Mike Reed 00:04

Hello, and welcome back to Unlocking Markets, our RBC Blue Bay podcast series. This is where we bring you our experts from across the firm, provide their opinions on the macro environment, and discuss how top-down themes help influence the way they invest. I'm Mike Reed, Head of Global Financial Institutions. Today, we are welcoming back Laurence Bensafi, who is both the Portfolio Manager and Deputy Head of Emerging Markets Equities.

At the start of the year, we were joined by Phil Langham, head of the team, and I recall that despite many people's concerns about President Trump returning to office, he was very constructive about the outlook and opportunities in the emerging market equity world. His positivity was well judged, so it'll be interesting to hear from Laurence to find out if she believes there is further upside following the strong returns EM equity investors have achieved this year. They have considerably outperformed both US and European equity markets. Welcome back, Laurence. Great to have you back on the show.

Laurence Bensafi 01.10

Thank you, Mike.

Mike Reed 01.13

I guess the obvious place to start is with the outperformance of emerging market equities. They have well outperformed developed markets so far in 2025. What is driving this? Can it continue?

Laurence Bensafi 01:25

Good question. Look, as you said, Phil and the team, at the beginning of the year, we were – and it's been going on for a while, to be fair, we've been saying that the opportunity for emerging market equities was really large. The asset class was trading at the largest discount ever compared to developed markets, which we thought was not sustainable because the fundamentals were actually not that bad, and actually, were pretty good for emerging markets compared to developed markets, especially if you look at debt levels, deficits, current accounts. Economic growth continued to be much higher in emerging markets.

What we've been always saying for a while is that you need a trigger, usually for a change of trend, where we had this trend of emerging markets underperforming for a long time, to see a better trend for emerging markets. We always say, as well, that no one knows what this trigger is going to be, and we found out because it happened earlier this year, and it was Liberation Day.

There were worries about Trump coming into power, what would be the impact on different asset classes, but what was clear after Liberation Day is that there's been a negative impact on the US dollar, maybe for longer, we'll see, but at least quite a strong impact since the beginning of the year, which has been very positive for emerging market equities because they tend to be quite correlated positively with a weakening dollar.

The second reason, I think, is that the tariffs, in a way, backfired a little bit on President Trump and highlighted actually the strengths of some of the emerging market countries compared to the US economy, and that's why we've seen a strong performance since then. Is it going to continue? I guess we're still very constructive over the long-term, the relative valuation is still quite attractive. We still like good economic growth, a lot of changes and reform in those country.

I would say in the very short term, the index has done really well, has been a good performance, and now we probably need to see good numbers or more reforms coming from some of the big countries, such as India and China, to see, until the end of the year, continuation of the rally, but still very positive over the medium, long-term.

Mike Reed 03:43

Okay. That's an interesting place to start, and you touched on a couple of things that I'd like to try and follow up on here. You spoke about economic growth and being strong there, and you talked briefly about the tariffs. One of the main trade policies of President Trump has been his desire to Make America Great Again, his MAGA movement. He wants to revitalise the domestic American industrial base, and he's been imposing punitive tariffs on countries that export to the US, such as India and China.

The emerging market growth and strength of the economy links into profitability. How are emerging market companies coping with this blitz of tariffs? Is it impacting their profitability? Do you think their numbers are going to continue okay back into 2025, into 2026?

Laurence Bensafi 04:35

It's also very interesting because we haven't seen much so far. I think there are different reason for that. One of the reasons is that some countries have prepared for a long time, China especially. China has been preparing for seven years now, because this is the second trade war with the US. President Trump, during his first term, already went after China.

The Chinese have really diversified their manufacturing footprint across Southeast Asia, for instance, and you can see, really, a big drop, yes, in exports to the US over the past few years, but there's been a massive export into Southeast Asia, in particular, and other emerging market countries. You can imagine that a lot of those exports are going back to the US anyway.

So, companies find ways around that. They're also being keen on diversifying their clients. We speak to a lot of manufacturing companies in China, and a lot of them have very little exposure to the US now. They sell to big superpowers now that are growing fast as well, so the Middle East is a good example. The Middle East is buying a lot from China at the moment, and Latin America, also a big continent, is becoming a big country.

If we look at overall, the impact, I would say, has been relatively muted. There would potentially be an impact, but also there's been quite a delay in terms of implementing the tariffs. China is still not completely decided. It keeps being postponed and discussed again. The US say they want to work with China, and that's because we really feel like China, and I know that, has the upper hand, and the US will suffer more from the tariffs than China will suffer.

There's a lot of moving parts. As I mentioned at the beginning, this backfiring, I think it exposed the fact that US economy, yes, they want to bring back some production onshore, but it's not easy, and in the meantime, you can really hurt your economy if you implement those high tariffs with your main partners.

