VALUE: After Hours (S08 E06): Juan Torres On Emerging Market Value Investing, China, Indonesia And Taiwan

During their recent episode, Taylor, Carlisle, and Juan Torres discussed:

Where the Real EM Value Is
If US Stocks Fall, What Happens to EM?
Should You Hedge EM Currency Risk?
Is Buying the Dip Still Smart?
Emerging Markets Outlook: Cheap or Fair Value?
Are EM Tech Stocks Overvalued?
How Pros Find Cheap EM Stocks
Are Emerging Markets Worth It Now?

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

TRANSCRIPT

[Tobias] This is Value After Hours. I’m Tobias Carlisle, joined as always by my co-host Jake Taylor, our special guest today. He’s an old favourite of the programme.

Juan Torres, he’s the Co-PM of Emerging Market Equities at Neuberger Berman. How are you, Juan? Good to see you again.

[Juan] Thank you very much for having me again, as always. It’s a pleasure to be here.

[Jake] Welcome back, my friend.

[Juan] Thank you very much.

[Tobias] Tell us what is happening in emerging equities.

[Jake] Strong to quite strong.

Emerging Markets Outlook: Cheap or Fair Value?

[Juan] Yeah. Well, everyone seems to be getting excited about the fact that the asset class has got off to a pretty good start of the year. MSCI EM is up something like 10% in dollar terms year to date.

[Jake] It’s up a mag 7.

[Juan] Yeah, it’s off from a very good year. So 2025, it was up something like 35% was the benchmark. But I am a little bit cautious just because, well, number one, since 2010, EM has not outperformed, I guess, DM or the US, I can’t remember, for two years in a row.

So that’s just a stat, meaningless probably, but it is a stat. And then it’s been, I mean, it’s interesting because the last time that we spoke, EM as an asset class from a valuation perspective was cheap, both in absolute terms and in relative terms. Now you could make the case that it’s cheap in relative terms still, it’s at around 19 times just a P.

Where the Real EM Value Is

I would guess, I would say my personal opinion would be that’s kind of fair value. But when you look at the dispersion, you see some pockets of the market, which are really expensive. And then you see the cheapest quintile, which is where I prefer to do most of our research and investing.

That one is still very cheap, very attractive. It’s full of opportunities across the board. It’s very rich.

But the ones that are expensive, I think that are really expensive.

[Jake] So the spread then has gotten, feels like more blown out than last time?

[Juan] Yeah, I think so.

[Jake] What kind of stuff falls into the cheapest decile these days?

[Juan] So it’s very rich. It’s across all markets. I mean, you are able to find, you should be able to build a well-diversified portfolio, different iteration of different portfolios from that opportunity set just because you’re finding companies across all countries and all sectors.

And I think that the CAPE on that cheapest quintile is something very close to 9 or 9.5, something like that. And when we last spoke, it was 8 or 8.5. So that’s very attractive. And the fact that the opportunity set is rich, it’s really compelling.

And then you will find some countries which are way more interesting than others.

[Jake] But for me- Does it feel like in the US, perhaps where one of the knocks against the value stocks has been that quality was sort of pretty well-sacrificed as you worked your way down, lots of cyclicality. Does that feel the same in the EM world as it’s gotten a little bit more… It’s still relatively cheap, but has the quality that’s fallen into that where you would look, does it feel higher quality or lower quality than, let’s say, a year ago?

[Juan] The thing in the markets is that what counts is the countries. Because when the market gets fear or there’s uncertainty around the country, the market won’t care about the quality of whatever you’re holding. It’s going to throw everything out of the window.

And so the bad and the good will go out. And so we don’t tend to think about sectors that much. We tend to think about countries.

And then in the context of countries, things like Indonesia, MSEIM threatens Indonesia to downgrade the country from an emerging market into a frontier. And then the market just sells off. And it’s just a threat.

It’s just saying, if you don’t correct X, Y, Z, I’m going to do this next time around. And then the market goes down a lot. And then, I mean, for us, for my co-manager and myself, I mean, we go into the office with a smile on our face and we understand that there’s a risk, but there is a lot of opportunities in the market with 170 billion of market cap around.

And so that’s attractive. And then you have something like Brazil, which is still quite attractive, and Colombia, and China, because it’s such a big market. And that’s another thing, like, I don’t know if you remember, but I think that last time that I was on the pod, we were discussing the fact that China had become very uninvestable in the narrative of many investors.

And it’s funny, because I’ve been telling clients over the course of the last few months, many of those people, I haven’t heard them recognising that China was one of the best performing markets in the world in 2025. And the opportunity is that in the cheapest quintile, still quite attractive in that specific country. But then you go to the other side, you look at Taiwan, and Taiwan is looking very punchy.

And so you have a country which on a cyclically adjusted PE is trading at something like 32 times or 30 times CAPE. And then you have India, and India has always been recognised as being one of the most expensive markets in the world. Then India is like 35, 36.

So you have India, sorry, Taiwan now very close or closing that gap towards India. And then in Taiwan, then you have this one amazing company. It’s a very good company.

TSMC is making 13% of the benchmark nowadays. It went from 4.5% a couple of years ago to 13% today. And it’s trading at 65 times CAPE.

I think that’s punchy. And so I don’t know.

Are EM Tech Stocks Overvalued?

[Tobias] So is that then skewing the results a little bit because they’ve got such one gigantic company that’s twice as expensive as the index, and then is everything else underneath that, like not quite as expensive, or is it, it’s all run up in sympathy?

