Our curious minds at work

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How are you now?

It's James Whelan here, Barclay Peers, Capitals Wealth Management managing director as a guest of the Ensemble platform.

And and welcome as you are today, we are doing an absolutely special presentation brought to you by T Rowe Price.

It's called the great broadening from AI and the Mag 7 to emerging markets and beyond.

It's an absolute cracking episode that we've got ahead of us.

So no more mucking around.

Let's get straight into it.

In over 85 years, we've learned that change is the only constant and curiosity is key.

That's why we have over 375 research professionals who go out in the field to get the answers we need.

They dig in, study in companies and ideas first hand, then use these insights to make invest in decisions you can feel confident in.

T Rowe Price is a premier global asset management organization actively investing in opportunities to help people thrive in an evolving world.

Welcome to today's episode of an ensemble podcast.

We're thrilled to have Sam Ruiz, Portfolio Specialist at T Rowe Price, joining us.

In this episode, we dive into the exciting world of artificial intelligence and it's growing concentration in the stock market.

Sam shares his insights on how AI is shaping investment strategies, it's potential risks, and the opportunities it presents for investors.

Stick with me.

Whether you're a seasoned market watcher or new to investing, this discussion is 1.

You won't want to miss special thanks to ChatGPT for helping me craft this introduction.

Let's get started Sam that that sounded like garbage.

I do apologize for that introduction.

I think you understand that the the matter of asking ChatGPT to write an introduction about AI and credit itself for writing that introduction.

Smoke started coming out of the top of my computer when I actually put that in.

So but Sam Ruiz of T Rowe Price.

How are you now?

Good day.

So that's a good introduction.

And was still FT off the bat.

Yeah, see, I show showing that humans could probably have just done that straight off.

Another example of this one.

You don't need me today, mate.

I'll tell you one day.

One day it's just gonna be two AIS talking to each other.

They'll put that into a podcast in different voices and and that'll be it.

And everyone can just go home.

But First off, Sam, what are you doing?

How do you make money?

Everyone gets that same question.

Yeah.

So T Rowe Price, we've been around since the 30s, so a long time, but how we make money, we are around 150 plus analysts and portfolio managers around the world.

So we tend to be able to cover markets much broader than your average smaller boutique team.

And how we make money therefore is our key edge and advantage is being able to leverage broader insights across the whole market really relevant to today's discussion.

We'll get there, yeah.

But that means that we've got some analysts covering emerging markets in details, all sectors and sub industries in much more detail than most.

And we think the way to make money, therefore, is being more diversified in where you're positioning your portfolio, not just piling into one theme like AI, which we'll talk about today.

And that for us, we just believe leads to more durable, consistent, repeatable returns in a portfolio versus being levered to 1 theme when it's in or out of favour.

Well, that's fantastic.

Now, setting the context around what it is we're going to be talking about today is, is to think how bad is it bad is what's going on today is, is it a real situation?

And what could the potential upside or downsides be of that particular situation?

How to how to navigate it, how to avoid a potentially and potentially how to allocate or even just some things to think about to go away with.

We can get to the end of this podcast with that.

Then there we go first and foremost.

Now we're going to get to what AI has sort of become with regards to the difference.

And the overarching theme on this one is we've gone from the tell me side of things and now it's time for companies to go to the show me side of things.

Is there actual substance behind what it is that they're saying?

We'll get to that second.

First off, let's just set the scene of exactly what has happened to get us to this stage with regards to concentration, size, allocation.

Is it justified with regards to how much AI has taken over the volume of various markets around the world specifically?

Obviously, I'm referring to the MAG 7, but in, in, in more than just that.

Yeah, it's an open question for you, Sam.

I'd just go, yeah, it's, it's more than the MAG 7.

And before I get to that, I'd just say I think it's taking over a lot of different industries.

And there's one particular company that we've held this year that's done really well that you wouldn't think is an AI company and that's a utility company.

They're providing nuclear energy.

What is fascinating, just in the last few days in the press, you'll see that Microsoft just signed a 20 year deal to secure new energy from this utility company.

They're going to reopen a decommissioned nuclear plant because energy is scarce.

We know generative AI is highly energy intensive and a lot of these companies have net 0 targets in the future and nuclear is one of the cleanest forms of getting that energy.

So you see a company like this up around 20% on the day, it was already up something in the order of 50 to 70% on the back of AI.

And I think it's just fascinating that we're talking about the Mag 7, which in a concentration sense have driven the market, but it's proliferating through all these other parts of the market.

I've got, I've got a couple of other little places where the, the, the second derivative of the artificial intelligence revolution is, is going to impact it.

The the power one seems relatively obvious and says relatively easy, which is a good way to make money with the the easy sort of way that it's called.

OK, so, So what sort of concentration are we looking at with with the mag seven?

Yeah.

So when we think about the mag 7, they pre generative AIS sort of launch and the reveal to the world, which is the end of 2022, they were circa 10% of the all country world index.

Now we're talking closer to 20%.

Yeah.

We've seen all of those companies basically expand in terms of their weights in that index.

These numbers would be much starker when it comes to the S&P 500 if you were AUS manager.

Some of the these stocks have become so large that your mandate and the rules of how you run your portfolio won't even let you be overweight those companies anymore.

So this shift in index concentration is having very big impacts on not just portfolios, how active managers can even create alpha and they're even having to rewrite the rules of how they manage portfolios.

One of the biggest it's it's probably no surprise to our biggest increase as has been NVIDIA.

Now NVIDIA has gone from a company of around $300 billion of market cap to around $3 trillion of market cap since the end of 2022.

That's I'll sort of pause for a moment because you have to let that settle.

Yeah, the company is up.

A lot of these companies are up because I think you said it's the the tell me then show me.

I think that tell me moment did did result in a little bit of valuation expansion for some of these companies.

Yes, they have become a little more expensive, some of them a lot more expensive versus the market and versus their own history.

But if we think about a company like NVIDIA, which has been one of the biggest increases in index weights, it's grown its earnings by more than 600% over that period of time.

So if I can tell you there's a company that's going to grow their earnings over 600% in a sort of 18 to 24 month period, you're probably expecting the the companies up some.

But I think I think it was a really prudent way that you laid that out.

It was this innovation that had all these great headlines of how it's going to change the world, improve productivity, some even saying it might fix the inflation problem due to this increase in productivity.

But now the, the biggest buzzword when it comes into anyone, what we do when it's like deep in markets is ROI, return on investment.

It's it's is this actually going to meaningfully be able to be monetized and create profits for companies?

Because if it doesn't and if the cost of actually utilizing these models is too high, then we're probably not going to see these earnings and cash flows come through that the market was predicting.

And then the valuations become more vulnerable around that.

And I think we're right at the epicenter of that debate right now.

Do you think and, and what's, what's the call sort of being made just with some of the maybe maybe NVIDIA is a different one because they are right on the, on the, that they actually have a tangible good that sort of comes out that that, that they can have.

There's a number of ships that they have that slot into the number of servers and the number of servers you can sort of predict how many things it's going to be.

The idea of nuclear power being able to more switch it, like switch on Three Mile Island and then you can power Microsoft's data centers, makes it very easy to then all of a sudden start to value these sorts of things.

If that's now becoming more popular.

What about some of the other ones though?

I mean, does does, I mean meta?

Is there enough of a show me situation behind Meta being able to utilize AI for what it does?

I mean, absolutely, yeah, absolutely.

I mean, meta is I'll, I'll, I'll give you a little, a couple of little stats.

Yeah, go, go for it.

That's what I've got.

Yeah, In in this AI boom, we'll call it the AI boom.

And a lot of people say the AI hype, but I think there's genuine profits and excitement behind us.

I'll call the AI boom.

We've seen those mag seven companies have earnings growth in 2024 that was 47% greater than the rest of the S&P 500.

OK, Now when we Fast forward to next year, just as a little bit of a point as well, we're only expecting that to be around 5%.

So something's changing.

They're they're becoming less good.

But there was a big boom that did happen and it was genuine earnings growth.

And Meta is a great example because Meta has surprised everyone in their ability to use AI and all the technology that they've built to improve the way that they generate ad recommendations.

If you're a seller basically advertising on any of Meta's products, whether it's Facebook or Instagram, you want to get solid data that your ad has actually targeted the right consumer and the conversion rate of them actually buying something from your ad is high.

Yep.

Now, if I backpedal a little bit, Apple has had a privacy campaign and they've really tried to sell themselves at this product where we're not going to let other people get your data if you buy an Apple product.

They actually previously would allow companies like ETA and Meta to get your user data from your phone via a unique identifier that was in your phone.

They turned that off.

That was turned off, which mean Meta no longer got the signal what you were doing on your iPhone.

And they had to somehow scramble to say, we had this great customized advertising tool because we knew what you were doing in your iPhone.

Now we have to figure out a way to get AI to go and piece that all together without any data from Apple.

Now that's a huge job.