Mike Reed 06:42

Hopefully their profitability continues. One final big picture question, and apologies, it, again, concerns a Trump policy. We've all witnessed his, shall I say, somewhat unconventional approach to foreign policy with Ukraine and Europe in particular. With President Xi of China having stated that he wishes to unify Taiwan and China, is this a high risk for emerging market investors due to the considerable weighting of Taiwan and other Southeast Asian countries in emerging market equity indices?

Laurence Bensafi 07:14

Yes, I think it's fair to say that it is one of the geopolitical risks we are facing in the world right now. I would say, overall, the geopolitical risk has increased everywhere. Just recently, Poland is now in tension with Russia. There's always a risk that the Ukraine war goes into other countries in Eastern Europe. You've seen a lot of tensions between India and Pakistan also recently.

There's definitely a lot of those geopolitical tensions at the moment. Taiwan, we see it as being one of them. There's definitely the willingness of China to bring back Taiwan in the country. Our main view that it may not happen in the next few years. It's quite a big thing to do. We're also thinking that if it happens one day, it's likely that it's going to be peaceful, as in discussed and agreed, because the repercussions of a war between the two countries would be a disaster for everyone. We'll have to see all those things play out. For us, I guess we see it as not necessarily bigger risk than other big geopolitical tensions we've seen over the past few years globally.

Mike Reed 08:35

Hopefully the residents of Taiwan can sleep easier at night for a while. Okay. Moving away from macro, I want to talk a bit more about your team, your investment process. I'm aware that the bedrock of your investment process is to focus on the very long-term global trends that are structural rather than cyclical. This has led to some fantastic results over many years now.

Two of the areas you've written about recently that I've caught have been future infrastructure and technology transformation. Those are great terms, but could you explain to our listeners what exactly you mean by this and what investment opportunities are you actually finding?

Laurence Bensafi 09:17

You're right. We are stock pickers on the team. We like to identify a great company that would create value for shareholders, but the way to find those companies is through a thematic approach, where we really identify areas of long-term growth. Two of those areas we identified is future infrastructure and technology transformation, as you mentioned.

In terms of future infrastructure, there's clearly been a lot of changes, especially around, I think, at the beginning, it was a lot around electrification. I think we were very early in the theme of electric vehicles more than 10 years ago, more recently, clearly on a renewable side, which has been really driven primarily from actually emerging market countries, India, China, the reason being that those countries want to be energy independent. They both depend – and you've seen the tension between Russia and India and the US because of that dependence on other countries, and especially countries that are not always very friendly with the US – so for those countries, there's really a need to develop this renewable energy, and so we've seen India and China at the forefront of the investment.

Yes, there's going to be more electric car, there's going to be more investment in renewables, but not everyone is going to make money and is going to create value for shareholders. We really look then very closely at which areas we think are going to be profitable. For instance, in the future infrastructure, one thing we think is really important within that big theme is transition materials, what we call transition materials, so the materials you need to run all those batteries and to build all this renewable, and in particular, the grid which needs to connect all this renewable production.

What we identify is that copper is a really good way of investing. We look at the best company we can find, and it needs to be a really good company, and then we've been able to invest in a company which we think is really, probably the best mining company actually in the world in terms of the way they plan their expansion, the way they look after safety records, and the culture in general at the company. They operate in an area where there's a deficit between supply and demand, and that should remain for years to come. It's really the way we look at this big theme and then really dig, dig, dig down until we find really an exceptional company to play that theme.

On the technology side, it's the same. We all seen over the years those massive transformations. Again, in this area, what we try to do is to be ahead, obviously. For instance, one area we've been doing quite a lot for the past four years, which was a little bit early compared to the market, is AI, obviously. When you talk about AI, people think about the big US corporates, the handful that are involved, the CSPs or the big technology companies.

For us, we had identified that in the emerging markets, actually, the entire manufacturing chain for those big corporates is in the emerging market, especially in Korea and Taiwan. We've been able to position ourselves for the past few years in some of those corporates, the ones, again, that we consider are best managed, have the higher barriers to entry, can really generate, create value for us and the shareholders. We had quite a significant exposure over the past few years, which really helped, again, on the performance.

We continue to identify those areas of long-term growth and where you can really benefit from them for our portfolio. I think what is important to note is that people think always developed market, but in emerging market, there is a lot of innovation. Actually, the technology sector, if you add up the hardware and the platforms and all the IT services companies, it's actually the biggest sector in emerging market and actually bigger than in developed market, for sure, much bigger than in Europe, but even bigger than the US indices. Something that people are not always aware, especially if they haven't looked at emerging markets for a few years because there's been a big change over the past, I would say about eight years.