[Juan] You mean in Taiwan?

[Tobias] In Taiwan, yeah.

[Juan] But I think it’s not only TSMC, I think that a lot of the tech, because if you think about what plays in emerging markets, plugs into the whole AI theme, that’s Taiwan, that’s Taiwan tech across the board. And so I’m not an expert, but I think that in the eyes of many people, TSMC is a pretty solid company. There’s no doubt about that.

Whether it’s worth 65 times, who knows? I don’t think, but that’s just me. But there are other companies with very punchy valuations in the tech sector in Taiwan that some people might actually say, well, actually those businesses look a little bit more fragile, or there are less, I hate the word modes, but I guess there are less moaty, I guess.

[Tobias] So you say that it’s countries that drive returns rather than sectors. So you don’t see, I think energy, oil’s been pretty beaten up for an extended period of time, energy looks pretty cheap to me.

[Juan] So I think that in the context of YEM, I mean, we think about it in terms of countries, but financials, for instance, financials is quite representative in the index and just as financials historically, or at least over the last 15 or 16 years, the sector as a whole has been relatively cheap. In YEM, that’s still the case. People just hate the banks regardless of where they are.

And then in YEM, you will find more cyclicals, metals and minings, representative in the index. And those were relatively cheap in the past. And now they have been rewriting quite powerfully because materials are rewriting everywhere else.

And YEM is not, won’t stay away from that specific trend. But we tend to look more at countries. I think that countries are more, it’s more interesting to think about it in terms of countries.

I mean, you think about it, if one bank hiccups in the US or in Europe, then the entire financial system goes down or the stocks fall. And there’s a little bit more of, you fear more that there’s going to be an impact, it’s going to spread around. One bank goes down in Kazakhstan, it doesn’t have really an impact on a bank.

[Jake] There’s not a contagion of that.

[Juan] Yeah, exactly. It doesn’t really work like that. And so they are less connected, I guess.

[Tobias] I imagine that among the banks, it’s the regulatory regime, the local regulatory regime drives a lot of the risk and return, I guess. Is that fair? Well, they’re all sort of traded as a monolith.

[Juan] The bank or the asset class?

[Tobias] Yeah. Well, I mean, the asset, banks as an asset class.

[Juan] I mean, in the context of YEM, I don’t think so. I mean, the beauty of banks in the context of YEM is that they are still very old, plain money. The business model is still what banks were in the late 19th century.

Most banks just capture deposit them, they extend the loan and they capture the spread and you don’t find investment banking or the insurance line is very small or the other lines of businesses don’t tend to be as developed as somewhere else. And so you are still dealing with your traditional analysis on, is the balance sheet strong in terms of the capital base? And what does that mean in terms of their core equity 301?

How the loan to deposit ratio looks like? And then a big question about whether or not you can believe the non-performing loans that are going through the P&L and the buildup of provisions in the balance sheet, if you can believe that. And then people will debate on whether they actually trust that.

[Jake] I was going to say the common old Wall Street saw is that YEM is kind of the tail of the whip. So if the US, let’s say the S&P 500 were down 20% tomorrow, do you feel like YEM would also bear the brunt of that and maybe even be worse? I mean, obviously you’re starting at a much different valuation point, but does that protect you at all in evaluation?

Or do you think YEM, you’re just likely to be down 30% if the S&P was down 20% because when panic sets in, YEM is sort of like first on the chopping block in people’s minds?

If US Stocks Fall, What Happens to EM?

[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.

How Pros Find Cheap EM Stocks

[Juan] So we are divided investors. We screen the market. We’re only interested in the cheapest printout of the market.

And that will, we run a screen and that screen, you can choose whatever valuation metric you want. We have a tendency to prefer the adjusted P just because it captures inflation. In Yemen, inflation is important and has always been around and some countries are more relevant than others.

But in reality, you can choose whatever valuation metric you want. In terms of the CAPE, that cheapest printout is, as I mentioned before, trading at something very close to nine times, 9.5 times. The cut should give you anywhere between 400 companies.

And we have a heat map and that heat map shows countries and sectors. And then there’s a very good visual way to just spot where are the best opportunities. And there are three ways to choose what you are going to research.

The cheapest, if there’s no crisis, then the cheapest in that specific matrix. It would be weird to call yourself a value investor and if you have 400 companies, go for a company at 399 when you have 398 cheaper options. And what does happen very often is that there’s a crisis or there’s a country under a lot of pressure or where there’s a lot of uncertainty.

So take, for instance, China in the 2022-2025 period or Indonesia today for whatever reason. If that’s happening, then we did that specific country just because we believe that there is an increase in probabilities that you will find something that is quite mispriced. We did that with Chile with a lot of success when the political election of the country was turning left and there was a lot of noise about the rewriting of the constitution and the water rights and this and that and the market sold off.

And then when the uncertainty was removed, then the market just rewrite it. And absent those two, we also see that when it comes to value investing in the context of EM, people tend to associate value investing with state-owned enterprises in metals and mining and oil and gas. And yes, those do exist in EM and yes, if you buy them at the right price, you should do well over time.

But the asset class is so inefficient that you find value in many different situations. You have fallen angels, the sick calls, you have a lot of corporate action, special situations where the management of a company is announcing that they are going to take an action and the market just doesn’t do anything about it. You have businesses under structural challenge.