That's incredibly hard.

And there's been a lot of anecdotes and stories.

You've probably had them yourselves where people are going like we've just had a baby, my wife's talking about what primary we want, and all of a sudden I'm getting pram recommendations two hours later.

Yeah.

How did that happen?

I can tell you how it happens, but OK, well, you can tell me how it happened.

I can tell you how it happens, but I don't think I might get home tonight.

It's OK, guys.

They have.

And in the last earnings result shown tangible evidence that their AI has been able to fix that problem.

And they're seeing much more cut through and more meaningful recommendations and better sell through and targeted advertising.

The algorithm is working incredibly well, and we have been surprised at how much they've been able to sustain the high level of earnings growth.

At the same time, they've actually been reducing their cost base and cutting headcount.

So that example doesn't exist for everyone.

I've honed in there because you did say Meta as an example.

Do they benefit from AI?

But I think you're very astutely narrowed on Meta because while NVIDIA sells the chips, the other companies that are basically benefiting from the rest of the world wanting to use AI, Google, Microsoft and Amazon, because they are what we call these hyperscalers that are building these massive industrial sized data centres where they're putting all these NVIDIA chips in.

And if you, if any one of us here has a great idea of some way you can leverage generative AI, you can basically then go and rent some of those chips off those hyperscalers and train a model using their models also.

And that, that has actually been something that we're already seeing come through in the numbers for Microsoft's Asia, for Amazon's AW and Google has a division GCP where we are seeing an uptick in the utilization of the cloud data centers specifically for AI.

So it is already happening.

But then there's we can probably go deeper into Microsoft's Copile and other things.

There's a bit more of a show me that we haven't seen yet.

Well, I mean, we, we might get down there later on as as we go.

So, but we've mentioned, OK, so there's justification behind the valuations.

There's valuations that are based on earnings growth.

Earnings growth is there.

We've got the, the, the perfect trilogy.

Everything's keeps on going.

I'll, I'll cut you off for a moment because I, I think that the justification around valuation, yeah, is something that's hotly contested and debated today.

So I don't know, I jumped ahead.

No, go for it, because that's what I want to talk about.

Because we're going to talk about that, that, that there's concentration.

We're going to talk about the valuations.

People always look at vowels and just go, oh, it's unjustified.

And a lot of the time that the valuation is just for things that you haven't actually put into account yet or stuff that hasn't even been thought about being priced in yet, IE most of what Kathy Wood did during the early twenty 20s.

So go for valuation.

I, I, I want to hear your thoughts on, on where you see this.

Yeah.

So the companies have wide-ranging valuations at the moment.

We would actually make the case that we've probably seen the best of some of the initial sort of AI translation to earnings and some of the valuation that's been put on that.

And from here, we think that that's going to dissipate and the market's going to broaden somewhat.

And there's a whole 2nd order bunch of ramifications from that and how advisors choose funds and index funds.

And I think people need to really keep their hand on their back pocket in terms of how you want to position for this next phase of the market.

But one example is NVIDIA.

Now Nvidia's earnings multiple doesn't look egregious, but when you start to look at the company on revenue multiples, it starts to look a bit more expensive and a bit more concerning.

Now that might be a lot for people that aren't in markets every day to understand that, but a way I'll dumb that down is NVIDIA is currently earning.

It's a cyclical company, but unsustainably high operating margins because there is no true competitor.

There is an arms race basically climbing over each other to get access to these chips, whether it's because they think they can monetize it or whether it's they think that it is imperative for future competition that they access this.

Otherwise they might be competed in ways they haven't before now.

It's very unlikely that NVIDIA can continue to earn those 70 to 80% operating margins, which means, sorry, 70 to 80% operating growth.

I, I, I myself had no idea they were that high.

They are.

And I've, I've, I've owned this stock on and off for the last few years.

They have, they have.

It's no surprise that company's doing well because they're selling everything they can and they're sold out to, to, you know, very big customers.

Yeah.

OK.

Yeah.

So, so a company like AAMD, for example, which is working really quickly to have a competing GPU, you've got the hyperscalers themselves are either funding competitors so that they can come up with a true competitive chip faster or they're even developing them in house themselves at some point when that competition comes online.

And every quarter we get closer to that competition being realized, NVIDIA is not going to be able to earn those same margins in the future.

And that just means that that's the distinction between when you look at cyclical stocks that are making unsustainable and unsustainably higher margins and we call that there in a period of over earning that when you look at them on revenue multiples, they're actually not as cheap.

And NVIDIA, it's just one that we would say, we think that the CapEx that's being spent through NVIDIA is actually peaking or has already peaked in terms of the percentage growth rates.

And from here, you need to be a lot more discerning.

So we've actually reduced our NVIDIA, it's our largest underweight of the Mag 7, which wasn't the case three or four months ago, I can imagine.

So if for an advisor who's doing a little bit of homework on this one, then you want to have a look at some of the research, you want to have a look at some of the margin expectations over the next few years just to justify or to, to just to back up what it is that you said, correct.

Margin contractions.

In my experience, a margin contraction is, is a bit of a death rattle for a company, maybe not necessarily a company like NVIDIA, but something that has run so hard.

Yeah, I can, I can see the justification for where you how you'd want to be still exposed, but not as not as not as heavy into that one.

Correct.

Also the, the other case is that if you've got the other people that are in the market now we're talking about, we've gone through the concentration that's, that's in the top end justification valuations, earnings versus revenue multiples and what's going forward on that one.

Let's now talk about what happens when a whole heap of money and we saw this happen at the beginning of August temporarily and then everyone got, everyone got distracted by some stuff out of the Bank of Japan.

We saw, which I'm not going to talk about because that was an ugly couple of days for everyone involved.

But the we saw the market suddenly start to rotate from that big end into small caps with the expectation being that the Fed is going to start cutting rates.

The big end of town has has definitely picked.

We've taken a lot of the money out of that that we've got on that we've got profits to lock in at this particular stage.

Let's go into small caps now because they are deeply, deeply undervalued.

They were the one of the worst performing asset classes or what were sectors, if you want to call them a sector, whatever of the year before, OK, let's charge in.

It was almost instantaneous.

The way that happened.

How much of it is a is a drop in the ocean for a mag 7 investment suddenly when it goes to small caps.

What are the ramifications of that as as everyone sort of rushes into into try to jump onto the same small boat?

Yeah.

I mean, I think the the delta or the impact's gonna be much larger for the small caps.

Because when you've got just by virtue of their market caps, that amount of money that's flowing is just gonna see them move much higher much faster.

Yeah.

And this is where it is a really hard thing to triangulate when you're an asset manager, when you're an advisor and you're thinking about these MAG 7 where I've kind of painted this picture up until now, that AI has benefited them hugely.

They've done really well, but a lot of it's deserved.

But maybe you need to be more cautious going forward.

But this isn't a binary thing of the Magnificent 7.

Stocks are good or bad.

The hard thing you have to think about today, and I'll get to your question.

Yeah, Yeah.

I really want to make the point that they are not bad stocks and it is really dangerous to bet against them in a big way.

What I would just say is it's not the time right now to be backing up the truck and loading up on Mag 7.

Given where we are in terms of the the future of earnings and where some of the multiples are in terms of valuation, did you want to use the term relative valuation on this or are you going to just go in terms of them versus the rest of the market?

Yeah, yeah, I mean, I think they're they're actually driving the rest of the market higher.

So in terms of relative valuations, they're probably even higher than their own absolute OK history good.

But when we think about how these companies are positioned, you have to recognise that most, most of them, and I think the Magnificent 7 tagline's going to go away at some point because it's not really the same anymore.

And Tesla's a different company, the rest and benefiting from different things.

But what I'd say is that this group of companies are quasi monopolies in their own space and that's really dangerous to bet against.

They are also funding a lot of this AI growth from free cash flow, not from debt.

Yeah.

And what was bad about the late 90s with the FI fibre build out and the.com bubble was it was a lot of debt fuelled spending that when the demand in the end of the day wasn't there, they effectively went bankrupt.

Yep.

Now what you have is the scenario where investors have to realise if these companies are spending a lot of CapEx to build out the AI infrastructure.

Now Microsoft's an example, not to get too technical again, but is actually kind of expect expensive on earnings.

It's around 30 times forward earnings, but it's even more expensive now, free cash flow because of the CapEx they're spending to build out the AI capacity, OK.

In terms of data centres, OK.

And then all of a sudden, if Microsoft goes, Oh, my goodness, the demand for our Azure, which is our data center, AI training model, business cloud there, cloud effectively, if the demand for Copilot isn't there, we can just rationalize all this spend.

We can just let all that money we're spending in CapEx come back to investors as more free cash flow.

And you're just going to see the stock all of a sudden get really cheap again on free cash flow and the stock could move again.

Yeah.

So it's really hard to bet against companies where they effectively have their own future in their own hands and they can really quickly hand money back to investors if AI is not a good use of capital.

