James Donald Discusses the Sensitivity of Emerging Markets

Episode Summary

Executive Summary: The episode centers on Barry Ritholtz’s conversation with James Donald of Lazard Asset Management, a veteran emerging markets investor, about how EM is defined, valued, and managed. Donald argues EM remains structurally different from developed markets: more economically sensitive, less efficient, more politically risky, and often cheaper relative to the U.S., with currency and commodity swings playing major roles. The discussion also covers China, India, Russia, South Korea, Taiwan, Greece, and Venezuela as examples of market evolution or risk.

Main Topics: What counts as an emerging market (Priority: 5/5): Donald explains that EM classification has shifted from broad economic/political development criteria toward accessibility, liquidity, and investability. Frontier markets are a step below EM due to even lower accessibility and liquidity. Valuation and long-term EM leadership cycles (Priority: 5/5): Ritholtz and Donald discuss EM’s long underperformance versus the U.S., arguing that valuation discounts and cyclical leadership changes often occur over 7-10 year periods and may now favor EM. Currencies, commodities, and macro sensitivity (Priority: 5/5): Donald says EM equities are typically negatively correlated with the U.S. dollar and highly sensitive to global growth, commodity prices, and deflationary pressure, making them more cyclical than developed markets. Country-level political and governance risk (Priority: 4/5): The conversation highlights how politics can materially alter EM outcomes through capital controls, governance failures, or policy shifts, with Russia, South Africa, and Venezuela as key examples. China’s evolution and capital-market integration (Priority: 5/5): Donald discusses China’s shift from low-wage growth to more mature industrialization, the importance of A-share inclusion, urbanization, and efforts to improve quality of growth while reducing leverage. India’s reform and infrastructure push (Priority: 4/5): India is presented as an exciting long-run opportunity under Modi, driven by bureaucracy reform, demographic tailwinds, and a massive infrastructure buildout over the next decade and beyond. How EM portfolios are built at Lazard (Priority: 4/5): Donald outlines Lazard’s multi-boutique structure and bottom-up, stock-picking process, including relative value, GARP, quant, and core strategies, plus adjustments for accounting distortions and macro/political risk.

Key Arguments: Emerging markets are defined less by GDP alone and more by how accessible they are to investors; liquidity, capital mobility, and information access matter most. EM and U.S. stock markets can be highly correlated short term, but over long periods performance leadership often rotates in multi-year cycles. EM equities have stronger sensitivity to global growth than developed markets, making negative real growth and crises especially damaging. A weak U.S. dollar generally supports EM returns, while a strong dollar tends to pressure them. EM is not one market: Asia, Latin America, Eastern Europe, and Africa have different sector mixes, with technology more prominent in Asia and commodities more prominent in Latin America and parts of Eastern Europe/Africa. Lazard’s approach is bottom-up: identify cheap, profitable stocks, adjust for accounting distortions, forecast fundamentals, and then discount for political, macroeconomic, and governance risk. Some countries can move between frontier, EM, and developed classifications as capital markets mature; South Korea, Taiwan, Mexico, and Chile are mentioned as potential candidates for reclassification. Venezuela is cited as the clearest example of an investability failure because state actions destroyed investor protections. China is moving toward higher-quality, less leveraged, more diversified growth, but state-owned enterprise dynamics still limit market-style discipline. India’s long-term opportunity comes from demographics, reform, and infrastructure expansion rather than current cheapness alone.

Data Points: James Donald career start: 1983 - Donald says he began his career in finance in 1983 in Toronto at Wood Gundy. London move: 1985 - He moved to SG Warburg in London in 1985. EM team development: 1987-1988 - Donald says emerging markets as a distinct investing area developed around 1987-1988. China weight in EM index: around 30% - Donald notes China is close to 30% of the emerging market index today. China weight in EM index historically: around 1% - He contrasts current China weight with its approximate 1% share in earlier years. Emerging markets universe sector mix: around 15% energy and materials - Donald says commodities now make up about 15% of the EM universe. Commodity sector mix a decade earlier: over 30% - He says energy and materials were over 30% of EM a decade earlier. Portfolio valuation discount: about 30% discount to developed markets - Donald states EM price/earnings ratios are roughly 30% cheaper than developed markets. Lazard EM analysts: around 70 analysts - He says Lazard has around 70 analysts doing accounting and fundamental work. Lazard EM team size: 75 people - Barry introduces Donald as managing a team of 75 people and analysts. EM market count in portfolio: 13, 14, 15 countries, sometimes 20 - Donald explains that their portfolios are typically invested across many EM countries. Population share: about half of the global population - Ritholtz notes EM countries contain roughly half of world population. Market cap share: 10% - Ritholtz notes EM accounts for roughly 10% of global market capitalization. Potential India workforce inflow: about a million people per month - Donald says India has about a million people entering the workforce each month. China cities with over 1 million people: over 100 - Donald says China has over 100 cities with populations above one million. China market access milestone: A shares inclusion in MSCI index - Donald describes mainland-listed A-share inclusion as a major event. India infrastructure buildout: two-thirds of total infrastructure in 14-15 years - Donald cites Indian planning for major infrastructure construction over the next 14-15 years.

Pivotal Quotes: "The clear enemies of emerging market equities are negative real economic growth and or crises." — James Donald: Donald explains why EM underperforms when global growth weakens and instability rises. "Weak dollar, strong EM. Weak dollar, strong EM. Strong dollar, weak EM." — James Donald: He summarizes the typical relationship between the U.S. dollar and EM equity performance. "I think at some stage, probably not in the immediate term, but you're going to see some of these countries like South Korea and Taiwan move into the developed world." — James Donald: Donald identifies likely candidates for reclassification from EM to developed markets.

Implications: Listeners should view EM as a long-horizon, selective asset class where valuation matters, but so do policy, governance, and currency. The next cycle may favor EM, yet outcomes will vary widely by country and strategy.