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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Emerging market shares are back with a bang. The returns have been really strong in the last year or so, although a lot of that has been driven by just a few shares in Taiwan and Korea associated with the artificial intelligence trade. What's been really interesting though is a former market darling of this region has largely been absent from the party and even had its own struggles. As India, investors once not long ago clamored to have exposure here, but some even seem to now be turning their backs. The question is should you get involved and if so what do you need to bear in mind?
Dave Baxter:So welcome back to On The Money, the show looking at the key issues affecting your savings and investments. I'm Dave Baxter here at II. Today I'm joined by Carlos Hardenberg, Portfolio Manager on The Mobius Investment Trust. Carlos, many thanks for joining today.
Carlos Hardenberg:Many thanks for having me.
Dave Baxter:So cards on the table, you know, we're discussing this because I guess what's interesting is you still do have a decent chunk of exposure to India in your fund. So I wanna turn first of all to the the first question notice on this paper here, which is two words: why India?
Carlos Hardenberg:Why India? Very good question, and India obviously is on the minds of emerging market investors. It's a market you can't ignore. Mhmm. It's a market that has seen immense progress over the twenty five plus years since I've been investing in India.
Carlos Hardenberg:And it's a... It's also a market that has not performed now for a relatively long period of time. We take a contrarian view. We've had much less invested in India up until more or less one year ago. Traditionally, we had a very chunky exposure to in...
Carlos Hardenberg:To India, and we've taken we've taken profits about a year and a half, two years ago, mainly in IT services and in some of the construction related companies, and had a much lighter weight up until the beginning of this year when we saw a lot of the correction, was already sort of recycled through the currency. You saw the currency having adjusted very significantly last year. You saw the market correcting substantially. And a couple of very specific India related developments. Number one, which is kind of almost strange to say, but India is not AI.
Carlos Hardenberg:So this is in... This is this is very omnipresent in the minds of investors. And number two, many of the key industries in India, like IT consulting, are being actually disrupted by AI.
Dave Baxter:So things like Infosys.
Carlos Hardenberg:Exactly. Exactly. And therefore, you had this correction, this underperformance, which, for a contrarian investor, is always a good time to reconsider. And we went in at the beginning of the year and found... We don't focus on the large companies.
Carlos Hardenberg:We focus on, you know, the 4,000, 5,000 small and mid caps. And that is a hunting ground which provides enormous opportunities. And we've rebuilt our exposure to India at the beginning of the year. It's already helping us a lot. We've actually performed really well this year.
Carlos Hardenberg:So often investors just look at benchmark. Yes, benchmark hasn't done so well, but many small and mid caps have done phenomenally well. There are a lot of structural stories. There's a very pro business oriented government. You have reasonable interest rates.
Carlos Hardenberg:You have inflation in check. You actually have a current account, which has improved significantly over the years. So a lot of initiatives, including the one by the government allowing data center investments to enjoy a tax free period for twenty years, has led to a lot of FDI which came into the country. So the story needs to be looked at with a little bit more attention to detail, I would say.
Dave Baxter:And if we're looking past, I mean, yeah, there are question marks around kind of the software services, a big part of that region, and you mentioned you're not so interested in construction now. What kind of sectors are appealing? And I suppose, often with emerging markets, people have a kind of a narrative they're looking at, for example, a trend like kind of favorable demographics. Are there any particular trends you're looking to kind of target?
Carlos Hardenberg:Absolutely. I should say first we shouldn't just talk about India because EM is obviously providing a lot of opportunities across different geographies, especially in Southeast Asia. But, in India, you you have a couple of, trends which are well understood. You have an economy, a very sizable economy by now larger than many of the Western economies, which is growing by seven plus percent. That's at least the measured organized data.
Carlos Hardenberg:I think the real data is probably above this. You have a very, very large, population, the largest population on the planet. I think this is all very well known, so you have a lot of trends which relate to consumption, which relate to the fact that households over the coming decades will have more money to spend. Also, the spending itself will migrate to new areas of spending like health care, technology, and modern lifestyle related spending. So all of this, I think, is quite well understood.
