Finding Quality Growth in Emerging Markets with Ian Smith

**SPEAKER_1** (0:01)
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**SPEAKER_3** (0:56)
Ian, welcome to Excess Returns.

**Ian Smith** (0:58)
Thank you very much, pleasure to be here.

**SPEAKER_3** (1:01)
Today, we wanted to sit down with you and walk through a number of I think themes and topics related to global investing and emerging markets. At William Blair, you are the portfolio manager on the global equity team, where you and your team build investment strategies that go far beyond the US. I think a lot of investors here in the United States are pretty dramatically underexposed to EM and global equities. And I think perhaps that's where we'll get into this. That's where maybe the opportunity lies for those investors that are looking for non-US exposure and more diversification to what they're getting if they're allocated heavily to US markets. A lot of the research I think that we're going to work through today can be found on William Blair's site.
They're putting out a bunch of great content and some of EM's work is up on there as well.
I thought we would start at sort of like a higher macro level with EM and then as we get down into it, we'll talk specific investment strategies and portfolio construction. But where I think we wanted to start with you is, emerging markets have had a very good run here, maybe one of the best runs in the last 15 or 16 years over the past 12 to 18 months on a relative basis. So those that have invested in EM have kind of been rewarded, but it seems like the war has kind of brought that to a standstill at least recently. And so I thought it would be good just to get your overall view on the emerging market landscape as you see it today.

**Ian Smith** (2:30)
Yeah, absolutely.
A lot of variables, important variables, to think about when you think about EM. It's not a sort of homogeneous set of countries or industries. But yeah, I think to your point, EM started to perform over the last couple of years. I think it's important to remember that EM equities had been in the doldrums for a very long period of time since 2010 So I think the extent to the out performance needs to be put in that context.
And I'm sorry to say this, but the outlook for EM equities, like many other markets, is going to be heavily influenced by the way that this AI capex cycle plays out. Technology is over 40% of the index. And so that's something that's going to be highly influential. So that's something that EM investors face much like investors elsewhere.
But to put that aside, we think that EM offers some very unique opportunities. For example, there's really two sides to it for us. On the one side, there's leading companies that sit within important secular trends. So the AI supply chains are clearly one of those where we've got the leading foundry companies, leading memory companies. But as we go through that AI and semiconductor supply chain, we've got leading niche dominating companies in many of those aspects of the supply chain. But then other important trends, for example, around higher defense spending, rebuilding shipping fees, power and electrical equipment, energy storage solutions, you name it. You really tend to find either the leading or amongst the leading businesses in the world sitting in EM countries around these trends. And then on the other side of the spectrum, another thing that's quite unique to emerging markets is you find countries where there's very interesting long-term domestic demand oriented opportunities because you've got underpenetrated levels of consumption of certain products and services. You've got income per capita at much lower levels, credit penetration at much lower levels. And so as we see economic development in these countries, you get on these S-shaped consumption curves, which are quite interesting opportunities as well. So you've got those two unique opportunities we find for emerging market equity investors. And then on top of that, relative to MSCI World, EM, despite the recent outperformance, still is about as cheap as it's been historically against MSCI World. So that's another interesting aspect for the asset class.