Yeah.

So I really wanted to to distinguish that I wouldn't be betting against them in a big way.

But nor are we recommending the anyone do that.

Yeah, I'm on the record of this one as well.

Yeah, there's a difference between under weighting, rotating and actively just going against these things.

Absolutely.

Yeah.

OK.

So, so to your question, which was a very long round, round trip to get there, but it's a podcast, man.

So investors need to be thinking about, this was one of the best periods that I can think of for passive investing, which is the point you made.

These these stocks became larger in the index, which meant that the things that were working were disproportionately adding more value to the index.

Yeah.

And there were some funds out there that really over expose their portfolios to these to these companies.

I saw one manager not from T Rowe Price has an emerging markets fund.

And in that emerging markets fund in the top ten were NVIDIA.

Yeah, ASML and Broadcom.

OK.

None of them are in emerging markets.

I'm sure you can do it.

A case that they sell somewhere into emerging markets, but there was a lot of crowding and rushing by active managers that had looser mandates to really load the truck up on some of these things.

I was on that point.

I would just say as an advisor, you need to, I think one of the best questions you can ask any of your fund managers is over the last two years, what was the contribution or the attribution in terms of the excess return just from a select group of AI stocks and mega caps?

Because if this manager all of a sudden has, you know, 10% outperformance or something, you then need to say if AI was like just a very narrow one time huge boom.

Are they going to be able to pivot to the next thing that's going to add that same value or what they did they just get lucky and load up on the AI stuff.

Yeah, bull markets make a lot of people smart.

Are they in hindsight, they do, yeah.

And, and, and, and the other side, which is we're, we're more focused now, I think is gonna be much tougher and more BR and broader.

But one, one interesting thing that stood out to me, we, we have clients in Australia that range from small financial planning firms to larger small financial planning firms all the way up to multibillion dollar mandates with industry super funds.

And one thing that stood out to us, that just was a penny drop moment of how these the indexation dynamics was driving these stocks further.

Some crowding from active managers was driving these stocks further.

But if you weren't institutional markets participant, now a lot of people are probably aware of the legislation in Australia called Your Future Your Super, and it's requiring the industry super funds to have much tighter risk budgets.

And if they have a whole bunch of active managers saying we don't like Apple for example, because Apple's a slow growth company on a high multiple and we don't think that it can go up much from here, they were actively covering other managers underweight by buying those stocks themselves so that their net position wasn't underweight.

Now, that means that you have this dynamic dynamic where there's a huge raft of huge pension or huge amounts of pension money globally, basically saying we can't afford the risk of being underway.

And if our active managers don't own them, we're going to go rush and buy them ourselves.

And that was another sort of circular force that was pushing these stocks higher and forcing money into these stocks.

And I think that's sort of on the cusp of changing now.

OK, That's what that is a whole different kettle of fish to go down that now we started going down this road.

So I don't want to go down that we can talk about the Super industry in this country, but that's probably for a whole different other bunch of podcasts.

So we kicked off the podcast talking about nuclear technology powering data centers and maybe some of the 2nd order where and, and you just touched on some of the 2nd order stuff that that there is out there as well.

One of the examples that I've got, and this is if you want to talk about micro caps, micro caps.

So I was sort of mining conference the other day and I didn't even think about this.

This is one of those things critical minerals is my thing.

I love, I love the space.

I think it's good.

It's hot.

China's doing a lot of work and that Europe's just put together a package on critical minerals.

We have a lot of the critical minerals here as well.

So it's great for this country.

It's, it was a gallium company and we're talking micro cap like you and I could shake the tin down at Reins Bar and be able to buy this company a few times over.

But it's a gallium company that had holdings in Arizona that apparently gallium makes things go faster.

Without getting too detailed on the thing, things go faster inside the AI, the technology, it makes the circuits go faster.

If you put gallium in there, it makes it run faster, quicker AI, quicker, regen, quicker, functions quicker, everything you need gallium and gallium is a really rare critical mineral.

So that's that's like a, a derivative of a derivative all the way through through there.

But that's the sort of thing where you need to find it.

Those little chestnuts are going to be out there.

Nucleus, the obvious one, which is there parking your data center right next to a nuclear power plant is a pretty obvious sort of thing.

Maybe not building a nuclear power plant next to your data center, not, not the way to go.

What are some other some other second derivatives that are out there that you could say?

Yeah, I mean, there are many and they're not all in the US, They're not all mega cap.

We've been playing some like 1 technology is called hybrid bonding, which is to your point, when there's scarcity of computing power and GPU's and everyone basically is competing to have the best high-powered AI technology or infrastructure.

Hybrid bonding basically means that we can stack various chips closer together, which means that the throughput and the connectivity and the speed at which it talks to each other, you can get more in a tighter space and get it talking together faster.

Kind of similar to your Gallium example.

There's a whole bunch of other things like testing technology where if we're going to be doing hybrid bonding, there's new laser technologies in particularly in Japan that can see through multiple layers.

So you can test as the technology moves to stacking of chips, you can do all the testing you need to do.

There's cooling.

So these are energy intensive, but they're also very hot.

These new generative AI stacks in the data centres.

So there's companies that provide water cooling, which is a better technology and also cleaner to keep them.

Everything from that just very simple copper connecting circuits from very traditional sort of electrical component companies.

So it's wide-ranging in that in that sense.

But what I'd say is we actually don't believe that we're in this zone where the market's going to broaden from MAG 7 towards the second or third derivatives.

What I would just call out is the Magnificent 7.

We've talked about why they've done so well because of earnings growth that's really pushed them there.

But what we haven't talked about is that there hasn't really been much else in the market to invest in.

So it's like in a relative sense, if you're an investor, you're not putting your money in Chinese tech because China has been an unmitigated disaster and you don't know how to think about what the government's doing.

Yeah, except for yesterday there was a stimulus package that some are calling the final moment where they're going to come to the market.

I know that's so wrong, too.

I don't really think about it.

Yeah, it doesn't even be I'm thinking about.

But my.

Yeah, I told you some of my PA personal stocks.

That's extraordinary.

You know, you, you're extraordinarily bullish for China.

But if I had a dollar for every time that I said, OK, that's the bottom in China, correct.

We, we would be sitting here, we'd be having this conversation on a but exactly.

So if you think about regionally, like there's a handful of countries, but US is one of the only countries that's outperformed through this narrow market that we've had.

Fun fact, India actually has as well because people are super down on emerging markets, but it's, it's a lot of the China cloud is what's made EM bad.

When we think about other areas though, I think it's fascinating.

Consumer staples, originally they were weak because some of the they don't have as much pricing power in terms of being able to really elevate prices and the raw input costs were really high because of supply chains, which hurt margins.

Then all of a sudden GOP ones threatened that people aren't going to consume as many potato chips or other calorie.

So that put a bit of an overhang on these consumer staple stock like ResMed.

You have a whole raft of financials, credit looked bad and people were worried about their exposure to commercial real estate.

Real estate, you have not just the commercial real estate issues, but both real estate and utilities tend to be a disadvantaged by interest rates actually being too high.

I can run through a whole bunch of other sectors, but there's been a bunch of things that have gone wrong for the rest of the market.

At the same time that AI has been really good and we just think that that's flipping now.

US rate cuts.

We've got some things like the weakness in industrial production in the US means the economy can reaccelerate.

We just think that while the MAG 7 won't be as amazing but not terrible, this whole other section of the market that was bad for so long is actually on the cusp of starting to do better now.

And there's other areas you can make money from.

Are you seeing any particular areas that are utilizing artificial intelligence to be able to increase or be able to sustain their margins now?

This is a big investment theme of mine.

Take for example, John Deere, you know that people see it as just being a simple tractor company.

If it's like if you knew what they did, that's an AI company.

That's that that is a, that is a tech stock.

Anything that's in that sort of area of people who who are being able to utilize.

Now that the we've gone for the tell me now, it's the show me now.

The company's going into the utilization side of things.

I think that we're incredibly early in the utilization side.

There's not a lot of evidence.

Frankly, it is one of the most hotly contested things that we debate internally and there's some some bulls and bears on both sides of it.

There are examples like Microsoft owns a company called GitHub, which does coding.

Coding was something that if you came out of university you'd be on a $200,000 plus salary.

All of a sudden overnight, using open AI technology that Microsoft effectively purchased, you can have a coder being 50% more productive.

Overnight.

The code just starts to fill itself out.

Chat bots for this like a company called Teleperformance in Europe, that was down a lot because all of a sudden companies were introducing this AI generated chat bots that were making the response times to customers way faster, etcetera.

So there's going to be some niche areas that are coming through.

Copilot from Microsoft is one that I think it's in the show me camp that has the potential to add a lot of value.

Let's go to that because you've mentioned it a few times.

It it seems like if you mentioned something four times, then you must be keen to talk about it.

What how does copilot change the change the game?

