Talk Your Book: Emerging Markets Are Back

Episode Summary

Executive Summary: The episode centers on why emerging markets may be entering a favorable cycle, driven by a weaker dollar, governance reforms across Asia, and strong earnings growth in EM technology and China. Roll Sharma explains how Schaefer Cullen’s dividend-focused, value-oriented EM strategy seeks quality, cheaper stocks while managing country risk and geopolitical uncertainty.

Main Topics: Why emerging markets are outperforming (Priority: 5/5): The hosts open with the surprise that EM stocks have matched or beaten U.S. stocks since January 2024, despite dominant U.S.-centric headlines. Sharma argues the main driver is the weaker dollar, with reforms and earnings growth adding support. China as an engineering-driven market (Priority: 5/5): Sharma describes China’s technological strength, especially in AI, EVs, robotics, batteries, and manufacturing efficiency. He says China can build competitive models and products at far lower cost than U.S. peers. Governance reforms across Asia (Priority: 4/5): He highlights a broad regional push for better shareholder treatment, including buybacks, dividend growth, and improved corporate governance in Japan, South Korea, China, and other Asian markets. Value investing in EM (Priority: 4/5): Schaefer Cullen uses a Benjamin Graham-style discipline focused on low valuations, dividends, and country-risk analysis. Sharma says EM still offers a better value/growth blend than the U.S., with fewer mega-cap distortions. Dollar weakness and EM returns (Priority: 5/5): Sharma explains that a declining dollar historically boosts EM stocks by easing debt burdens, improving import costs, and attracting foreign flows. He sees continued dollar weakness as a major tailwind. China/Taiwan risk and portfolio construction (Priority: 4/5): Geopolitical risk remains a real discount factor for Chinese stocks. Sharma says the fund avoids smaller/mid-cap exposure in the region to remain flexible if tensions worsen. Dividends as a stabilizer in volatile markets (Priority: 3/5): The fund emphasizes dividends because they reflect governance discipline and help lower volatility in down markets, while still allowing exposure to growth sectors like technology.

Key Arguments: Emerging markets have outperformed U.S. stocks more than most investors expected, largely because the dollar has weakened significantly. China is no longer just an imitator; it is a global leader in several advanced industries, often building comparable technology at much lower cost. Corporate governance reforms are spreading across Asia and are improving valuations through buybacks, dividend increases, and greater shareholder focus. Value investing remains effective in EM because many growth names became cheap after large corrections, creating opportunities that don’t exist as often in the U.S. A weaker dollar is structurally positive for EM because it reduces debt pressure, improves local-currency conditions, and can pull in capital flows. Dividends matter more in EM than in the U.S. because they signal governance quality and can reduce downside volatility. Geopolitical risks, especially China-Taiwan, are real but should be managed through position sizing and liquidity awareness rather than blanket avoidance. The U.S. is not the only market improving governance; many EM countries are making shareholder-friendly reforms similar to, or inspired by, Western standards.

Data Points: EM total return performance: over 32% year-to-date - Host cited EM returns as of October 20th EM vs. U.S. stock performance since Jan. 2024: almost even ("even Steven") - Host noted EM and U.S. stocks have roughly matched over the period Dollar decline: over 10% - Sharma linked this year’s EM strength to a double-digit dollar drop Historical EM performance after dollar declines: about 45% average EM return; 90% hit rate (9 of 10 periods) - Sharma cited prior periods when the dollar fell more than 10% China AI model cost advantage: about 90% less expensive to build - Sharma said Chinese large language models are only slightly behind U.S. leaders but far cheaper China AI model gap: 5% to 6% behind ChatGPT - Sharma’s estimate of the performance gap AI supply chain valuation gap: 50% cheaper with yield over 3% - He compared EM AI suppliers to U.S. counterparts AI enablers valuation gap: about one-third cheaper - He cited Alibaba and Tencent versus U.S. equivalents Fund downside capture: down less in 83% of down markets - Sharma said the strategy’s dividend-heavy approach helped reduce downside Portfolio dividend mandate: 90% of companies with dividend yield over 2% - Core mandate of the Cullen Emerging Markets High Dividend Fund Low-yield allowance: up to 10% of portfolio can have dividend yield below 2% at cost - Allows selective growth exposure such as Tencent and Alibaba Screen breadth: about 6x the number of companies vs. U.S. screens - Sharma described the larger EM opportunity set EM earnings growth outlook: best average annual earnings growth over next 3 years among major indexes - Based on Bloomberg consensus, as cited by Sharma EM valuation gap: about 40% cheaper - Sharma said EM stocks trade materially below the S&P 500 China EV market share: half of cars sold in China are electric vehicles - Used to illustrate environmental and industrial transformation Fund growth: more than doubled in the last 12 to 15 months - Sharma said client flows into the mutual fund have accelerated

Pivotal Quotes: "If they can't get NVIDIA's best chips, that's not really holding them back as much as maybe the U.S. thought it would." — Raul Sharma: On China’s ability to innovate despite semiconductor restrictions "A declining dollar has always been a huge catalyst for emerging market stocks." — Raul Sharma: Explaining the macro driver behind EM outperformance "We just think companies that pay dividends, they care a lot more about governance." — Raul Sharma: Why dividends are central to the fund’s EM value approach

Implications: Listeners should view EM as a more compelling diversification opportunity than it has been in years, especially if dollar weakness persists. Governance reform, cheaper valuations, and tech exposure may support returns, but geopolitical and country-specific risks still require active management.