And then our favourite bucket, which is hidden growth, is the fact that as with any asset class, there’s always a narrative at play and there’s always a story playing out. So five years ago, it was Chinese tech. Today, it’s anything that has to do with AI, which means that in an asset class that has 25 different countries, people are not paying attention to 22 or 21.

And there are great opportunities to find good companies growing, maybe not at the 30% but the market gets super excited, but they are still growing with a very good balance sheet and at a very attractive valuation.

[Tobias] When you say you use CAPE, are you using that at a country level or using that at a company level?

[Juan] So both. So the matrix will show you the aggregate for the country as a whole and then in that specific quintile. So I think that the cost would be anything below 14 times or 13 times, and it will show you the different countries.

So Turkey will be at five times and then Brazil will be at 10. And then it will show you across different sectors. And if you hover on top of say, for instance, Turkish banks, then it will expand.

It will show you every single bank or financial institution within that specific quintile that is making the call. And it will tell you which companies are in that. So a very good example of that is at the end of 2024, Brazil was under a lot of pressure across the entire asset, like all asset classes we’re selling, like the currency, the sovereign yields, the equity, the high yields.

And so we did a deep dive and the cheapest company in Brazil was Vale, which was a very large cap company by then. And it was trading at something like 4.5 times CAPE. So we did the work and we found that that was pretty attractive to buy.

[Jake] When it comes to, sometimes you try to bring those returns home and there’s not as much left by the time you do the currency conversion. How do you think about hedging for currencies?

Should You Hedge EM Currency Risk?

[Juan] So we don’t. And the reason for that is the following. We go into a situation with the mindset that we’re going to own whatever business we buy for at least five years.

And the reason for that is whatever is happening, there’s uncertainty. Whatever the problem is, it will take some time to get sort out. And so if you are going to hedge the currency, it’s going to be extremely expensive to do it if you’re going to hold that security for the next five years.

The other thing is, and it’s not perfect, but the aspiration is that when you are entering a country where there’s a lot of uncertainty, that uncertainty is already priced in across the board. It’s already showing up in the sovereign yields, in the corporate bonds, in the equities and in the currency. So it’s not perfect.

You might still find yourself in a could keep falling. But we have found over the past that once we get into a country where there’s a little bit of panic, the sell-off has already sort of happened, or that’s at least the hope. And we tend to think in terms of dollars.

We understand that we think in terms of dollar returns, which is what matters. So it doesn’t really matter if you buy. I pitched Telecom Egypt when I was joining Troyes back in 2017.

That was my pitch to them. And in local currency, it did amazingly well, like 100%. But in dollar terms, it was flat or five or 70, whatever it is.

And so, yeah, I mean, you didn’t lose money, but it wasn’t great.

[Jake] Well, and then theoretically, a lot of times there’s an export-driven component to these businesses, I would imagine. And therefore, a little bit of currency devaluation actually kind of helps you be more competitive on an export basis.

[Juan] Yeah, 100%. Especially if you are investing in businesses that are cyclical in nature, your commodities, or businesses that have a footprint that is more global than local.

[Jake] Another question. Is there anything that any countries that are no-goes for you? And what would be required for you to put on the do-not-invest list for you?

[Juan] So, no. I think that there is no such thing as an investable asset. It’s all about the price that you’re paying for the asset and whether or not you’re being compensated for taking that risk.

[Jake] How about Mars, though? Are you ready? Is that EM enough?

Or is that frontier?

[Juan] Yeah, exactly. But having said that, I mean, it would have to be, from a regulatory perspective, mandated that you cannot actually invest in those specific countries. Now, having said that, look, every time that you read about finance theory and markets and investing, the textbook example is always like, you need to buy something super cheap that’s going to grow with a very good balance sheet and all of that.

And you know where you find a lot of that? In frontier markets. But frontier markets are very risky for a reason.

And they are less liquid and they are more prone to changes in the macro and political environment where you might get stuck in a way that, well, actually, that’s what the price is telling you. That’s why it’s a two times pay or whatever. And so, it’s not an investable.

You just need to be very careful. We always tell clients, when people are pitching EM as an asset class, it’s an amazing asset class. It has, from a macro perspective, all the growth going forward, the demographics, in some places, the youth, the younger populations, the GDP per capita.

But the one thing that they never say is that EM as an asset class is a risky asset class and you need to be compensated for taking that risk. And so, just don’t get carried away. You know, Joel Greenblatt’s book on special situations in the 1990s, when he was talking about bankruptcies, he said, approach them with an open mind, not a hole in your head.

I think that applies to emerging markets all the time.

[Tobias] Do you travel to the markets? What does that achieve? How important do you think it is?

[Juan] So, I’ve done it in the past. My manager, Vera German, she has done it as well. Over the course of the last five years, since we launched the strategy, we have not really done any visiting.

I believe that it’s important to travel to many of these countries, just because just by being there, you understand what that culture is and how it operates and the different brands and the shopping mall and the stores and all that. But doing the visits to the companies, number one, many of those companies will come to London at some point. And number two, all of the information that they can give you, it’s already publicly disclosed somewhere else.

And so, what you don’t want is, or what we try to avoid is being biassed by the narrative that management might bring to the table. And we try to allow as much as possible for the numbers to do the talking.

[Jake] That brings up another point, though. Then how do you feel about the quality of the accounting in frontier and emerging?