What is what's what's special about this particular one?

I think copilot the the jury's out whether it entirely changes the game.

But effectively, if we were all right now doing this on teams, you can then just say to copilot.

I can see shaking the head.

I'm I'm a zoom.

My preference is zoom.

I don't know about you, but I'm a, I'm a Zoom guy.

I've, we use Google and that's it.

But you know that my, my personal theory is that COVID was started by Microsoft to get people to use Teams, right?

I, I wouldn't put a pass.

I wish you'd told me that before I invested in Zoom because I think my, my, my position was at about 80% before I realized it's going to get disrupted.

But anyway, but you can basically type in and say, I want you to publish the minutes of this call.

I want you to allocate the action items.

I want you to e-mail each person two days before their action items are due, and I want you to put that in a board memo paper and send everyone invites to the next meeting.

I mean, that would take someone time.

And that's something that now the AI basically can go and do for you if you're in PowerPoint, basically saying I want you to reorganize all this to make it look pretty.

I want you to make this in my corporate template.

And then no more than six dot points per slide go.

And then the thing that's really powerful with generative AI is it's iterative and you can talk to like a human.

So and you don't have to be too kind.

I always ask please.

I ask please.

When I when I did this on chat, TPTI asked.

I always say please.

It's it's they'll thank me.

You're not you're nicer than me.

I'll be the last, I'll be the last.

I'll be the last one wiped out.

You're an area producers nodding his head too.

When the when the when the when the when the robot revolution comes.

I want to be one of the last ones that's a whole another topic.

I mean, that's all Elon Musk's his his robot venture and why he thinks aging demographics, we're all going to have robots everywhere is a whole another thing.

But so anyway, that's like a really smart Clippy.

Yeah.

Do you remember Clippy?

I don't remember clipping.

No.

How old are you?

Can I say that?

Clippy.

Clippy Clippy was the thing that popped up in Microsoft Word Yeah.

And and other and other Microsoft documents.

So it's part of the office package.

He just popped up and just like.

And this is the the if if you wrote D something, it would pop up on the side.

Yeah.

And he was shaped like a paper clip and he was called Clippy.

Yeah.

And it looks like you're writing a letter.

Do you need help?

Yeah.

And you go yes.

Oh yeah.

Yeah.

And then and then it would then proceed to not help you at all through your through your path, right.

Yeah, That was interesting.

So this April time, this is supposed to be a lot better than clipping.

But I think that I think that when you look at Microsoft and how you think about it as an investment opportunity, you have to believe that there's going to be a very big uptake of people around the world paying an extra $30.00 a month.

I would do that for this service, Yeah.

And I've got no doubt it's going to get better than where it is today, but it's not perfect.

And as an example, all those great scenarios I gave you of how you can use it now or hopefully in the future.

I had had these visions of if someone sends me a million rows of data and a spreadsheet, I don't have even know have to do it know how to do a regression analysis or anything, I can just say go do this and generate 5.

Amazing charts with the most powerful data and write me an analysis.

Whereas we're finding out now that the data has to be perfectly organized into a perfect pivot table, otherwise it can't organize it.

And so it's not perfect, but you know, that's a use case.

So that's going to make people more efficient.

And yeah, yeah.

And it's, it's, it's the training and utilization of a company like mine.

So for example, I didn't know that those things were were there.

I'm still, I'll tell you what I've got, I've got an office admin who I think has potentially been using it and using it quite successfully.

And I think that she's amazing.

Yeah, And maybe there there is no difference.

There's no difference between her being amazing because she can reformat these documents for me that I can't do or if she's just getting something else to to do it for her and handing it back to me and like it look like it's her own work.

I've got.

I don't care.

Yeah.

Yeah.

OK.

So yeah, I think the company companies do need to utilize these things better because we just don't even know what what these things are.

Yeah.

And we do it.

We do it ourselves.

We have decades of research analysis and notes and minutes from our meetings with CEOs, all in this big research management system.

And we've developed our own internal model where I can basically say, tell me the thesis for Amazon, how that's changed over the last three years, and tell me what the key revenue generator of Amazon is today.

That would have taken me 4 hours to go through various meeting notes in the past.

And now it's just going to summarize it for me.

And then if I say, wow, that's really complex, I'll say dumb it down and tell me in layman's terms.

And then it just does that for me.

That's perfect.

That's exactly how that's supposed to work.

That's the, that's the way the future is supposed to go.

And all of those things require, because you know, you need Microsoft, you need the data that's behind it, potentially your own internal things, the 8000 companies that all work together to be able to build that for you.

Half of them listed, half of them about to be bought or, or all listed in there as well.

There is obviously a future that is that is to be dominated in this side.

And I'll, I'll give you a point that I think some people don't recognize.

I don't entirely buy into this.

You said at the beginning, small caps are super cheap.

There's a big mean reversion event happening and it's time to to light up on small caps.

One thing I think some people miss is what do large companies have?

They've got history, yeah, and they've invested and they've got typically got large customer bases and they've typically got a lot of data.

If you're a small company that's been around for three years and you haven't had a huge team basically putting all this stuff in the cloud and generating data, you are at a distinct advantage to a large company that can compete with you utilising AII.

Don't think AI is going to actually be able to be utilised as much.

This is a very generalised comment.

No, no, it's by some of these small companies.

And I mean, how aggressively those big companies can can and protect their mote as well.

Correct.

Is is phenomenal.

Yeah, to be able to do that.

So until and what is it one of those a bit of a futurist actually was saying that until there's a time when everything doesn't flow through that very small handful of companies, then is the the normal probably so, yeah.

Well, I think that we're about out of time here, Sam.

We got anything else to go over?

I mean, I just want to emphasize that a lot of this AI stuff is known.

A lot of this AI stuff, which is a technical term has driven the market.

And if we look at since ChatGPT was announced to the rotation, we actually already started to see on the 10th of July, the MAG 7 outperformed the rest of the US market by 115%.

Since the 10th of July, they've underperformed in general by around 12%.

There's only one company that's outperformed since that point, it's Meta.

And it comes back to how we actually think that's the one stand out company driving better return on investment from AI.

But then if we're right and the market continues to broaden from here, I think investors need to not just think about how much of this big AI mega cap exposure they have in index funds or with some managers that maybe have really loaded up on the stuff.

It's about how big changes and big changes tend to drive big variations in the market will mean something for the future.

One big change happening right now, the US Fed obviously is just cut by 50 and it's likely going to go go for more.

What does rate cuts mean?

Well, it is a point you did mention, but it means that for some of the smaller companies out there that rely on capital, that's going to become cheaper for them and that investment mode can start effectively starting off again.

Emerging markets is a really big one that has been under the cloud of China and a lot of these EM countries, without getting into the detail, have to fight against high US rates with their own high rates and inflation, which really hurts consumption.

And we think that's set to improve from here.

You've got potential opportunities like China, if this stimulus is real, helping not just China and other parts of Asia, but some Western economies like Germany that rely a lot on Chinese demand and the commodity complex in general.

I think it's really interesting that we're talking about weakness in energy prices, a lot of it funneled through or because of Chinese demand being weak at a time when we have war breaking out more than is comfortable, much more than is comfortable and more than one war in that region is probably more than I could, more than I could handle.

Yeah, correct.

And and typically this is something that requires a premium for commodities.

You've got other parts of which it might sound a little bit early, but lower rates in the US is actually good for some banking stocks.

If this, if we are truly heading towards a soft landing and there isn't a credit problem, which we fundamentally think credit is quite healthy in the US, you've got banks.

Now this is something that I as a mortgage holder in Australia hate to stomach, but people in the US still have these 3 odd percent 30 year mortgage rates.

Now we can lock it in maybe at 4:00 if you're lucky, where some banks actually going to see their interest margin expansion.

Because if those low interest rates that they're lending out for are locked in, all of a sudden finally lower rates means that they're paying less to depositors and that that means net interest margin expansion.

That should also the lower rates potentially spur some of the activity in the US economy.

We've seen industrial data actually be in contraction for a number of quarters now.

Yep.

And there's parts of the economy you wouldn't think like very simple durable businesses in areas like logistics.

This is sending freight on trucks and trains that have been very weak because.

Of that activity being low, these types of things we think have been bad.

It's funnelled more money into the MAG 7, it's focused more attention on AI and the MAG 7.

But now we think we're on the cusp of and we are already seeing it more, more tailwinds hitting the rest of the market, hence why and it's a, it's a point I made earlier, why the market consensus is already predicting what was a 47% premium of MAG 7 earnings growth versus the rest of the market is contracting to only 5% next year.

OK, So that so say that again, a 47% premium of earnings growth over the rest of the market will now only be a 5%.

Is that because the rest of the market is going to be picking itself up or just the both the crocodile I'm doing it, I'm doing a thing like that.

The crocodile jaws close together exactly right.

So both jaws are moving.

So the the earnings growth of MAG 7 has peaked and it's contracting.

