VALUE: After Hours (S08 E06): If US Stocks Fall, What Happens to EM?

During their recent episode, Taylor, Carlisle, and Juan Torres discussed If US Stocks Fall, What Happens to EM?. Here’s an excerpt from the episode:

[Juan] I mean, it depends on what’s driving that drawdown. If the drawdown is the rating of many AI-related stocks, then I would expect those very pricey components of the index to actually do it as well. Dan Rasmussen from Verdad, he wrote a paper a few years back, which was all about investing in crisis.

And he applied that to emerging markets. And his conclusion was the best time to invest in emerging markets as an asset class is when there’s a crisis that is not being originated in emerging markets. So, we have seen COVID.

And so, and actually you can see that because then people panic and YEM as an asset class is a risky asset class, then it goes off. But the crisis is not being generated by YEM. So, if that happens, I think you just sell everything else and just close your eyes and buy YEM across the board.

And actually, I think that there’s the data that he put out and it’s quite compelling. And you have seen it in the past. And that’s very different from a crisis that is originated in the YEM base, like a crisis in China because it’s not- Like in Japan or something, you know.

The political regime or whatever, which when that happens, I think that his research showed that it just takes much longer for the market to recover from those specific periods of crisis.

[Tobias] Do you find that there are a lot of sovereign government shareholders in emerging markets? And how do you deal with them when you do?

[Juan] So, I think that it depends very much on the country by country. Look, I think that SOEs in general have a bad reputation just because the quality of management might not be there. People think that they’re always going to mistreat minorities and they are just going to be poor capital allocators.

And in our experience, it all comes down to the price that you pay and whether or not you’re being compensated for taking that specific risk. And you invest in China and some companies have SOEs that are poor capital allocators, but so are the privates. And you have some SOEs that are actually quite good capital allocators and they have done well and they look after all stakeholders.

And so, I just think that in EM, I know that every time that you talk to someone that invests in the asset class, they will mention something along the lines of, you cannot think about it as a monolithic block, because it isn’t. And it all depends on where you are. And I think that it all depends on the price that you’re paying and whether or not you’re being compensated for taking that risk.

I’ll tell you something else. And I think that I mentioned this before, or maybe I mentioned that to you guys in private. People were saying that you should not invest in SOEs in China.

Jack Ma in Alibaba was not an SOE. And when he pronounced the most expensive words in finance, in the history of finance, he took down Alibaba and the entire tech sector with him. And the fact that it was, none of those companies were SOEs.

[Jake] That’s true. I mean, you have the US government buying 10% of Intel. Tell me the difference here on some of these activities.

[Juan] You have the US telling some companies that they cannot distribute dividends or do buybacks. That’s pretty chicken pink.

[Jake] Maybe shouldn’t be throwing stones in glass houses, perhaps.

[Tobias] Juan, tell us a little bit about your investment philosophy and your strategy and how you sort of implement that.

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VALUE: After Hours (S08 E06): If US Stocks Fall, What Happens to EM?

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