[Juan] Again, I think that you need to be super careful. So, we actually, in our process, we build models that go back 10 years in time, because we want to actually cross-check the accounting over time and to pick up red flags along the way. But I would say that accounting in many of these places has meaningfully improved over the course of the last 25 years.

And you look at the disclosures of the companies that are listed in Hong Kong, Hong Kong exchange is pretty punchy in terms of what they require for many companies to disclose. You have MSCI. What MSCI is telling Indonesia is that the disclosure and transparency is not very good, hence why they are threatening the country to actually be downgraded to frontier.

So, I mean, there’s a point about that. I find it a little bit funny that they do have an issue with Indonesia, but they don’t have an issue with all of the shibbols in Korea. But that’s, I guess, another topic.

[Jake] Buffett’s observed that he thinks the now tells a worse version than it did 30 years ago in the US.

[Tobias] Because the capital gains flow through the earnings statement?

[Jake] No, that’s even more broad than that. More like, oh, we put it in a footnote, but to actually help you understand the business, the accounting is much more obscure than it used to be.

[Juan] Yeah. I mean, yeah, the accounting is where it is. I mean, you need to make a call on whether or not you’re going to believe what the numbers are telling you.

That’s some of the issues that people fear with the accounts in EM. But that was the case when UK investors were allowed to invest in European companies in the 1970s, they had that same fear. Like, I cannot trust the accounts, I cannot trust the accounts of the European companies.

And then with time, people actually grow into it and they understood a little bit better of what the accounts meant.

[Jake] Yeah. I mean, could you, if you were buying a company in Deadwood in the 1870s, did you trust the accounting? I mean, these things are all just works in progress, right?

Yeah, exactly.

[Juan] I mean, there are things like when we are checking the accounts, we always look at has the auditor changed in the last 10 years? And I mean, that is super, it’s a very simple check, but it’s so powerful. Because many times when the auditor is changing is because there was something happening before.

And then you make a judgement call whether or not the new accounts or the accounts of the last five years after the change in the auditor are a good reflection of the business is actually doing.

[Tobias] It’s mostly big four or, I don’t know, with a big seven or whatever, the slightly bigger group than big four is the local office of some big four accounting firm?

[Juan] No, I think it’s still the big four. There are some, in some countries, you will still find your local auditors that you might not recognise. But then you can just cross check whether or not they are real.

You can ask the sell side, you can do a little bit of digging. There are some countries where the big four have acquired a local and they keep the still the local name, but it’s the big four behind them. I think that, I don’t know which of the big four has been involved in like 80% of the frauds in China over the course of the last 10 years.

The fact that the big four is there might give you a little bit of comfort, but like- Yeah, whenever you find a four, there’s going to be- It was big five before that.

[Jake] That’s a good point. That’s a good point.

[Tobias] That’s the top of the hour. Let me just give a quick shout out in JT. I want to do some vegetables.

Got a good spread today. Tallahassee, Yorkshire, Pettitikva, Israel. What’s up?

Surbiton, London, suburbia. Thank you. Oregon City, Oregon, Jupiter, Florida, Kennesaw, Georgia, Boise.

What’s up? Breckenridge, Limerick City, Ireland. What’s up, Colm?

Tumble, Texas, Philly, Charlotte, Chicago, NCR Delhi, Transylvania, Romania. That’s a good one. Gothenburg, Sweden.

Good to see you again. JT, take it away.

Is Buying the Dip Still Smart?

[Jake] Sure thing. I thought that Juan might get a kick out of this week’s veggies, so I’ve been saving it for a little bit. I want to look at a behaviour that really feels like it’s been trained into markets over the last decade and a half, which is buying the dip.

At first, BTFD was the thesis. You’d see weakness. Maybe you’d assess the policy, balance sheets, valuations, recession risk, and you decide whether the expected payoff justified that risk.

Maybe even try to price the Fed put. What was that worth? But when a behaviour gets rewarded repeatedly, it stops being a thesis and starts becoming just a natural reflex.

This isn’t because people are necessarily lazy. It’s because our learning systems compress what works into something fast and quite literally calorically cheap to execute. Here’s the question that really matters.

What happens when the payoff function changes, but the cues stay the same? In markets, this core payoff function for buying the dip has been dominated by the price of money. Real rates, liquidity, discount rate, all that’s applied.

It’s all been going down. We had a Zerp period forever. When the price of money falls, duration gets rewarded, multiples expand, and drawdowns are shorter and shallower.

When the price of money rises and stays up, that mechanical tailwind obviously weakens or maybe even disappears. That same drawdown can be a completely different animal. There’s actually a clean laboratory analogue for all this, which was the psychologist Anthony Dickinson in the early 1980s.

He had rats where he trained them in a simple box. They press the lever and they get a little food pellet. It’s a very stable contingency of repeatable trials.

Over time, these rats learn the rule and they press very efficiently. They push the button, they get a treat. Push the button, get a treat.

But then Dickinson devalued the reward. Outside of the box, the same pellets were then paired with a nausea-inducing chemical. When the rats got sick from eating the pellet, they recovered.

Then afterward, they avoided that pellet when it was offered directly to them outside of the box. They clearly knew that the pellet had become undesirable. Well, now here’s the critical test.

They put them back in the lever box after this. If the lever pressing was goal-directed, pressing in order to obtain a specific outcome, then pressing should decline once that outcome has been devalued. We see the outcome and we say, okay, we don’t want that anymore.

Don’t push the button. For many rats, that’s exactly what happened. They reduced their pressing.