So that's the top jaw coming down and for the what we call the S&P 493, So the next the lower the mag 7 in the S&P 500 actually had five sequential quarters in a row of negative earnings growth.

And the last earnings season we just had was the first quarter of earnings positive growth for that subset.

And that's going to be improving from here.

I mean, if, if you look at the three or just I've picked 3 examples out and I can put a justification, I can put a thesis.

You don't need an AI to be able to do this, right?

You want to talk about transport, you talk about diesel costs being being way down, right?

That helps transportation companies.

Fantastic, you know, to talk about rates coming down.

All of a sudden that family that has been sitting on this house just going, we have outgrown this house, but we can't move because we cannot refinance.

We can't get more money.

We've got to sit here with our 30 year loan.

All of a sudden, maybe 4% is going to be that isn't that much of A stretch spot.

Again, we can refinance, we can get a bigger house that helps your home depots, it helps your property, it helps all of those things underlying it as well.

Finally, consumer discretionary straight out-of-the-box, right?

And that was immediately, as soon as that there's more equity in homes then for a very long time, potentially ever, I think someone was saying, because you would just rest your cash straight out-of-the-box.

And so like rate cuts bang.

And you can say that's that's impacted as well.

You don't need AI for me to tell you that.

And I'm not a guy who's right on the cutting edge of those markets anymore.

Pretty easy to say that there is going to be a dispersion.

What are we going to call it?

I think we call it the great broadening.

I like it.

Great broadening.

On that note, Sam, I think that we're about done.

Thank you very much for joining us.

Sam Ruiz, investment specialist at T Rowe Price, Thanks for joining us.

Thanks, James.

Great to be here.

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How are you now?

It's James Whelan here, Barclay Pearce Capitals Wealth Management managing director as a guest of the Ensombl platform.

And welcome as you are today, we are doing an absolutely special presentation brought to you by T. Rowe Price.

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Welcome to Part 2 of the special Ensombl podcast.

Now this is the second-half of the big game before the before the half, before the oranges.

We talked to Sam Ruiz, an investment specialist at T. Rowe Price.

We talked about AI.

We talked about the foundation of it being that, that the reason for that huge bullish run that we've had in the MAG 7 stocks.

Then we talked about the concentration risk that's, that's in markets there at the moment that has been in there for most of the year.

And then we talked about sort of what interest rate cuts from the Fed and, and now a rate cutting cycle around the world, potentially, hopefully here as well means for markets and where you can start to see the reallocation of money away from that MAG 7 looking for better value, looking for everything like that.

So we need someone and, and we did touch on emerging markets, which is important.

So one of my favorite subjects on is coming up as well.

Fortunately, I'm not the one who's going to be able to take you through the emerging markets.

Otherwise, it's really just going to be a conversation about India.

So hopefully we've got someone who can tell us with a few more parts of parts of the world.

We've got Iona Dent, who is an associate portfolio manager for the global growth equity strategy at T. Rowe Price.

Iona, Iona, I got it wrong.

I'm so sorry.

Iona.

No problem.

No problem.

Thanks for having me, James.

Great to meet you.

That's OK.

Look, if you want me to do that intro again, I'll do it again.

But otherwise, I do apologize for that.

Iona thank you so much for joining us.

Thanks.

Thanks for having me, James.

I appreciate that.

So you're in Baltimore at the moment.

So that's why we're sort of talking both of these ones, is that correct?

Yes.

Yeah.

I'm, well, our headquarters are in Baltimore.

I spend my time between Baltimore and DC.

Very good, very good.

OK, so it, it does mean that there's a difference between being in the room.

I was in the room with Sam for the first half of the of of this podcast for the for the first episode.

And you can sort of tell all of the intonations and everything that needs to be done.

So with this one, because we're, we're over the wire, if you get, if you get going on a subject, I'm not going to get any way.

OK, Iona.

So you just you just you just carry on some things.

Now we talked First off, everyone gets the same question.

You don't get, you don't get out of this one either.

What are you doing?

How do you make money?

That's a that's a good starter.

So I'm an associate portfolio manager and on our global growth strategy.

And so I work with portfolio manager Scott Berg, who's actually Aussie as well.

And so it's pretty truly global in nature, you know, around 30 countries and our strategy of any country, including 20 APM so very broad.

I've been APM since January.

Actually, I joined at the beginning of this year.

On my side, I'm a bit more focused on global financials, consumer staples, as well as emerging markets.

And before that I was a research analyst for essentially a decade, primarily in EM banks.

So I think I'm very lucky.

I, I would say it's sort of the best job in the world if you like travelling and are curious about things and wants to dive deep into more inefficient markets and make alpha.

And that's essentially what I'm, I'm trying to do here.

Do you want to draw that out a little bit there just with the inefficient markets in the, in the quest for alpha, which is a noble quest.

I've tried it once.

It didn't go well.

The let's talk about the, the inefficient markets.

So emerging.

I mean, obviously with the emerging markets, I've always hated the fact that people bundle in EM into one basket.

I actually find it, I actually find it a little bit offensive.

How's, how's your definition?

How do you separate?

I've, I've that time scored up to maybe five different emerging markets that I could basket up together.

How do you, how do you define and separate in your, in your life?

I didn't agree more.

I think it's so very, I mean, there's so many different ways that you can look at it, whether it's from kind of the commodity importer, so the commodity export, the kind of more service focused economies, the more manufacturing economies.

But the more ways you try and look at it, the more you realize that every country is truly individual and has idiosyncratic drivers.

And I think what's exciting about EM when I talk about inefficiencies, it's sort of in terms of the research process, right?

So whereas if you look at Amazon or Apple, you'll have hundreds of analysts on the sell side modeling it, sending you notes according through every note of the financial statement when you go to EM.

Some of the the markets I've looked at, they have been theory of analysts looking at the companies and, and it varies across across the regions.

But I mean, Saudi Arabia is a good example.

It only got upgraded into emerging markets in about 2018 and at the outset, you couldn't get any information unless you went on the ground and you met management teams.

If you sat at your desk and kind of looked at Bloomberg, honestly, you'd be none the wiser as to the change that was going on the ground.

So I couldn't agree more.

It's it's very, very varied and I don't think it's fair.

I mean, even if you lumped into geographic kind of OK, Asia and see me essentially nice in Europe and Africa, Middle East.

And then that time, you know, I don't think that's doing it just as either.

Now, I mentioned that Taiwan, Taiwan being bunched in with with an emerging market is that is sort of one of those borderline ones for me.

And definitely we'll get to China in a little while.

But I wanted to talk about specifically, just on Taiwan specifically because I'm sort of drawing you into the idea with semiconductors.

TSMC is obviously the the pretty colossal stock that they've got there.

That is a part of of sort of what's underpinning all of this growth in this one.

And I am obviously segwaying pretty, pretty horrendously on the on the direction towards making AI, which is the subject of this conversation.

AI and EM What?

Yeah.

Now, I mean, let's, let's just let's just get straight to the question that we wanted to have answered First off and see if we get to it.

And then we might come back around to to see how we go see, we'll draw some things out.

How how is EM moving certain emerging markets?

I know that's that's, that's pretty much that's the question that we wanted to answer anyway.

You mean from an AI perspective?

From an AI perspective, yeah, yeah, sure.

So, the way I think about it is in a way EM is in a central factory of the the world, right.

So when there's a trend, whether it's ARA or anything else, you know, when we look at the picks and shovels and the AI supply chain, EM certainly benefits.

And and Taiwan, as you call out is a key one.

I mean you have TSMC that the sole manufacturer essentially of Nvidia's AIGPUS including the latest architectures like Blackwell.

So as a result, it's also been a hot stock.

I think it's like more than 70% year to date, not quite near the 150% of NVIDIA, right, but still be in a great pace to be and on relative valuations, it's still cheaper and around 20 times scored earnings versus NVIDIA back near 30 times today.

And with you know, the share price supported by APS upgrades.

So, you know, I'm sure you had the debate with Sam as to where we are in this AI build out.

And I think Satya and Adena and Microsoft makes the point that 10% of GDP was spent on railroads, railroads in the UK during the industrial revolution.

So this CapEx cycle could have plenty further to go, but the rate of change is likely slowing.

What I'd say more generally, when we think about EM and AI, it's, it's kind of at this point we're looking for the next leg of the thesis, right?

And so we need to be looking beyond the direct ramifications, the obvious ones, starting to think about second order effects, so more around longer term potential productivity gains and revenue benefits for other industries and sectors like even financials or consumer.

And I think that speaks to where the market can broaden out from here, even within EM, but across the board.

So I think it's early days, but that's something we're we're pretty excited about from here.

Yeah, I, I think that there was an initial narrow view and I will say it was a narrow view of thinking that I will, AI is going to take the jobs of that cheap over the phone, over the wire labour that you have in, in certain parts, Southeast Asia and India, for example.

I, I disagree vehemently on that.