Mike Reed 14:02

Okay. That's an interesting statistic. You make it sound quite easy. You identify cheap companies that are going to grow for a long period of time, and then you just hold them. I suppose it's worked very well for Warren Buffett and it's working very well for you guys, so carry on.

One theme that has gained traction in global markets this year has been the return of value investing, one that's close to your heart. Generally, however, one associates emerging markets with the growth story, but do opportunities exist for a traditional value-based investor in EM?

Laurence Bensafi 14:39

Yes. As you said, it's very close to my heart. I've been investing in value in emerging market for many years. I would argue that it's actually one of the best places to find value in emerging market because we have such volatility and inefficiency in EM that we really can find opportunities to buy names that are temporarily mispriced because something happened. Often, something happened in a country, maybe there was a pandemic, maybe there was an election. There's always an event in emerging markets where, of course, you've got an impact on developed markets, but because it tends to be a bit of a more volatile and riskier asset class, when you have those type of events, you can have, really, a big sell-off, and then we can identify names with a big, big upside.

Many examples, but during Covid, for instance, emerging market sold off massively, and it was a great time to invest as a value investor. More recently, during Liberation Day, again, for us, on the value side, we were able to buy some names. For instance, in Taiwan. Taiwan sold off massively and way more than recovered the following months. We were able to buy company that were very cheap and being high quality and delivering strong growth.

I think it's a great place to be. In emerging markets, like in developed markets, actually, value as a style, over the long term, has delivered the best performance, and growth at a few years here and there, but over the long term, it's also a very interesting way of investing in the asset class. The way we do it in the team is quality anyway. It's not deep value. When things go wrong, you're not going to be impacted as much as the more volatile deep value strategies. The quality remains our focus, which is across all the team anyway.

Mike Reed 16:37

Moving on to that, I want to talk a bit more about flows. Our listeners often ask us what other investors are up to as they like to understand where the money is going in markets. Obviously, you can't talk about specific enquiries or inflows that you've received, but can you give us a general overview of investor activity in your region? What have you observed this year? Any particular trends you've noticed, such as investors re-engaging with the EM universe and maybe lowering exposure to other places?

Laurence Bensafi 17:09

I would say over the past few years when EM has been underperforming, you had some people, I would say a minority, which were still convinced and they kept their exposure. They said, "Okay, we have to go through that tough period, but EM would come back." I would say that was the minority. The majority had given up, and had really lowered their exposure, and we've seen really outflows from the other class.

I would say this year is probably the first time in quite a few years where we had a lot of enquiries, a lot of people wondering, "Is it time to come back?" I would say that link it to what we discussed at the very beginning on the weak dollar. This weak dollar, when you have large exposure to US equities in particular, even if the market does well, if you lose 10%, 20% or potentially at some point 30% on the FX, then you think about your exposure.

The level of enquiries about what we think is going to happen, where to be positioned has increased. Probably it's the highest we've seen for many years. I think a lot of people are still waiting, which is typical. I guess when you have a big change of trend, people tend to miss a good chunk of it, and they're going to follow on later on.

What we've seen, I would say, a bit of inflows. I would not say it's been zero, but it's more at the enquiry level at the moment. The good performance of the market has been driven quite a lot by local investors, I would say that, especially in China. If you look at the Chinese market, it has done really well. There's a lot of flows coming from mainland China into the Hong Kong market, and it's been the same in other countries. Clearly, an increase in activity. I think people want to wait a little bit more, to be convinced a little more, but they're definitely waiting on the sidelines to deploy some capital.

Mike Reed 19:05

That would be interesting because obviously capital moves markets, and if people haven't moved yet, then there's the opportunity to drive returns further. It's clear that it is the ever-evolving political, social, and economic landscape that makes this a hugely interesting and compelling asset class. I greatly appreciate you coming back on the podcast, Laurence. It's been really interesting hearing your thoughts and understanding how you and your team intend to generate returns for clients in what sounds like markets that are full of alpha-generating opportunities.

I would also thoroughly recommend to our listeners that they read some of the insight pages that you and the team write, which are available on our website. Thank you for coming back on the show, Laurence.

Laurence Bensafi 19:48

Thank you for having me. Thank you.

Rd

Mike Reed 19:51

Many thanks for listening to the show. If you've enjoyed it, please like and subscribe on your podcast platform of choice. We'll be back next time. We'll be off to the United States to speak with Andrzej Skiba, head of our US Fixed Income team, so it should be interesting insights from Trumpland there. If you wish to listen to any of the previous editions of the Unlocking Markets podcast, they are also available on our website, or can be found on Apple, Spotify, or Google. Thank you once again for joining us today. Good luck and goodbye.