But the over-trained rats, those that had pressed hundreds of times for this magic button, they often did not. In fact, they just kept on pressing at old rate, even though they would refuse the pellet when it was handed to them outside of the box. Same knowledge, but very different control system, actually.

This is a really key distinction of what’s happening, goal-directed behaviour versus habitual behaviour. Goal-directed behaviour is outcome-sensitive. It uses a model in your head of, if I do X, Y will happen.

Then it updates that value as Y changes. In the brain, this kind of evaluation leans on your cortical, your newer part of your brain. It’s involved in planning and inference.

It helps to represent, what is this outcome worth right now? That’s your system two thinking, really. Now, habitual control is different.

It’s stimulus and then response. The cue appears, the action fires. It’s learned through repetition and reinforcement.

It can run with minimal evaluation of the current value of the income. It’s that system one thinking. The basal ganglia is part of your brain that is at the heart of this.

These things are not just for movement. They’re also selection machinery for action. With training, control can shift from more associative outcome-sensitive pathways towards more habitual pathways.

You’re just going to basically hit the bid. Let’s map this back to the markets. For a long stretch after the GFC, the environment has just repeatedly rewarded this one pattern, like buy every single weakness, catch the rebound.

Monetary policy has been accommodated this whole time. Liquidity is quite abundant. Rates trended lower, multiples expanded.

The cue basically was the drawdown. The market would have a tantrum about it. The response was buying and all the rats hitting the lever.

The Fed would panic and then intervene. Then your reward, your pellet that you got to eat was this recovery. It just kept happening over and over again.

When was the last time we didn’t see that play out? The important thing to think about, too, is this is not really stupidity or lack of discipline that’s happening. These poor rats were overtrained.

They weren’t confused. They knew that the pellet was bad. It’s just the part of the control in the brain that was driving the behaviour.

The context was different. I think that might be a useful way to understand why regime shifts can feel sudden, even when the ingredients have been changing for quite a while. These habits don’t update just because new information exists.

They update through experience, usually through repeated prediction errors. One failed rebound might get shrugged off. Two starts to get rationalised.

It takes a series of disappointments before the system reallocates control back to the deliberate evaluation. My hypothesis is that it’s going to require a fair amount of abuse to desensitise all of the dip buyers that have been pushing the little lever for the last 15 years. Here’s a quick quiz to bring Toby and Juan back into this segment and outside of my soliloquy.

Multiple choice, no pressure. If a rat refuses the pellet when it’s handed to it directly but keeps pressing the lever in the box, what’s most likely going on? Is it A, it forgets what the lever does?

B, it’s hungry and just being a drama queen? C, the behaviour has become habitual and isn’t updating to the new value of the reward? Or D, it’s trying to keep collecting its rat management fees?

[Tobias] Ah, good one, JT.

[Jake] C.

[Tobias] C for mine.

[Jake] Of course. Everybody knows the answer is C. I just like to get jokes in once in a while.

Once you see the structure of this, hopefully there’s some practical implications. The point is not never buy the dip. The point is don’t confuse a trained response with an evaluated decision.

Next time you want to smash the BTFD button, maybe run a quick little audit. Write down the mechanism that converts today’s drawdown into tomorrow’s rebound, not just a habit. What specific evidence would you look for to confirm it?

What would falsify it? Over what horizon? If you can’t articulate those in advance, you’re likely executing a habit rather than thinking through a thesis.

I think we just have to be careful that repetition builds this efficiency, which is great most of the time in our lives, but it also creates an inertia that can be dangerous and makes you miss the turn. Unfortunately, pain is probably required to update the wrong habits. We will all find out together when this actually plays out, but I thought, Juan, you might enjoy that one.

[Juan] Yeah, that was extremely good. Thank you very much for that.

[Tobias] What do you think that is, a flush in the markets? A full flush?

[Jake] I mean, I’m going to editorialise a little bit more than I normally like to do, but I would say I think it probably has to look like a 2000 to 2003 scenario where it’s just day after day of the market going lower, you buy, it goes lower again, you buy, it goes lower again. It’s just an excoriation of the bad habit. Eventually, when everybody’s like, I can’t do this anymore, I can’t take this pain anymore, that’s when you bottom, and then you start to recover.

[Juan] I read somewhere that during that specific period of time, people forget that. I mean, there were days or months where the market was still going up. It’s just that the trend was still downwards.

[Jake] That’s right. Yeah, you got big rebound, and then you gave it all back, and then more, and then you just do that, keep doing that over and over again, and then your heart gets broken.

[Juan] Yeah. It’s so interesting because sometimes we meet with, or we hear from capital allocators, like value investing has become this asset class that is considered to be- Untouchable? No, well, yes.

Radioactive? It has a pretty bad vibe to it, but it is associated with risk, but proper value or value investing done the right way, supposed to be a safe way to approach the market because it’s all about embedding a margin of safety on what you think anything is worth, and embedding that specific protection downward. When you think about the fact that over the course of the last, maybe almost 20 years, no one has seen value investing properly work.

For a new generation of investors, that’s not the way to go at all.

[Jake] Yeah, you buy a bulletproof business for 60 times earnings, and then you’re not taking any risk because of the quality of the business, right?

[Juan] Yeah. Well, I find it absolutely fascinating that software companies are becoming distress assets at the moment, when only 24 months ago, they were- Just darlings, right? They were people who hold forever businesses.

It didn’t matter what price you were paying for them because they were so safe that nothing was going to happen.