Carlos Hardenberg:One of the areas which we find particularly interesting is the focus on the fast growing, more affluent part of the Indian population. So we're moving up a little bit to the the part of the population which has enjoyed enormous increase in personal wealth over the last decade or so. And therefore, one of the areas which we find particularly interesting are services that are directly geared and focused to this part of the population, and that is, for example, wealth management. So we've invested in businesses which are providing wealth management, like your business actually, providing wealth management services to Indians, and it's growing exponentially, and they increasingly want their own homegrown solutions. And they are piggy backing from...
Carlos Hardenberg:Or leapfrogging from the Western benchmarks and offering increasingly very sophisticated products and services. So that's definitely growing very fast. There are other areas which I find very interesting. So this infinite access to talented labor and low cost are constantly producing business models which are competing also globally, not just in India, but globally. So we invested in a company which is one of the world's leading provider of refurbished consumer electronics.
Carlos Hardenberg:It is almost an... It's a hedge to the exponential price increase in memory in consumer electronics driven by memory prices. So they are focusing on refurbished products, smartphones, laptops, desktops, and are working in The US. They're supplying to The US market, to the European market, to the Asian market, and they're they're doing phenomenally well. So there are these types of opportunities which I find interesting.
Carlos Hardenberg:Another one, last one I will mention, is I mentioned data centers. And so India is not totally outside of the technology opportunity set. There is a lot that the government intends to do. They are looking at Korea. They're looking at Taiwan, and they're trying to attract these types of investments.
Carlos Hardenberg:So we invested in a company which is providing special cable and wire solutions, for example, to data centers and servers in general, and that that is also an area which is growing very fast.
Dave Baxter:So you're getting some of those so called kind of picks and shovels plays on on the AI trend? Yes. So you did mention that benchmarks can be misleading, and perhaps there is some positivity in the India story that's not really captured by those kind of... Those figures. But, you know, at some point, you would think maybe India does more broadly come back into favor.
Dave Baxter:What do you think it would take? I mean, is it very strongly linked to that kind of AI trade? Do we need things to kind of... The air to come out of that, or are other things to consider?
Carlos Hardenberg:So I think at the end of the day, what plays a role in the minds of investors... And by the way, I totally agree with that idea that benchmarks in my world, in the emerging market world, are definitely... You have to take them with a... Not with a pinch of salt, but with a lot of skepticism. I mean, if you just follow the benchmark, you would, you know, load up on China.
Carlos Hardenberg:You would have had 7% in Russia. You would have lost that. You have... You know, the the benchmark, I think, is is is a terrible, terrible and poor guidance in emerging markets. What is required in India?
Carlos Hardenberg:Starting point in India is always macro. So what investors typically... The sensitivities that investors typically look at are global commodity prices, of course, global inflation, so right now... And and geopolitics in general. So India is sort of at the weaker end of this.
Carlos Hardenberg:India is suffering from the current environment as a as a large oil and gas importer. So that hits the Indian consumer. We talked about IT services in some of these industries, are particularly hit right now. And then we also talked about flows being redirected to Taiwan. So all of these things need to normalize to some degree.
Carlos Hardenberg:But I think at the end of the day, what will lead to a a renewed interest in the Indian market is going to be ultimately driven by earnings growth. And Indian companies are well prepared and are working in the right environment to generate sustainable long term and durable earnings growth. And once the market realizes again that that is actually the fact and that's observable in India, investors will come back. Of course, there's always the discussion about valuations. And India has typically been rather on the expensive side.
Dave Baxter:Yeah. Has that come in now? Because I guess at the back end of the really strong run that we have for India, you know, a few years ago, people were quite concerned that prices looked a bit high, quite rich. Has this normalized enough, or does it still need to come a bit further back?
Carlos Hardenberg:It has normalized to some degree. It has never been an issue for us because we do not look at the crowded trades. It is a misperception. The the... These sky high multiples were always mainly, to be found in the largest names in India, the crowded trades, which are bought by ETFs and large mutual funds and also the domestic investors.