Didn't would you like to have a stance on that one?

I agree.

I mean, actually, interestingly, we're in the Philippines earlier in the year and and you know, that's a key one for them.

I met a lot of experts in this space and I will say there were varied views and often people kind of talk a book, right?

But in general, people think it's going to create more efficiencies and and more productivity overall.

And so you can have the same person handling more queries, but that doesn't necessarily mean, you know, the volume of queries can't expand as the result of it.

So it depends on in demand, but I think and, and you know, also in Vietnam, that's actually this, this company FBT and it's sort of an IT outsourcer.

And from their perspective, it creates new projects, which is pretty exciting, helping companies get on board with this trend and get their data and order and everything.

But it does make it a bit less labor intensive as well, so they can see the cost benefits.

So I think, you know, as with all these mega trends, there's always a bull case, there's always a bad case and probably the reality is somewhere in the middle.

I think.

Yeah, OK.

I actually think that anyone who thinks that there's going to be huge job losses, you clearly have just missed a bit of a jump on that one.

I think that job, job gains is probably the the way that I'd like to go with it, but let's not go down that path.

The let's talk about, let's take a little trip around the world.

If we want to start at the frontiers.

Now, I, I do like to double sometimes in those areas.

And it's been, there's a couple of couple of good little frontier ETFs, which I've which I've played around with in the past.

But is there anything let's let's go around the world in your expertise, because I'll have to pick your brain on this, on these things.

Like you said, unless you've got someone on the ground, sometimes you don't know what's going on.

Are there any frontier markets that you're seeing right now that are really exciting?

So I think one of the ones that's most interesting for us would be Vietnam.

And it's one of the most dynamic economies in Southeast Asia.

You know, you've seen kind of 6 to 8% GDP growth for the last decade and it's been pretty well diversified growth as well.

It's an export orientated economy, but again, quite diversified.

So tech people think about, but it's really electronics, it's also textiles, it's machinery, it's seafood.

And there's been this huge FDI story due to a favorable investment climate and numerous trade agreements.

And so it's benefiting from the what's going on in China as well.

So it's a very strategic location, a young workforce and an ongoing reforms aimed at imparting for the productivity and investment.

I'd say it's been through a bit of a cyclical kind of tougher patch.

And so 2022, well, first actually they had a tough COVID lockdown and that hurt the economy.

And then you had these sort of shocks in 2022 to 2023, sort of tougher external demand.

You actually had a bit of a, a liquidity crisis in the financial sector, including a deposit run and and a bit of real estate time.

I'll and also a bit of an anti corruption drive going on at a political level.

And actually now we're seeing everything just start to turn.

It's in this real sweet spot of sort of attractive EPS outlook, recovering spending indicated accelerating credit cycle with growth back in the mid teens and the corporate bond markets have reopened again and valuations are still pretty attractive.

It's, it's doing well and it's improving, but it's still being slightly off people's radar.

So I think for us, that's a really interesting one and it's definitely high up the, the priority list.

OK, that's, that's a, that's a good case anything.

So that's Vietnam.

And so the single stocks that would be owned by your, by your global growth strategy.

So we own FBT, which is the one I mentioned in the in the tech space.

And then we own some of the banks there as well.

So these are great banks delivering kind of high mid to high teen Rres and they aren't really seeing any asset quality pressures and yet they're trading, you know, some of them still near one times book.

So for us, we think that's a pretty exciting space.

And then we've got a smaller plan in consumer as well.

OK, sure thing.

Not to get too far into the weeds on these ones.

Just interested with with how it works structurally on these ones.

It's better than just having a a shotgun buy the whole market approach that you sometimes get with, with ETFs or just speaking out loud.

Yeah.

OK.

Anything else that you're seeing aside from that?

You mentioned Saudi Arabia.

Wait, is, are there any, is there anything in the Middle East that you'd like at the moment?

You know, Saudi Arabia to me, I think it's one of those interesting markets because I think it's honestly the most misunderstood still.

And I could actually probably do a whole podcast on the economic and social transformation going on there.

But in short, I guess they've realized they need to diversify away from all right.

So under MBS, they have this vision 2013, pretty aggressive economic and social targets, but they're generally on track to achieve them.

And I actually, I first went to Sally back in 2018, and it was a very different world, pretty strict.

I had to go, you know, I wasn't allowed to go by myself as a woman.

So I had to go with male colleagues in restaurants.

I was separated from colleagues, you know, men and women weren't sitting together and I would go to the effective floor to meet CEOs and and there wouldn't even be any female bathrooms to be seen, right.

It just, it wasn't a thing now.

And back then that's because female labour to participation was just 15%.

Now that's been phenomenal story.

It's actually hit 35%.

So more than double and over their 23rd 30 target of 30% for the female labor force participation there.

And so now I go to the conferences and I meet, you know, female management teams, but all I see very well informed female investors.

But it's it's much older than the female story, right?

So it's also about tourism, entertainment, infrastructure.

And you might not think of Saudi as you'll go to tourist destination, but they actually had 27,000,000 international tourists in 2023, so up more than 50%.

And pre COVID, they've also got, you know, you might have read about these huge construction projects and that they've committed nearly a trillion dollars to the some of these projects.

So Neon, for example, has been in the headlines, but much, much broader than that as well.

So as a result, it's sort of the most dynamic economy in the region from non oil GDP growth perspective.

And because of this rate of change, it's it's my favorite country to visit in the region.

And you know, as I mentioned also when I went in the past, there was no music or anything like that.

Now you can and I'd have to buy it.

Now I can just go, you know, and I've been a usual dress and I can go to an open mic night or a concert.

And in the financial sector, they've got this mortgage law that they've passed, which meant there's been a booming property market.

And I guess from a technical perspective as well, it's a huge underweight.

People haven't been paying attention to it.

Positioning is light, but it's also pretty nice diversifier versus the rest of the EM.

And it's lower beta and it's less correlated as well.

And so I think that's a really interesting one that warrants people doing a bit more work on.

OK, well, that's, that's two fantastic ideas for us there.

Thank you for that, Iona.

Now we're just going to jump really quickly into the rate cutting cycle that we're seeing.

And specifically we're going to talk about, I mean, emerging markets do have a, without getting too detailed and technical on the whole thing, I mean, the US dollar does change the way that certain emerging markets work financially.

You know, if they're as bullish a case that they should be a lot, we've got a rate cutting cycle.

We saw 50 basis points cut just recently by the Fed, which not a lot of people were predicting, but there it is.

And we've got to have more cuts through the through the rest of the year before we get on to the other bigger end of the emerging market space, which I want to talk about India and China after this.

But now do you see those cuts and how do you see the leadership of the Fed with regards to to this new leg on the cycle as as shaping the emerging market space?

It's a great question because honestly, I think you can't actually overstate the importance of the Fed and what they're doing and what that means for EM.

I remember actually at the start of my career, I was doing an internship on a trading floor and I was on the EM team and the head trader said to me, you know, do you know what?

I want you to spend more than 50% of your time on in EM?

I thought, oh, you know, that's sort of just graduated.

Felt pleased with myself and I thought, well, I know China is important for EM, so I'm sure it's China.

It drives for commodity cycles.

And yeah, it was the Fed, he said.

He said US economics.

I want you to be paying more attention to that than any EM country.

And I mean, it's so true, right?

Because the Fed rate impact, the cost of borrowing, it impacts the global interest rate cycle, therefore the global credit cycle and the global economic cycle, You know, capital flows were just so important for the currency appreciation or depreciation and investment sentiment.

So I, I don't think you can overstate the importance of it.

And yeah, we've had this 50 bits rate cut, the first rate cut in four years after one of the sharpest hiking cycles in history.

And I'd say it's hugely well it it's nuanced, but probably it's very positive for EM.

And you can see that already in the in the performance last week, right.

So MSTIM was up kind of 2 1/2 percent week on week in line with this cut, whereas DM was up 1 1/2 percent week on week.

And I think this is just the beginning.

We still have the market.

Thanks.

We still have close to 200 bits for the cuts and which are priced through 2025 S.

So the new on terror is referring to that.

I will just touch on is how this plays out.

If you look at prior cycles and again, each cycle's a bit different, but as it sort of depends on what happens in the US.

So it's going to be a very good scenario for EM if we see a sort of softer landing in the US Whereas if the US does see a recession that's sort of tough across the border, EM can't escape that.

But one thing I'll point out as well as it's not just the level of rates, it's also the shape of the yield curve.

And right now we've got a pretty steep yield curve and which kind of happens as we're seeing the front end ease.

And typically that's also very good for the amount of performance.

Because what it means is that investors expect stronger economic growth in the future as well as possibly, you know, rising inflation expectations and actually moderate inflation is usually a pretty good backdrop to EM when we think about corporate earnings, etcetera.

And then just the last kind of brief point I'll make on this is what traditionally comes with the Fed easing is a weak dollar.