[Jake] Some of the price charts from 2021 peaks to today are just absolutely amazing. What were you thinking in 21, and how did you get so far off from what it looks like today? The businesses look pretty normal throughout that entire thing.

It looks like they’re growing at what you would expect them to do. It’s just the expectations got so far ahead, and now maybe some of them, the expectations have gone so far behind. I don’t know.

Markets be crazy, man.

[Tobias] Yeah. Two things. I missed the main streets of Jared’s Cross and Qantas Midflight across Oz.

Thanks for both you guys joining. I’m glad I grabbed you. I’ve had this thesis that I’ve been putting up on Twitter for a little while, that basically there’s market capitalisation where the flight adjusted spy, and there’s everything else in the world.

That means equal weight.

[Jake] Is this the meme where the tuba is right in the person’s face and it’s just blasting?

[Tobias] I’m going to say it until… Maybe it’s turned around. I don’t know.

Value, cyclicals, mid caps, small caps, and I guess emerging markets, and probably XUS. Everything else has suffered as a result. I feel like everybody in the world should be basically watching that relationship of market cap spy to equal weight spy, because when that relationship goes the other way, it gives everything else in the world a chance, which it has been since mid-October last year, or- Don’t jinx it, Toby.

Well, I got to talk about it, because it’s the longest run in two years, but that did happen in post-pandemic. There was a 2021 or two. It looked like it had returned to…

By the way, over 100 years plus of data, that’s the normal direction. Equal weight outperforms market capitalisation rate, because small tends to outperform large, and that’s because they tend to grow their earnings faster. That doesn’t happen all the time, and that’s been one of the little anomalies over the last few years.

I just wonder if… I know that emerging had a good year last year, so emerging started the year pretty well. Why do you think that emerging has started to look a little bit better?

Was it just the valuation was so…

[Juan] Well, I think that it was… Look, in the past, it has been very difficult to allocate to anything outside of the US. I mean, if you put yourself in the shoes of a capital allocator in the US, say you’re managing an endowment, and you allocate 5% of your capital to YAM or the asset class outside of the US over the last 15 years, it’s been very painful what that has cost that person in terms of performance, right?

And so, I mean, I think it goes a little bit back to Jake’s… And job prospects. Yeah, exactly.

It goes a little bit to that piece. I mean, if the markets keep going up, you just keep allocating to it until something breaks, because even if many of these very smart capital allocators know that they are suffering from home bias, even if they know that they need to diversify away from the US, it’s been extremely painful to do it. Yeah.

And so, I think that it requires that big correction for them to justify… And then, capital will always kind of be chasing performance, right? I mean, that’s just a…

[Jake] Well, and think about it from their perspective. Am I going to make a career bet on Kazakhstan? What do we…

Let’s be real.

[Juan] Yeah, that’s pretty punchy. Yeah, that’s pretty punchy. It’s very difficult.

It feels very difficult.

[Tobias] Yeah, particularly because these companies, when you buy them, I mean, the reason that you get a discount in a business is because there’s something, not everything’s gone right in the business.

[Jake] And everybody knows how bad it is, right? That’s the…

[Tobias] Yeah.

[Jake] Everyone could give you 10 reasons why this is a stupid idea. Yeah.

[Juan] Yeah, but those are the best risk-adjusted returns, because the price tends to be so low that you’re placing… I think that’s the key. You’re placing probabilities in your favour.

That doesn’t mean that if you allocate capital to Kazakhstan, nothing bad is going to happen because you’re buying a bank with an ROE of 40%, compounding every single year, trading at five times speed. It doesn’t mean that you’re not going to lose money because there’s a risk attached to investing in Kazakhstan. It just means that probabilistically, the odds are more in your favour than doing otherwise.

[Jake] Juan, I have a question. One hypothesis I’ve always had about why value studies have looked really good in back-tests is that just by their mechanical nature, you’re taking all the macro call bullshit things that you normally would want to think about out of it. And it’s just like, you’re just buying cheap.

You don’t have any opinion about where rates are going or currencies or regime changes or anything. You’re just buying the cheapest stuff. How do you kind of square being able to talk to people about, inevitably, macro things are going to come up when you’re in the middle of this.

How do you square trying to maybe avoid as much macro as possible while still maybe be mindful of it? It seems like a really tough balancing act there.

[Juan] So that’s why the screen is based on just one metric, and that’s our valuation metric. And it doesn’t have anything else. And look, I’m not going to say that macro is not important in the context of EM.

It is important. It’s a big driver.

[Jake] But how do you know, though? Just because it’s important doesn’t mean it’s knowable.

[Juan] Yeah. So that is the thing, right? So the vast majority of people approaching EM as an asset class, they follow some sort of process that is first top-down, trying to get the countries right at the macro level.

[Jake] Yeah, what’s Ray Dalio think?

[Juan] Exactly. And then doing the stock picking in those specific countries. But what fascinates me about that is that we know that getting the macro right in one individual country over the next six months is almost impossible.

But then trying to do this exercise with 25 different countries, the interlinkages in many of these countries with one another, and then the influence that the U.S. policy will have and the waterfall of that policy into many of these countries, that’s almost impossible. And so what we tend to say is we are macro aware, we’re not macro-led. We sort of understand what’s happening on the ground, but we don’t want to make our stock selection based on Korea is going to grow more than Indonesia, hence I’m going to allocate capital to Korea.

