Talk Your Book: The Case for Emerging Markets

Episode Summary

Executive Summary: Animal Spirits explores why emerging markets may be set up for a long-awaited comeback. Ben Carlson and Michael Batnick argue active management remains highly relevant, then interview Calamos co-CIO Nick Nizalek on how EM underperformed for a decade due to a strong dollar, post-GFC dynamics, and U.S. growth dominance. They discuss valuations, flows, innovation, and why EM is increasingly driven by tech, semis, and green infrastructure rather than old commodity cycles.

Main Topics: Active management is not dead (Priority: 4/5): The hosts use Calamos as an example of a large, relatively unknown asset manager to argue that active management still exists at scale and benefits from long-run market growth even amid ETF-era headlines. The case for emerging-market outperformance (Priority: 5/5): The episode centers on the idea that EM may be entering a favorable regime after a decade of lagging U.S. equities, with cheaper valuations, underownership, and potential mean reversion supporting the case. Why EM lagged in the 2010s (Priority: 5/5): Nizalek attributes weak EM relative performance to the post-GFC environment: China’s stimulus pulled forward demand, the U.S. became a safe haven, and a strong dollar hurt overseas risk assets and policy flexibility. Dollar cycles and policy regime change (Priority: 5/5): A major theme is that a weaker dollar would help EM by easing funding pressures, reducing inflation strain, and allowing central banks to loosen policy; valuation alone is not a catalyst, but the macro backdrop matters. EM innovation and the rise of technology (Priority: 5/5): The discussion emphasizes how EM is no longer just commodities and industrials; countries like China, Korea, Taiwan, India, and Latin America are producing digital payments, e-commerce, fintech, and semiconductor leaders. Green infrastructure, EVs, and commodities (Priority: 4/5): Nizalek argues the next EM opportunity set includes copper, aluminum, cement, semiconductors, batteries, and automation tied to electrification, supply-chain rebuilding, and global decarbonization. Flows, benchmarks, and active selection (Priority: 4/5): The interview highlights the gap between EM’s share of global GDP and its portfolio weight, plus the inefficiency of indices that underrepresent many fast-growing EM companies, creating opportunity for active managers.

Key Arguments: Emerging markets have been underowned and underfunded for years, so even modest reallocations could create a powerful flow-driven tailwind. The U.S. dollar tends to move in long cycles; a strong dollar hurts EM through translation effects, funding costs, and inflation pressure, while a weaker dollar can unlock growth. Emerging markets are becoming more innovative and technology-driven, with growth coming from e-commerce, digital payments, healthcare, semiconductors, and EV supply chains rather than just commodities. Valuations in EM are attractive both on a historical basis and relative to U.S. equities, but valuation only matters if a catalyst changes investor behavior and capital flows. The EM benchmark is backward-looking and misses many new winners, so active managers can find opportunity before companies enter the index. Green infrastructure and supply-chain reorientation may create a multi-year demand cycle for materials and industrial inputs, even without a classic commodity supercycle. Country selection matters in EM, but the larger driver is often secular change and business fundamentals; top-down country or macro inflections can still overwhelm stock selection at times. EM performance is likely to be uneven by country, with markets like China, Korea, Taiwan, and India in different phases of reopening and reform. Convertible structures can help manage downside in riskier EM markets while preserving upside optionality. Market narratives matter: if EM starts to outperform materially, media attention and investor chasing could amplify flows and returns further.

Data Points: Calamos AUM: north of $30 billion - Referenced to show that active management remains sizable even if it is not widely discussed. Emerging markets strategy return in 2020: 55% - Nizalek’s EM fund performance cited as a standout year versus the benchmark. EM benchmark return in 2020: about 19%-20% - Used to illustrate Calamos’ active outperformance. S&P 500 vs EM over the last year: 49% vs 52% - Hosts note EM outperformed U.S. stocks over the prior year, though only modestly. S&P 500 vs EM over 10 years: 270% vs 43% - Used to show the magnitude of U.S. outperformance over the decade. 1994-1998 S&P 500 performance relative to EM: 194% - Example of cyclical swings where the U.S. dramatically outperformed before EM’s later surge. 1999-2007 EM performance: 420% - Illustrates the prior EM boom during the commodity-driven cycle. 1999-2007 U.S. performance: 38% - Contrasts with EM’s massive run in the same period. EM share of global economy: about half - Used to argue that EM is economically important but underrepresented in markets. EM share of global stock markets: less than a fifth - Shows the mismatch between economic scale and equity market representation. EM share of U.S. investor portfolios: about 6% - Highlights severe underallocation to EM in typical portfolios. Global benchmark EM weight: closer to 18% - Used as a reference point for how much portfolios may need to rebalance. Investor flows: 24th straight week of positive flows - Mentioned as evidence of early but possibly self-reinforcing capital rotation into EM. Universe size: 1,800 benchmark companies vs over 7,000 in Calamos systems - Used to show benchmark inefficiency and the advantage of active screening. Examples of EM innovation leaders: Mercado Libre, Sea Limited, Yandex - Cited as examples of large, innovative businesses that may be underrepresented or newly included in indices. Apple cash vs foreign stock markets: $165 billion - A prior point showing how large a single U.S. company can be relative to multiple EM country markets combined.

Pivotal Quotes: "Active management is not dying. It's quite the opposite." — Michael Batnick: Opening discussion framing Calamos as evidence that active management still has a large and relevant presence. "I think the environment is changing once again." — Nick Nizalek: Summarizing why EM may be positioned for better relative performance after a decade of U.S. dominance. "The dollar does look more fully valued... but it could stay expensive." — Nick Nizalek: Explaining why valuation alone is not enough; catalysts are needed for a regime change.

Implications: Listeners should view EM as a potential multi-year relative-value and thematic opportunity, but one that will likely be driven by flows, the dollar, and active stock selection. The episode suggests the next EM cycle may be more tech- and supply-chain-led than commodity-led.