Again, depends on the cycle.

There are always new answers here.

But if you look historically in the last six season cycles, the dollar has traditionally on average recorded a decline and emerging assets almost always outperform on a relative basis when the dollar is depreciating.

So I think that's a really a really helpful setup too.

Yeah.

And I could say that too.

All things being equal, the US dollar should should theoretically come off a lot of other things.

There's always another side to that to that coin, if you'll excuse the pun on that.

Thank you for the courtesy.

Laugh means a lot.

We we now before.

OK, so let's head into the big into the big players.

They are the big names.

Recently, I was interviewed by as a Hong Kong radio station just before Chinese regulators were set to come on and and say something that seemed like it was important.

James, what do you think they're going to?

What do you think they're going to do and say, well, you know what, there's been a lot of talk recently.

I really don't think they're going to do that much with regards to stimulus for their own economy.

I think that the focus for China is probably going to be more on more on, on making sure they're protected in their in their semiconductor space and their technological space to make sure that they're they're immune from any attacks from the US in this political cycle.

I could not have been more wrong ever with this extraordinary stimulus that the Chinese have announced that they're coming out with.

It just seems to have put a floor underneath their market substantially.

And I hope that it does continue on.

What do you see with regards to, I mean, with with the fact that the landscape has changed a bit when in China recently, If we're doing this a few weeks ago, we'd probably be talking a different story.

What do you see China at the moment?

And and then we'll get into the weeds of the AI side of things with regards to China in the semiconductor space.

Sounds good.

I mean, I think the first thing I'd say is, you know, you're definitely not the first person to have been caught out on China.

In fact, I think if any investor told me that they had a perfect track record in China, I, I frankly just wouldn't believe them.

But I think your point, yeah, no, 100%.

I think, you know, this links back to the prior point actually about Fed easing.

I don't think it's a coincidence that the Fed cut last week and then we got this news right.

So the Fed is in has almost certainly made space for them to do this.

So on the one hand, I think it's kind of peaceless confirmation that lower rates is generally good for.

Yeah.

But if we look at what happened, I mean, some of it was expected, right?

So we got rate cuts kind of across the board.

We got the Reaper rate cut, we got reserve requirements card.

But I would say it's worth highlighting it the first time they cut the policy rate and the reserve requirements on the same day in the past decade.

So it does_the urgency here and then you got this kind of 1% or so of GDP STIMULUS on the property and credit side and then another half a percent or so on the stocks kind of swap program so.

So, to a point that we would have had a different conversation a month or so ago you.

Know I, THINK it was needed the.

Latest macro data has been pretty depressing on both growth and inflation and leading indicators were suggesting further downside risk.

I think the issue though, is this is more of a kind of monetary stimulus package.

And, and from a macro perspective, the problem is that the Chinese economy, it's not lacking liquidity, but it's lacking demand.

So it's a bit like during COVID when the Fed cut, but in reality, people aren't going to go and buy houses, you know, with lower rates at the outset when they're not sure if they still have a job.

Of course that changed when the fiscal stimulus then came through.

So I think but what's missing still in China is the fiscal stimulus, the monetary transmission mechanism is a bit broken really.

We still got this demand deficit, you know, this broken House of market and a loss of confidence.

And IMF I think thinks the property sector is going to be a drag on GDP into the twenty 30s at this rate.

So perhaps something will follow on the fiscal front.

I don't want to I think that is a possibility.

But in reality, I think we need something in the order of kind of five to 10% of GDP that we saw in in 2009 or 2015.

Sixteen.

What I will say though, what I thought was almost the most interesting was a swap and buyback facility on the equity side and actually look at the price that very, very similar to to actual market.

Sorry, get going to that.

I jumped in.

Yeah, yeah, no, I agree.

I mean, if you look at the price actions throughout the press conference, it was actually only when this came out that the market started moving, right?

So some on the ground think that officials now really care about the stock market.

And that would be a notable change in tone after, you know, a series of regulatory clampdowns.

And it would be also pretty important in the context of the fact that people are underinvested.

So I think mutual funds in aggregate have kind of 5% allocation in Chinese equities, which is only first percentile over the past decade.

So active mutual fund mandate clearly underway in China and if they really care about the stock market, I think the jury's still out on that, but that could be a big tailwind.

So our view if you can't ignore China, you know it is cheap 9 * 2 year I think in aggregate for the market, including some decent companies that are growing well, the focus on shareholder return is is coming true.

You're getting more supportive kind of divvy and buy back yields and it's it's 18% of the world's population, right.

But to your point that geopolitical risks are real.

Actually today was at this really interesting kind of few sessions at the Senate in DC and you know it, it is bipartisan the views on China and from the US.

So that is a risk that can't be ignored.

And I agree.

I think that with, if I could just throw in my two cents on this one because yeah, that's that's what I do. I think that with regards to the stock market, and there's a few things just to say on this one.

You can be, you can be as right as possible.

There's something that I need to train my guys as much as I possibly can on these on these things.

So like your thesis can be right.

You can be right all day.

But if you don't have the money flow into that particular thesis, then there's no point in having it.

You were mentioning earlier about about frontier markets and some of the markets that great value, great companies, great anything.

But unless, unless there's actually people that are buying these things and the thesis spends nothing.

And that's sort of that next stage that did you guys specialize in.

And sometimes a lot of people do forget with 100 Vican agree.

Yeah, but yeah, you can be right.

You can be right and the stock still goes down.

You can be right and the market still goes down.

It does happen.

You're not it doesn't count as being right unless you have the money flow going into it.

OK, so now let's get to the big one, the mother and my favorite market.

I've been bullish India for a few years now based on my thesis, but we're not here to hear my thesis.

Where do you see India on this one, especially with regards, I mean, the the, the tech growth in India and and factories having a second.

Well, I won't jump in Iota India.

No, you're laying out, you're laying out the thesis very nicely.

I mean, I mean, you've been right.

And it's actually a trade that we've been on too.

I mean, if you look at the past decades, India's outperformed China by 100%, which is pretty astonishing.

And last year they overtook China in terms of population.

This year, they've actually not overtaken China in the weight and EM index.

And, and you know, to the China conversation, I'd say India's almost the mirror image of China right now in terms of the growth, in terms of demographic support, in terms of the property market and in terms of geopolitics, which is actually kind of working in a favor driving strong supply chain alliances.

I mean, I was in India actually early this year, and someone jokes that India's the only place where the PM can sell a plane, simultaneously import Russian oil and still be invited to the White House for dinner.

But they've managed to.

Yeah, exactly.

They've managed to navigate this pretty impressive, impressive situation.

But, you know, I think the structural support is that it wasn't always this way, right?

I mean, it was part of the Fragile 5 back 10 plus years ago.

Now it's one of the strongest economies that we follow and it had a tough COVID, but it's had this great recovery, recovery coming through and it's the fastest growing large economy.

Essentially, I think it's set to become the third biggest economy soon.

It's it's overtaken Germany and Japan.

It's always, it's already actually overtaken my home country, the, the UK.

And I think the context here is important.

And this is more a near turn point.

But I mean, one reason they had a pretty tough pandemic was because of the monetary and fiscal discipline that they're showing now.

So the flip side of that was we've seen more benign inflation and, and rates than we saw in many DMS and other EMS as well.

And they're just being a lot more disciplined versus, well, both their own history and versus peers.

But, but to a broader point as well, they're seeing, yeah, a lot of benefit on the, on the FDI point.

They have a lot going for them and MNCS are relocating there.

They have a high skilled workforce, but obviously still a relatively attractive cost of Labor.

And more generally, they've had these great Big Bang reforms from Modi coming through.

I mean, you have the GST, the goods and services tax now driving tax collections way ahead of expectations.

So it's still paying off.

You know, that was a few years back.

It's really virtuous cycle because that then gives the government more spending power and primarily they're spending that on infrastructure.

And so it's really good long term mindset.

And you know, it's it's one of our favorite economies when you look purely at fundamentals, I would say valuations are the one thing that means, you know, it's hard to be all in right right now.

I think it's the most expensive market actually in the world on absolute valuation, partly supported by high arteries.

And some of that brought it's more in the small and the mid class space.

You've got some pretty attractive looking large caps at the same time.

So again, you have to dig deep into the market here and check out the nuances.

But they've done a fantastic job from a structural reform perspective, cleaning up the corporate, the banking sector, balance sheets, this bankruptcy reform.

And again, opposite to China, I'd say, you know, consumer gearing is very low and corporate gearing is also low.

So they're sort of under invested versus China being somewhat over invested.

I think with the valuations that a lot of people are throwing that at me as well on the valuation side of things.

And if you're looking at the straight valuation, then yes, technically you do.

But I think that India is one of those rare, rare occasions when the economy and the market are actually side by side in lockstep, that because you've got the systematic investment plans and a growing middle class, you have people as effectively.

It's like our superannuation industry, but it's all because it's a market.