Because actually, we believe that the lower the price you pay for any asset, the higher your expected return should be on average over time. And when there is a lot of noise, then the opportunity set is richer, which means that you should be able to buy. I mean, the misconception that you’re always buying something bad.

And yes, those do exist. And probably, yes, if you buy them and you get them right, you’re going to get some good risk adjusted returns. But again, when the country is selling, it’s selling everything.

And so you should be able to find some really good companies when everything’s under a lot of stress. And so to answer your question, we try to be, again, we are aware of what’s happening, but we don’t allow that to let the investment process.

[Jake] Does it feel like today there’s more kind of hot money chasing countries and ideas around than maybe 15 years ago, 20 years ago? Coming and going.

[Juan] I don’t know. It’s a good question. I would like to think that markets have evolved more today.

And yeah, mass analysis is more, it has made way more progress than people give them credit for. And I don’t think that you see, I mean, you think many of these countries are quite well run from a macro standpoint of view, like many of the central banks when they saw that inflation was coming during the COVID years, they move way ahead, way faster than the developed counterparts. Their finances are sort of, in many cases, not all.

[Jake] You see them moving rates up at the central bank level?

[Juan] Yes, exactly. And so many of these places have had a more prudent macro behaviour over the course of the last 15 years, at least relative to the past. I think that, I mean, many of the risks in many of these countries are still, you have political uncertainty.

Many of these countries are very young in nature.

[Jake] Older than the US, a lot of.

[Juan] Yeah, maybe. But I think that people are, I don’t know if flows have changed in a way that you still see that hot money that you were seeing before. I mean, I think it still happens in some countries, right?

And in some sectors. I will say that what’s happening today with Taiwan might be an example of that. And maybe Chinese tech five years ago, maybe.

I don’t know. When a country gets hot, it’s the same behaviour that you’ll see in anywhere else.

[Jake] The cognitive dissonance between hot on Taiwan, but China’s uninvestable makes my brain hurt.

[Juan] No, I love that bias. Because when it comes to many markets, there are human biases regardless of where you are. But when it comes to many markets, you’re compounding all of these biases.

And so, when people say China’s uninvestable, and then you ask them, why is it uninvestable? And then they will list the macro, the autocratic government, and the real estate. And so, in that list, there is the possibility that China might move against Taiwan.

And then you ask them, okay, so how much are you investing in Taiwan? And they are like 20%, 30% in TSMC. This is actually a fact.

This is a fact. 93% of all loan only’s own TSMC in some sort of capacity. And the average weight of all those loan only’s is very close to 10%.

So, they are underweighted. So, I think that they recognise that maybe the valuation is a little bit stretched. But also, I think that many of these funds are kind of bouncing against the ceiling of how much they can allocate to one specific company, which tends to be 10%.

But if you think that China’s uninvestable, and one of the reasons is that it might move against Taiwan, then you cannot have 20% of your capital in Taiwan.

[Jake] Yes, that’s why my brain was hurting.

[Juan] It gives you a headache as well.

[Tobias] Is emerging mostly a bet on basic materials and local banks, financials? If I think about Australia, which is not emerging, but Australia and Canada- Might not even be a real country.

[Jake] We’re still waiting to find out about that.

[Tobias] If you look at those two indexes, they’re dominated by banks and basic materials. And so, the behaviour of those countries is sort of dictated by the behaviour of those sectors. When the commodity super cycle was a thing in the early 2000s, Australia did very well, but less so when it’s a tech-dominated market as it has been over the last 10 or 15 years.

[Jake] It’s not these impenetrable, rock-solid businesses like software. That’s right. That’s right.

[Juan] So, I think that that’s right. I mean, one of the things that makes investing in EM a little bit difficult is regardless of how many companies are listed on a country basis, you still have five companies that will dominate that specific benchmark. And usually, it’s either a telco, telcos tend to be quite big in the context of EM, banks or materials.

And that’s a reality. Maybe a consumer name and healthcare, real estate, tech are a little bit underrepresented. And so, that’s why when you look at the benchmark, 60% of it is pretty much greater China.

That’s Taiwan, China, Hong Kong listed names. That’s where there’s a little breadth. And then in India, that’s a place where there’s a little breadth, maybe Brazil, South Africa.

But if you go to a place like Colombia, I think that 60% is the Colombian. I might be getting this wrong, but I think 60% of the benchmark is the Colombian state-owned oil and gas company. But I was checking before we came online, the COSPI today, two companies in the COSPI, which is South Korea, account for 38% of that index.

And those are Samsung and Hynand. That’s a pretty punch concentration for one of the most developed countries in EM.

[Jake] It’s not like Nortel in Canada, but it’s pretty punchy.

[Tobias] When gold and silver were going bananas a few weeks ago, there was a lot of talk that it was Korean buyers of Korean speculators in gold and silver. Do you have any idea? Have you heard that?

Do you know what that is that I’m talking about?

[Juan] I heard that it had something to do with China, but no, I didn’t hear the Korean thing. I have no idea.

[Tobias] When you look at the consumer discretionary, there’s really very little consumer discretionary around the world, except in the US and China. I was surprised by that. There’s quite a few big Korean discretionary in China.

Do you guys look at that stuff in China? Unless you have that sort of specific reason to not invest in China, if I look around the world, I think there’s a lot of interesting businesses in China, a lot of big, interesting. Some of them are replications of what we’ve got in the States, and some of them are new things.

Are they just too expensive, the big stuff there for you guys to look at?

