching investing in emerging markets?

I'd say, first of all when it comes to emerging markets, I think hopefully it's clear from a lot of the issues that we've talked about that you can't ignore the macro, you have to think about factors such as politics, such as currency, such as GDP growth. But ultimately, one of the things that is really important in emerging markets is that there's a huge difference between the really good companies and the really poor companies, there are a lot of state-owned companies in emerging markets that are really not run for long-term shareholders. That's something for people to think about perhaps when it comes to passive investment that there are so many very poorly run companies.

What we have found is that a key difference between the really well-run companies and the really poorly-run ones is, first of all, quality of management, but also the focus that companies put on corporate governance. Corporate governance is so important in emerging markets and by focusing on very well-managed companies we have found that that has really tended to make a very, very big difference to long-term performance.

That makes sense. Well, thank you, Phil. I did get a couple of questions coming in and I think actually these ones will go hand in hand. We've been getting these questions outside of this webinar. But the opportunities in Saudi Arabia, we've seen that really rise in prominence in the benchmark in recent years. And then maybe what the next wave of countries could be if it's something like Vietnam.

I'd say, so first of all in terms of Saudi Arabia and the Middle East, in general, we are seeing very strong improvements from a macro standpoint and from a governance standpoint and we do feel that the macro outlook in the MENA region and particularly in Saudi Arabia over coming years is very strong. I'd say that the biggest issue with investing in Saudi Arabia and MENA is actually the quality of companies, the quality of management, issues with corporate governance that I just talked about.

A lot of the work that we've done suggests that there are issues with quite a few of these companies. Many of them are state – either state-owned or the influence of the state can be very significant. And we often find when we look in real depth at many of these companies that we feel that we can find much better companies outside of the MENA region. So, I'd say that in terms of where we stand currently, although we do very much recognize improvements in the macro, our concerns on the MENA region largely come from the bottom up.

Vietnam is actually a very similar story. Again, great top-down, really strong demographics and you've got a smart, educated, young population. Again, coming from a low base, penetration in a lot of different areas is very low. But the country is still, I'd say, at quite an early stage of development in terms of issues on factors such as corporate governance, quality of management, and there are also a lot of issues with liquidity and with getting hold of or being able to access good companies, not actually very easy in a country like Vietnam.

We do think that, over the coming two or three years, that's something that's likely to improve. But for now, we would say that that's definitely a key headwind in terms of investing in that particular country.

I think that's actually all the questions that we got. I tried to weave them in while we were going through those slides. So, everyone, thank you, really appreciate the questions that were submitted. But thank you, Phil, for your time today, talking us through all the risks and opportunities in emerging markets.

So, as everyone can see, we're very excited about the asset class as a whole and if there are any follow-up questions or if you want more information about emerging markets or our strategies here, please feel free to reach out to your RBC representative.

So, again, thank you all for coming today and I hope everyone enjoys the rest of their day.