The money just has to stay inside.

So it goes straight to the funds and straight to the ETFs.

Those funds and ETFs have to buy the underlying stocks.

Everything keeps growing, everything keeps spinning.

The fat Labrador chase his tail up the stairs, as I've said before.

So I think no, that's a really good point.

And equity culture, you know, is rising.

But I should say there are no major concerns.

And you look at the rise in household leverage, it's among the lowest still across large markets and still less than 5% of household wealth is invested in equities and and that compares to sort of 40% in the US So I agree with you.

I mean that that I think will take some time and can still come true.

And actually foreign investors are under invested.

So really it has been a great domestic story, but foreign investors have looked at valuations and ignored it and then regretted it for the most part.

I could only tell people so many times.

You can't force them into it.

The whilst we're on this subject, I want to keep on going into India because you mentioned having people on the ground in the weeds, getting into the thick of it, that you need to say some things.

Recently, you know, one or two Indian stocks have had some pretty damning short reports come out on them.

You've seen now whilst you mentioned reform and banking reform, some of these have got auditors that maybe seemed a little bit, a little bit thin on the ground.

How are you?

I mean, the, the, the work that you're doing there into, into single stock names is pretty thorough.

I can imagine.

Yes, that's correct.

I'd say for the most part, well across the board really a lot of our analysts have an, either accounting backgrounds of some kind or financial backgrounds.

And often we'll get in specialist accountants to that.

Any red flags to them on the, on the financial statements as they call through them.

And so fortunately, we haven't been exposed to any of those kind of those ones that have been impacted by the short report.

I mean, there's always sometimes indirect questions that come about when you have exposures to the banks in India, for example, you know, if there's a big short report or some questions going around, you then have to go and dig in the bounce balance sheet and look at their loan book and see where their

exposures are and see what collateral they might have against what projects and kind of where they sit in the hierarchy.

But the thing about an Indian management teams I'd say is when you meet them, they're they're almost always bullish and to there is a fantastic story, but I'd say they're not the best telling you the bad news.

So what I think our team is very good at is, is taking what they say with a pinch of salt as well and always kind of triangulating the evidence and doing their own due diligence and speaking to customers, speaking to clients and you know, even looking at Glassdoor reviews saying what employees have to say and

doing GLG calls for the individuals who used to work at the firms and have left.

And so it's a a pretty lengthy due diligence process.

Yeah, well, that's, that's good to know then as as was to like I said, just the scattergun approach to just buying the market via an ETF or something like that.

So that's, it's much more specific and targeted through the global growth equity strategy.

OK, that's that that's sort of the two blunt 2 blunt stable and that one unfortunately.

So it's good.

I really don't have that much to go through here anymore.

I don't know have you got anything else you wanted such on around the world?

Feel like I'm done.

Yeah, I mean, I guess I'll add of two things.

And I maybe maybe 1 is just on EM itself as an asset class in the outside of what's happening in in feds, the Fed rates cycle, which I think is a huge driver.

You know, I think we're at a really good starting point in EM in terms of earnings growth.

And, and if you look at GDP growth differential, global GDP growth is broadening.

So this helps with the broadening theme.

The EMGDP growth premium over DM is expanding.

You know, it was around 2 1/2 percent last year.

It's expected to be heading towards 3% this year, this year, in 2024.

And actually from next year, I read in the FT that, that more than 80% of emerging countries are expected to have GDP per capita growth ahead of the US up for about half in the in the past few years.

So that's really encouraging.

And then we're saying good EM EPS revisions and particularly outside of China, you need to call out Indonesia and Philippines is great ones there.

And then we're starting with these valuations of at least 35% lower on a forward P basis than DM.

And some of that is skewed you know, by this weighting to China, which as we discussed with imploding real estate sector doesn't help.

So maybe that's somewhat flat as comparisons, but if you consider historical ranges, you know, the US is at the very top end of their their valuation range, whereas EMS kind of mid historical range despite an improving and earnings outlook and pretty low investor positioning, I'd say a lot of people have kind of given

up their own EMR to the top ten years.

And so for us that feels like a pretty a pretty good starting point.

You have to make money being contrarian in the end.

That is, that is true.

It's when everyone just gives up that all of a sudden it's there.

I have often been the giver up and I've I've often been the charge.

He did the charger in on those ones as well.

Now I'm just sort of taking away from what Sam said.

Sam said in the first half with regards to how much the the magnificent 7.

So that concentration risk in the US market, how much higher their earnings beats were than the other 493 stocks.

That's now going to to become much shallower.

The crocodile jaws will clamp shut.

So there won't be as much benefit to be had in those seven stocks, which will discipline and not be called the seven anymore, I'm sure.

And so as you find things, as you find other things to go into, going offshore is absolutely a place that you want to do with regards to diversity, with regards to valuations, with regards to just capturing innovation and growth where where it wasn't before.

Completely agree.

And I and I just thought for any.

Yeah, no, no, 100%.

And I think what's really encouraging is, you know, we're kind of talking theoretically about this broadening out as if it's sort of in the future, but actually we're already seeing evidence of this start to happen, right?

So if you look at on a geographic basis post, I'd say July, if you go back to July, we had the source CPI print, right?

And that was when everyone said, OK, if it's it's going to cut, so it's going to cut.

And people started talking about a 50 bit cut.

And since the expectations move there, we've already seen Indonesia, you know, up nearly 20% in dollar terms since the beginning of July.

And we've seen the Philippine Stock Exchange index up over 22%, some of the local banks up well over 30%.

And that's just in a couple of months.

We actually had a very timely visit.

We were there in in July.

But had you looked at a share price chart, then it would have told a hugely different story.

It was unloved, people were uninterested, liquidity was banned that you know, locals who are going to often control and indicators were saying this is never going to turn.

There's nothing interesting to see here where in practice rates have been a key driver and they've been cut and that's helping improve cost of equity and improve the market.

And at the same time these markets being up 20%, you know, S&P is still done, OK, but it's been up 5%.

So I think that's really important to flag as well.

Some of this is starting to happen already.

OK, well, on that note, I'm I'm happy to close it off there unless there's any any last bits.

No, I think that's it.

Do you think you've got enough content?

I mean, the only other one I think is interesting possibly to talk about is Argentina.

Ohh, yes, don't sorry.

Yes, because I mean, as a libertarian myself, proud libertarian myself, this guy's this guy's really supercharged it hasn't he go please Argentina good.

This is another another great idea here.

Well, it is true.

I mean, he really has supercharged it and it's something we we didn't see, think we'd see happen so quickly.

And what's phenomenal.

So Simile, you know, he really has done a lot in short space of time and all these key things when we think about EM and the framework and what we look for from a macro perspective in particular and imbalances, you know, you look at the budget deficit, you look at external deficits, of course, you look at inflation

as well.

And in a short space of time, he's done a very good treat.

So he's bought the budget from deficit over 5% fiscal deficit back into surplus and external deficits have have essentially disappeared.

The current account 3% on the eve of elections and the economy is that on surplus.

And then the big one for for locals in particular, given the pain of people feeling is headline CPI inflation.

And you know, the headline rate is still around 250%.

So it's not a great look still, I will grant you.

And, but actually, if you look into the details, there's been a complete collapse in month on month sequential inflation.

So it's fallen to only around 65% on an annualized basis.

And what did allow the government to slash rates?

I mean, they were 130% when he took office, and now they're down to 40%.

And I think what's pretty incredible about this market is that he's done this while maintaining his popularity because traditionally, you know, a lot of governments that come in, they try and improve this fiscal discipline and they get boosted out pretty quickly because people decide they don't like it.

I mean, I would say they're not out of the woods yet.

The exchange rate is still pegged.

We've got this kind of fixed 2% monthly call rate, which isn't ideal, but I think he's doing the right thing getting the house in order before he addresses that.

So it's it's it's a risky one.

It's one where a lot of investors have been hurt before and as a result, valuations are pretty attractive.

And, you know, bond holders have been hurt in the past as well.

But it's one where I'd say we're saying encouraging green shoots.

Yeah.

OK, well, that's one to look out for.

I mean, if we've got three ideas that are there, we've got Vietnam, Saudi Arabia and Argentina for the green shoots.

But you've got to be specific.

You've got to be active.

You can't just take a scatter gun approach at it.

And the global growth, the global growth equity strategy at T Rowe Price is probably worth a look, I would say based on this conversation that we've had with Iona Dent, who is an associate portfolio manager for the T Rowe Price Global Growth Equity strategy.

Thank you for joining us today, Iona.

Fantastic.

Thank you so much for having me, James.

OK, thank you.

And you have joined us for this special ensemble podcast.

My name is James Whelan, managing director of the Barclay PS Capital's wealth Management team and a humble servant of the ensemble crew.

If you need any more information guide figure it out on the platform at Ensemble and we'll talk to the guys there that we happy to help you out.

My name is James.

Thanks very much.

Have a great day.