[Juan] No, not at all. We’ve owned some consumer names in the past. I don’t know.

A company like Alibaba, is that tech or is that consumer? I think it’s actually classified as consumer discretionary, I think. That’s the sort of stuff.

[Tobias] We tend to call it tech, but I think it’s more consumer discretionary. I think of stuff like, yeah, Henson, Pinduoduo, Alibaba, all those kind of things.

[Juan] Exactly. Yeah, for sure. We’ve owned Alibaba in the past.

We’ve owned Baidu, Pinduoduo. Pinduoduo, it’s quite interesting. You look at the top line growth expectations, that’s still a company that it’s supposed to grow at anywhere between 9% to 10%.

At least that’s what the street is expecting. Somehow, the market is not very happy about that type of growth. How many companies would love to have that kind of growth somewhere else?

[Tobias] The thing I took away from our trip to China last year was that even if something is big and growing very, very quickly, it can be just wiped out very quickly in China. The competition seems to be just ferocious.

[Juan] Yeah. Yeah, absolutely. Yeah.

I mean, did you read that some officials or some employees of Pinduoduo kind of had a fistfight with the regulator, someone from the regulator a couple of months ago? I don’t think that’s very much with the story. I think that’s a pretty bad idea.

But no, yeah. I mean, it’s a very competitive market. The Chinese market is a very competitive market.

[Jake] Yeah. We had a friend there say he thought when he was buying JD that he was buying Amazon of China, but it turned out he was probably more buying Macy’s. I didn’t realise it.

It’s just things are just moving that quickly.

Are Emerging Markets Worth It Now?

[Tobias] Yeah. What do you think, Juan? You said that the valuation on a relative basis for emerging markets is still pretty interesting, but on an absolute basis less so because of the 35% run over the last 12 months, which makes sense.

[Juan] I think that in aggregate, in absolute terms, the asset class as a whole looks like fairly valid. That’s just my opinion. Again, one of the beauties of the asset class is that there’s so much in that asset class.

It’s not just one block. So if you actually ignore the bits that you might think that are expensive, there’s so much that you can research and invest that is actually trading at very attractive multiples of valuations.

[Tobias] And so it’s not so much sectors, but you think Indonesia potentially because they’ve been threatened with frontier rather than emerging?

[Juan] Well, I mean, Indonesia was already as a country over the last 18 months, there has been a lot of uncertainty because of their political regime. So that has created a lot of uncertainty and that happens in EM all the time. From a macro point of view, I think that nothing really is happening.

It’s just the uncertainty with the person that is governing the country. And then MSCI didn’t help because they threatened the country and then it happened what happened. But I think that, again, at least on the cheapest quintile, you can build very different portfolios from that specific cohort and still expect to do well over time just because the valuations are attractive.

[Jake] Just cheaper starting ingredients on the whole cake.

[Tobias] Well, what’s Indonesia look like? Is it oil and gas and gold? Is it like that kind of…

[Juan] I think it’s an island, Toby.

[Tobias] Well, it’s attached to Papua New Guinea, I think.

[Juan] I mean…

[Tobias] Which is oil, gas and gold.

[Juan] Well, there’s a meaningful coal mining stocks in there. There’s a lot of mining. There’s gas distribution, the banks, the telco.

I mean, it’s not a small market. I mean, there’s a good range of opportunities that you could buy in a place like Indonesia. I mean, it’s not like…

I mean, I think that out of Indonesia, the cheapest country in EM… And this is based on Mayfabers. You know how he aggregates valuations on a quarterly basis?

So I was checking the valuations that he sent in January. The cheapest country is Colombia, but then there’s not that much that you can buy in Colombia. And then again, why is Colombia the cheapest country?

There’s a lot of political uncertainty because of what’s been happening over the last four years and the elections that might happen this year. But outside of two banks and an oil and gas company, there’s not that much you can buy in Colombia unless you’re managing very small parts of capital.

[Jake] There’s like 300 million people that live in Indonesia, isn’t it? I mean, it’s not like a…

[Juan] Yeah, it’s like two… I think it’s 250 or something. It’s a pretty…

It’s a big country.

[Jake] I’d be curious what market cap per capita would look like around the world and if it would track pretty closely. Because at the end of the day, what you really want is to own economic activity as an investor. So if you had a very cheap amount of market cap relative to the amount of people, it might be an interesting initial screen to look for getting access to human productivity.

[Juan] Yeah. I have never done that exercise, but I’m pretty sure that in the context of EM, not only in Indonesia, it would look pretty attractive.

[Tobias] Juan, we’re coming up on time. If folks want to get in contact with you or follow along with what you’re doing, what’s the best way of doing that?

[Juan] I think that the best way would be to look me up on LinkedIn. That’s where I post most of my work, my stuff. Or reach out to Nugurgar in London.

That would be the other place where they can find me.

[Tobias] And Juan called in from his vacation, so we appreciate you.

[Jake] Thanks, Juan.

[Tobias] We appreciate you, Juan.

[Jake] Tell your wife we’re sorry.

[Tobias] Yeah, and the kids. Always good chatting to you.

[Jake] Yeah, thank you very much for inviting me.

[Tobias] JT, any final words?

[Jake] Uh, no. I guess if you’re a developer who likes investing, we’re always hiring at Journalytics, so find a way to raise your hand.

[Juan] Basically.

[Jake] Well, yeah, eventually.

[Tobias] And we’ll be back soon.