Dave Richardson

Hello, and welcome to The Download. I'm your host, Dave Richardson, and it is always a special episode of The Download when we can connect with Laurence Bensafi. Laurence par excellence, comme on dit à Londres. Laurence, how are you doing?

Laurence Bensafi

I’m all right. I'm pretty good, actually.

Dave Richardson

I would imagine so. Here's the thing. I'm a big believer in emerging markets, and of course, Laurence and her colleague Phil Langham are the leads on the emerging market team at RBC Global Asset Management. Despite all the opportunities in emerging market for a number of reasons, which we've talked to on previous episodes where we've had Laurence or Phil on as a guest, the emerging markets have lagged behind the US, lagged behind some other developed markets. But all of a sudden, boom, we get into 2025, and we look the first half of the year. We're doing a series right now, Laurence, where we're talking to people who are managing different geographies, different types of asset classes, and looking back at the first half of the year, looking forward into the second half of the year and beyond, which is really what's the most important. But all of a sudden, emerging markets... And again, emerging markets is always tough. How many emerging markets are there? How many countries are categorized as emerging markets?

Laurence Bensafi

Technically, we've got about 25.

Dave Richardson

25. So not all 25 fall into this category, but when you aggregate them together, emerging markets are the top performing asset class in stocks, top performing area of equities around the world in the first half. And I guess as you sit there, triumphantly, it's about time. But what do you think finally kicked off this big rally? What did people finally see that we've seen all these years in terms of the opportunity in emerging markets?

Laurence Bensafi

Yeah, I think you're right. We've been saying for several years now that we expect a rebound in emerging market. And the emerging market has been underperforming for too long developed markets. That didn't happen for quite a few years for a lot of different reasons that we mentioned through the years. One of the biggest one being the very strong US dollar and the fact that there was this belief that US equities is where you want to be because they're doing well, the US dollar is adding to your performance, so why changing anything on that? I think we've been always saying that the valuations were attractive for emerging market. There's a lot of interesting countries. The positioning is pretty low. Everything was there for a rebound, a change of leadership. But we always said at the time, I remember saying, look, there would be something. Usually, you've got a change in leadership when something happens. There's a big event. Last time we had that was actually the global financial crisis, when the US really started to dominate, I would say, and the US dollar started a very long period of strengthening. We said, look, it's going to be something like that. But by definition, we don't know what it is. We don't know when it's going to happen, but it would happen at some point. Now, when we're going to look back, we're going to say, yeah, it was the Donald Trump election, which, to be fair, no one would have thought that would have such a big impact because if anything, going into the elections, the market were a little bit more positive about Trump coming into power. He's very business friendly. It's going to be good for the US for the economy. But basically, what happened is that quite shortly after he started his presidency, we can talk about it for hours, but I would say it surprised the market, I think, with the tariffs. That was really, I think, the turning point. Those tariffs were badly received, to say it mildly, by the market. And I think why is because at the end of the day, the US economy, maybe some of the weaknesses were highlighted. First, it was highlighted that the US—and we knew it, but people realize that maybe now—that there's a lot of debt in the US, and your creditors are a lot of emerging market countries such as China or others. If you upset them, maybe there would be repercussions for you. That was one. The other one is that actually Trump and his backtracking, as you've seen many times already. Now, he says the first of August and that's it. But he said that already quite a few times. I think the fact that it's been backtracking also, I think investors have realized that the US economy definitely is strong, but there are other strong countries, other superpowers. I remember talking about that before. The world has changed. It's really new superpowers. China has been for a while, with India, Saudi Arabia, the Middle East, those have some power as well now. There's been a lot of discussion back and forth, and it's not obvious that the US will get what they want. All that made a situation where the US dollar finally started to weaken. I think that was the turning point, is when you have a little bit of worry about the US dollar and thinking, okay, what's going to happen in the next years? It's a bit of self-fulfilling, is that when the dollar gets a bit weaker, some people think, okay, maybe I'd rather put my money somewhere else and they take money in US dollar off. You're right. I talk to a lot of clients outside Canada, in US or in Europe, and everyone is thinking or is starting to move money outside of the US and into Europe, and emerging markets are obvious candidates.