Carlos Hardenberg:We've been steering away from this into the sort of into the thicker... Into the into the depth of the market. We... You can always find attractively valued companies. When we bought this business, which I mentioned earlier, which is refurbishing consumer electronics, we we we paid a very, very reasonable multiple.
Carlos Hardenberg:There was not a single foreign investor there yet. Same with the wealth management businesses. It's kind of... It it it wasn't it wasn't so popular, that trade already. So if you really look deep into the market, you'll find undervalued opportunities even in India.
Dave Baxter:Mhmm. And you mentioned earlier that, you know, you're not so keen on kind of benchmarks in this space, and, you know, had I... Say I invested in a m s o... MSCI Emerging Markets Tracker. As you mentioned, I will be loading up on China.
Dave Baxter:My last look at the trust suggests you are very light on China. It's always been a... And particularly in recent years, it's been a country that's quite divisive. You know, some people think it has kind of recovery to come through, and, of course, some people even dubbed it as uninvestable just a few years ago. What is your kind of current take on China?
Dave Baxter:What would it take for you to get more involved?
Carlos Hardenberg:What would it take to get more involved? A lot. A lot. Let me start by saying this. You you can never ignore China per se, and you should never ignore China as long as it is an economy of such significant size, an economy that is pressing time and again, how it is reinventing itself, how it's moving ahead in investing in the right sectors and technology.
Carlos Hardenberg:And it is very impressive that what the Chinese have achieved in many, many industry... Industries in many ways. I mean, to provide this environment for such a large population, of course, with a with a lot of prices that had to be paid, but still, it's it's impressive. I think the structural problems that they're facing now have not been sufficiently addressed, and they will... And you have to discount all of these risks into your equation before you consider investing in China.
Carlos Hardenberg:So this endless discussion about the Chinese real estate sector, we we have not seen a proper way out of the dilemma. The degree of overbuild, the degree of exposure that private households have to real estate, the numbers indicate that between 6070% of household wealth on average is tied to real estate, and the real estate prices keep falling quarter after quarter. So the perceived personal wealth of households is declining. Therefore, the appetite to spend is declining. Mhmm.
Carlos Hardenberg:The impact this has on domestic consumption is very, very negative. The government has been trying to steer from the dependency of... On fixed capital investment and exports to a proper domestic economy desperately without without success, without the desired outcome. So actually, the... If you look at the GDP composition, the domestic consumption is is, still, of of very little relevance.
Carlos Hardenberg:So that's one thing. You have 19 youth unemployment. This is excluding youth that is in university. So this is a very substantial... If we had this in this country or in the West, it would be perceived as a national crisis, and I think it is one in China.
Carlos Hardenberg:So that's that's another problem plus, and I have to say this, and I think it's well understood, but often in in the more recent past, less mentioned, the overcapacity that they've built in every key industry, whether it's cement, steel, aluminum, copper, anything, you name it, you have overcapacity to a degree that is literally scary. And the government's recent initiatives, some of them make sense. Others are also going in the wrong direction, limiting now travel freedom for certain individuals. This has been... It's actually not new.
Carlos Hardenberg:It's been there before. It's now suddenly discussed more intensely, which is negative. So having said all of this, and I want to wrap my answer up here, the problem is we invest in companies. We invest in people. We invest in businesses that impress us, that can do really well.
Carlos Hardenberg:And to find those in China is very difficult because often governance continues to be, very disappointing. You often have, a situation where minority shareholders, have absolutely, you know, no chance if things get tough. And the the imbalance between voting shares and economic interest is still significant.
Dave Baxter:And government interference, though, is still quite a risk because it is... That is what burnt investors Yes. What, five, six years ago?
Carlos Hardenberg:Time and again, whether it's education, tech, whether it's health care, and they will continue to to run it this way. So we had, over the last years, almost nothing in China. The benchmark is 25 plus percent depending on the benchmark you use, and we continue to look at China with a great degree of skepticism. Having said that, we invest via Korea, via Taiwan, via via other South Southeast Asian businesses, can succeed in China, but in a concentrated portfolio, you want to be careful in China. That's very clear.