Dave Richardson

Yeah. We had Andrzej Skiba on the podcast yesterday, and one of the things that he talked about—and we've been talking about a little bit, and I think when we've had conversations on the podcast before—one of the behind-the-scenes whispered policy out of the US, when up front, it's America first. It's one big, beautiful bill, it's economic growth, America as the world power. But behind this, and underneath it's to make everything work, we need a weaker US dollar. And this was something that we had anticipated happening. I know many of our guests on the podcast. And then, sure enough, Trump's elected. We start to see and get a better understanding of what the policy regime is going to be, including tariffs. And it already started once US rates had peaked in October of 2023, that the US dollar started its drift, and then it's accelerated since Trump has been in office. On a dollar index basis, we've seen the dollar pop back a little bit over the last couple of days, but we're down anywhere from 8 to 12 % on the US dollar against a basket of global currencies. That's a pretty big move in a short period of time. And as you say, that gets people looking to other areas of the world where there's opportunity. And emerging markets have been one of those obvious choices, because when people don't look there for a while and they start to dig around, they find what you and Phil find when you're out traveling around the world, visiting these different companies, that there's some amazing companies in emerging markets. There's amazing potential, and you should have some of your portfolio exposed to this part of the world, because this is where the future population growth is and the biggest opportunity for productivity gains, and therefore, the biggest opportunity for growth. Have I stolen your whole presentation?

Laurence Bensafi

That's it. We're done. Yeah, absolutely. But, you're right. That's why I said it backfired on Trump a little bit, because I think, for instance, China, the fact that it stood up to him, and I think now a lot more people are aware of how advanced China is, and the fact that actually China can say, you know what? We'll see. We can negotiate with you, but we're not going to say yes to everything you say. We have that power, actually. China is one of the first countries when Trump went very quickly to try to negotiate because they think China can hurt more the US than the US can hurt China. You're right. I think a lot of people realize that actually there's a lot of potential in the emerging market. There are great companies, and the valuation support is there as well. When you start to look at it and you look at how little you pay for that. I think a good example is what happened in Korea, for instance. Korea has been on fire. It's the best performing of our big country this year. It's at 40%. It was a bit of a forgotten country, I would say. Then you had a change in government, and a few reforms have been announced, a little bit like what happened in Japan recently. And suddenly everyone is like, wow, that's actually a fairly interesting country at super, super low valuation. And then you've got value creation and people get excited. So I think Korea is a bit of an extreme point, but that's how people, I think, are looking at EM now, exactly what you said. It's been ignored for so long. And then when you start to look at it, you're like, wait. The same way as Taiwan has been doing well, because you have all the suppliers for the AI value chain, and they trade at a fraction of what you would pay for the US companies. Some of those names in Taiwan and somewhere on in our portfolios have been flying also recently. Yes, definitely a lot of good things that people are coming back, finally. We're quite happy with that. To your point on the US dollar, I think the ideal scenario for everyone—you're right, the US wouldn't mind a weaker dollar—but it cannot go down too quickly. It cannot depreciate too quickly or too much. But if you have a gradual depreciation over the next few years, that could work for everyone because that would make US export more competitive. That would make emerging market countries for which the currency were maybe too cheap, they can import a little bit more, so that's going to rebalance a little bit the economy. For us, that class is really good. It's really positive for the asset class. I think that could be this kind of environment we're looking at for the next few years, which would be very positive for EM for sure, but not necessarily negative for the US as well.

Dave Richardson

Yeah, and Canadians can remember in Canadian US dollar terms. It's often said that the one number that any Canadian can quote, Laurence—and I know you're over in the UK and you're born in France—but for Canadians, it is the Canadian dollar US dollar exchange rate. I can walk up to pretty much anyone on the corner of the street here in Canada and say, where's the Canadian dollar today? They don't even think of it. They'll go 73.5 cents US. They can nail it, usually to a decimal point, sometimes even two decimal points. And so Canadians will remember the period from about 1999 or more like 2000 to 2011, where the Canadian dollar went from below 70 cents and rallied up to at one point it was at a $1.10 US very briefly, but it sat above parity for a little while. And it was at that same time that the US dollar wasn't just weak against the Canadian dollar, but it was weak against all global currencies. And it's through that period that emerging markets really were the place to be from an investment perspective. So not surprising as you see the US dollar roll over again, that you're starting to see the same outperformance occur again.

Laurence Bensafi

That's it.

Dave Richardson

And Laurence, you talked about Korea, Taiwan, and again, you've got 25 different markets, as you say, that you're looking at. Korea and Taiwan, they tend to be markets that do well as the global economy is doing well. They've got that technology focus, which has been a big part of driving US and developed markets as well. Is there a characteristic to the types of markets that are doing well, or are you seeing across the board those emerging markets, even ones that are more commodity related? Are they doing as well, or is this a winner and loser? And how are you going about determining where you want to be within the different emerging markets?

Laurence Bensafi

Yeah. Because we are in a bit of a new environment now, which is a bit of a change from quite some time, where you have dollar weakening, appetite coming back a little bit for emerging market, well, we've seen more of the riskier parts of the market that are doing better. For instance, what has been doing really well as well this year is Latin America, which has been, again, the biggest loser of the environment we were until recently. Latin America really is a very small part, actually, of our universe. It should be a lot bigger when you think about Mexico, Brazil, big countries. But Latin America, in our benchmark, is about 7%. I mean, it's tiny. It used to be more than twice that easily. What we've seen since the beginning of the year, really, a return to Latin America, which we were positioned for. It was one of our call at the beginning of the year, thinking that really Latin America was trading at the lowest valuation. People were worried about the trade war between Mexico, obviously, and the US. In Brazil, you've got a populist government that is spending way too much money. There was a lot of worry, and they had issue in Chile, in Peru, in other countries. Really what we've seen, we were very pleased to see that actually with this new environment, we've seen really a return to Latin America with very strong performance from those markets. If you look at Mexico, Brazil, Chile, they're all up about 30% in US dollar this year, so very strong performance. We're still positive on them, I would say. We've got a very good President in Mexico. I know she's been negotiating with Mr. Trump with quite success. We think they're going to renegotiate the US-Mexico trade agreement, USMCA. It should be renegotiated successfully soon, hopefully. Mexico has a lot to offer still. As an underdeveloped country, we like the financial sector, for instance, or the food retailer sector. Brazil is interesting. We're going to have elections in a year, and it's always a big deal, and people are already starting to be excited if you have a return to more business-friendly type of government. Chile has election at the end of this year, actually, same story. Latam is still an area we like, and I think it's more like a risk-on environment type of country and could continue to do well. I would say something that has been doing a bit less well recently, and I remember we flagged it a little while ago, is India, which remains an amazing story, and we've got obviously good exposure in our portfolios, and we encourage people to have a bit exposure. But if you remember about a year ago, we had highlighted how expensive India was. India benefits a little bit less from this. India is a lot more domestic story, and the domestic has been a little bit weaker in India, where growth has disappointed. And because of really high valuation, there's been really, I would say, people waiting a little bit on India. Medium or long term, we’re very positive India will do well. But in that environment, it's not necessarily going to be the country that's going to perform the best, I would say. And finally, the big question mark is still on China. China has done not much. I think people are waiting to see more evidence, even though the government, I think, have said a lot of the right things to say. They're focusing on the private sector. The issue in China is that even though there's often good economic growth, GDP growth, it doesn't translate into EPS growth. That's what investors want to see, obviously. The question mark is there. Yes, they're going to stimulate the economy. Yes, they want to reform the manufacturing sector. They say the right thing, but it needs to translate into EPS growth, and that's when China is going to do well. But I still think at this level of valuation and potential for improvement, it's not a bad place to be as well.

Dave Richardson

Now, I was looking at some of the different portfolios that you and Phil manage, and I noticed that the small cap portfolio has done very well, and the dividend portfolio, which I know is very specifically your area of expertise, is doing particularly well. Why are dividend stocks in emerging markets doing so well? And is there a particular sector or sectors in that space that have been particular winners and that you've been able to tap into to drive performance?

Laurence Bensafi

Yeah. So we would have expected small cap and dividend, dividend/value. We have a value tilt to do better in that environment because you have a market that is up 17% in a few months, which is quite a good performance, and risk appetite coming back. In that dividend strategy and the same as a small cap, we buy stocks that are a little bit more, I would say punchy. They can do very well when they tend to be quite cheap, and they can be a bit more volatile. When things align, they tend to do very well. That's what happened in that portfolio and in the small cap as well. But I think in that risk-on environment, the dividend would tend to do better. It did what we expected to do, so we're quite pleased with that.

Dave Richardson

Yeah. If I bring it back to main street here in Canada, it seems like there's a bank on every corner. Canada has a distinct banking culture and banking environment. And the bank stocks have a particularly strong presence in the Canadian market as a dividend payer. Banks in emerging markets, what's the opportunity there? I know when I've been with you and Phil, I think Phil was talking specifically about a Peruvian bank that you'd invested in and then just talked about the market activity. Every Canadian just takes for granted they have a bank account. But in the emerging world, it's not exactly like that. It's an underbanked area. Maybe you could touch on that.

Laurence Bensafi

Yeah, and it's a great question because I think financials, so banks and insurance in particular, are an area which is one of our favorites, where we tend to have always quite a lot of exposure. It's very interesting because it's exactly what you mentioned. On one hand, it's quite under-penetrated. Not in all the countries. Taiwan and Korea are penetrated, but Mexico, 50% of the population doesn't have a bank account. Same in Indonesia. In India, they have a bank account, but everything which is mortgages, credit card is very under-penetrated. You've got a massive story of under-penetration for billions of people, basically. At the same time, those banks and insurance companies went through hell quite a few times in emerging markets, different crises, etc. The surviving ones tend to be really good. When you look at them, they actually make a lot of money. They know how to manage. They know they need to have a strong deposit franchise. They cannot rely on an external funding. They tend to be quite profitable. It tends to be relatively concentrated in quite a few countries. They make money, they pay a lot of dividends, and they're growing. But despite that, they're cheap. It's the perfect area to invest in. You still have to be selective, obviously. I'm not saying you can buy any of them. But in a lot of countries—you mentioned Mexico, Peru, Indonesia, Philippines, India—you can really find really high-quality banks growing, paying really high dividend yield. You mentioned that bank in Peru, but plenty of them would have 5, 6, 7, 8% dividend yield, even higher in some countries, and for growth and profitability. We like that sector quite a lot. We like to be diversified, so we have it in different countries. But for us, it's a very long-term penetration story with quality names.