Dave Baxter:And turning to other parts of the emerging markets, world, which kind of countries do you think are really standing out now? Where do you think, I suppose, the next bit of of potential is?
Carlos Hardenberg:Yeah. So now you get me talking. This is where the excitement is is is really... And we spent... So I spent a lot of time in Southeast Asia.
Carlos Hardenberg:We talked about India, but we we spent a lot of time in in Korea, Taiwan, Vietnam, across Southeast Asia. And when when you look at the broader situation in Southeast Asia, number one observation is people are very optimistic, which which which is in itself already interesting when you're coming from Europe. People, whether you speak to young people or whether you speak to elderly entrepreneurs, they basically see the world kind... Situation now really in their favor. And this is because Southeast Asia, especially Korea and Taiwan, they are optimally positioned to benefit from what's going on right now.
Carlos Hardenberg:They worked on the right education systems. They build ecosystems supported by the government and the private sector, which can compete globally. They have developed, a dominance in exports and many key industries, and they also increasingly disrupt traditional industries where the West and US and Europe has traditionally been in the lead. So... And this is no longer following the old recipe just being cheaper.
Carlos Hardenberg:They are better. They are advanced. They invested in intellectual property. They invested in in patents more than anyone else. And they now have the ability to source knowledge and skillful people from their own ecosystems.
Carlos Hardenberg:They no longer have to recruit people from US universities. So this is the broader context. And we've been incredibly excited about Taiwan despite the geopolitical discussion, which we can also talk about. But Taiwanese companies are... Without Taiwan, you know, this recording studio would not function.
Carlos Hardenberg:The whole city of London wouldn't function. If you look at the dependency on leading edge processors, when you look at, all the technologies which are now, used in the development of data centers and corporate servers, When you look at IC design itself, the design behind all of this, it's made in Taiwan dominated by Taiwanese companies. And this goes far beyond TSMC. We have not invested in TSMC, but we've actually... Many of our holdings have outperformed the likes of TSMC.
Carlos Hardenberg:So we've got companies which test semiconductor products. We have companies which are providing, as I said, infrastructure to build data centers. One is very particularly interesting. They do rail kits. And rail kits, you would think, come on.
Carlos Hardenberg:Rail kit. Anyone can do this. But, no, there are 2,000 patents, and the rail kits use the data centers. I mean, you can you can imagine that trays are worth, you know, tens of millions in some cases. So they have...
Carlos Hardenberg:Really have to work well, and they are made of special material. So the technology opportunity is huge, and it's lasting, and it will grow even bigger in the near future. Korea is another very interesting market where, of course, everybody knows memory, but there's more than this. So we invested in very specialized technology leaders that are catering to the memory industry, which are really doing well. But we've also invested in a health care provider or health care business doing...
Carlos Hardenberg:They they are one of the leading developers of medical aesthetic aesthetic devices and are, for example, number one in Brazil and in many other markets.
Dave Baxter:And I suppose taking a striking more pessimistic tone, what worries you in emerging markets? Like, what are the kind of key risks that you are worrying about right now? I imagine one surely must just be if the air comes out of the big AI trade, maybe that drags a lot of kind of companies and indices down with it.
Carlos Hardenberg:Of course, that is a risk, which is largely right now visible, especially in the benchmark. If you look at the benchmark, you look at the ETFs and large funds they have often 12 to fifteen percent and two, three names, and they're all their memory and TSMC. And if you then add a couple of more names, you'll have 25% and maybe four, five stocks. So there's a risk there. We don't have any exposure directly to these names where you have this mega concentration of ownership, which I think is in itself not healthy.
Carlos Hardenberg:I agree with that. Mhmm. Think the... I would rather say there is a tremendous opportunity, broadly speaking, right now. And I would argue that compared to other periods where you had maybe some sectors doing really well, broadly speaking, emerging markets are trading at a 60% to 70% discount to US markets, to the S and P five hundred or to the Dow.