Dave Richardson

I should never ask a question that I don't know the answer to, but I'm going to ask it right here. Most of those dividends from those banks in emerging market countries, they would be paid out in the domestic currency, correct? Or would they pay out in US dollars?

Laurence Bensafi

No, they're paid in domestic.

Dave Richardson

So once again, the US dollar weakness and then the relative strength of those currencies helps the value of those dividend payments as they come out, whereas in previous years, if I get my dividend in pesos, and I bring it back home, I'm not as happy about it. I know my dad lives down in Mexico. He likes his peso dividends but bringing them back to Canada hasn't always been the best thing. So that's a phenomenal story. So Laurence, we've talked a lot about where you're looking, what's been good. Is this a story now that carries through the second half of the year or maybe even longer now that you've had that switch flipped, which was the Trump election and all the discussion around tariffs, the weaker US dollar? Is this a story that can last a little bit longer? And is it something that investors should be really thinking about? Because I'd argue that most investors are probably underweight emerging markets.

Laurence Bensafi

Yeah, we think so. We think that you tend to have long cycles in the US dollar, long cycles in performance in region. So US economy, US stocks, US dollar have been dominant for a while. Now we're entering an area where there's a lot of debt in the US. Even more is coming up. We don't know what's going to happen with inflation. There's a lot of uncertainties in the US. On the other hand, you've got Europe that seems to have a bit of a new purpose now. Emerging markets, I think, you can see the benefits or the strengths of a lot of those countries in the end. As I said, I think if we imagine an environment where the US dollar depreciates, again, little bit by little bit, or maybe 10 to 15% this year, maybe another 5 to 10% next year. You don't want to crush it. I think a crush will not be good. But if you see this environment, the way you can look at it is that between emerging market and developed market, and mainly the US, the discount of valuation on the equity market is about 50%. It's the highest it's ever been. When you were talking about the top in 2011, EM was trading at a premium, if you believe it. So it went from trading at a premium, because people were paying for superior growth, to a 50% discount, which has never been in the past. I'm not saying we're going to necessarily go back to a premium, but even though you have this discount to close to, I think a normal discount should be about 20%. That's still a lot to go, but we'll have to see because the world is so uncertain, geopolitically. There are a few wars around the world. The US remain an area that people favor. But I think it's more about being diversified and not having everything in one basket and making sure that it's diversified across. EM has definitely a place in a portfolio, I think, considering the potential for growth and the quality of the corporates we invest in in particular.

Dave Richardson

Yeah, and that's such an important point. It's about diversification. As we were saying last year, when a lot of investors were coming up and talking to me, and I know you, when we would be out traveling together, why don't I just invest everything in the US? Why don't I just put 100% in the US? And that's never the right answer. Just as selling all your US right now is not the right answer. But same thing, emerging markets is performing well. This is not just Laurence and myself too, as emerging market believers. We wouldn't say put 100% of your portfolio as a Canadian in emerging markets, but it's good to have some exposure, and that could be through a portfolio that's managed by someone else to determine that right ratio or with your advisor. But emerging markets where we're sitting today certainly merit, for any Canadian portfolio, some exposure for you to take advantage of the potential that these areas have. And again, as you say, hey, 50% off, a 50% discount to American stocks, that's got to be attractive. When I see that something that is on sale, that's when I start to get interested in it. And again, if I wait, if I'm patient, eventually that fair value is going to be shown. Again, even if it ends up being at a little bit of a discount for good reasons over the long term. A 50% discount seems a little low. So it's nice to see emerging markets, some life in them again, especially for those who follow that diversified discipline and have that exposure. But you and Phil—Phil the thrill, Laurence par excellence—they don't have those nicknames for no reason at all. They're about the best there is. And Laurence, it's so nice to see a big smile on your face with things going so well right now. And congratulations on the first half of the year.

Laurence Bensafi

Thank you. And yeah, let's see where we catch up again at the end of the year. But hopefully the trend will continue.

Dave Richardson

Well, thanks for your time, and hope the family's great, and we'll hopefully see you soon.

Laurence Bensafi

Thank you so much.