Carlos Hardenberg:So valuations, you have to... Valuations are very reasonable on average right now in emerging markets. Number two, currencies are undervalued. You're you're not in an environment where you have to overpay for currencies or where they are grossly overvalued. That has been the case very often in the last twenty years.
Carlos Hardenberg:It's the opposite right now. Degree of ownership in emerging markets, institutional exposure, especially from The US, rather underweight emerging markets. So the potential selling pressure coming from this in an event is much less than in previous phases where there has been immense overexposure to emerging markets. So I think these are insurance policies which are baked into the markets right now. I think the opportunity is much larger than understood right now in terms of how these markets are powering ahead with their, also, technology leadership.
Carlos Hardenberg:And as I said, I think over the next two, three years, I would think that there are less risks in EM than in some of the developed markets, and there's a lot more potential to do well also because earnings will continue to do really well. The risks, some of the risks relate to a strengthening US dollar and tighter rates in The US. This is diverting flows away from EM into developed markets. Geopolitical risks, the meeting tomorrow is something we need to watch, Xi Jinping and Trump. But I think that both are so much under pressure that they want good news.
Carlos Hardenberg:And, ultimately, what's happening in in The Ukraine is not just an an unforgivable human tragedy, but it also is causing further risks with regards to destabilization in Europe with a negative impact on commodity prices. So that that is always a risk one needs to watch. But I'm more concerned about developed markets than emerging markets right now.
Dave Baxter:Mhmm. And finally, a different note, we had the... This year, had the passing of a kind of iconic figure of emerging market investing in Mark Mobius. You, of course, worked with him for a long time. I was interested to ask for those, you know, who who do know of him, who followed EM for a long time, what were your kind of key lessons that you took from him?
Carlos Hardenberg:There are many. As you can see, I'm not wearing a white suit. So this... I mean, he's he's not been look. Not adopted his look.
Carlos Hardenberg:So he's not my fashion adviser, and I will not do that. But I I miss I miss the the courage, of someone to dress up like this. No. Many lessons. I think the number one lesson...
Carlos Hardenberg:I worked with Mark for twenty five years, and he's he's been a friend and a scholar and someone I I spend a lot of time with. I think what impressed me... And I often think about this when I meet companies in Asia. What impressed me is his unrelentless effort to focus on governance. You know?
Carlos Hardenberg:We can all understand business models. We can all do numbers. We... You know, now, especially in an age of AI, to do a proper discount cash flow analysis, a DCF or some of the parts of it. You know, we used to work with annual reports and manually type in all these numbers.
Carlos Hardenberg:A lot of this is now much more efficient, much faster. There's more transparency. The operation is much easier. We work with AI agents now. We have a lot of AI agents in our process.
Carlos Hardenberg:But what you cannot replace is what also he focused on, the quality of the people, the quality, the culture in companies, the relationship between the founder and his siblings or his children who are in the business, how they deal with corporate culture, and how this reflects on other stakeholders, and how they deal with other stakeholders. This is something we and I are focusing on a lot, and this is a lesson I learned. And when you... It's not just a personal narrative, sort of, or a personal observation. If you look at the numbers and simply study what caused the...
Carlos Hardenberg:What stood behind the most successful business models in emerging markets, and what stood behind... What were the factors leading to disasters in emerging markets. And in ninety nine percent of the cases, it was somewhat related to the individuals and the way that they were dealing with their immediate surroundings that caused the success or the failure. So I take that lesson from him and continue to focus on people.
Dave Baxter:Interesting. Well, that is all we have time for, but thank you for coming in.
Carlos Hardenberg:Thank you very much.
Dave Baxter:And thank you for watching and for listening. I hope you found it useful and enjoyed it. As always, remember you can contact us directly. Do email us on otm@ir.co.uk. Let us know what you think.
Dave Baxter:Let us know ideas for future episodes. Thanks again and take care.