What interesting investment themes are there for investors in EM outside Asia?
I think the advantage of a global emerging market mandate is that it allows you a more diversified set of opportunities, a more diversified set of drivers for your portfolio. I think one of the things that we’ve been thinking a great deal about over the last four or five years is the exciting prospects for certain commodities. Take copper, as an example, because I think it’s the commodity we’re most excited about. Copper is, we think, likely to be undersupplied for the next five, six, seven years. The demand is definitely there, related to the electrification of pretty much everything if we’re going to achieve net zero, but I think the fact we’re seeing fundamental shortages of copper supply is underappreciated. The fact that we can invest in Latin America and EMEA gives us opportunities to invest behind that; opportunities we wouldn’t have if we were just investing in Asia.
To give a clear example, I think Chile occupies a position in the copper market which is not dissimilar to Saudi Arabia in the oil market. It’s a smallish market, it’s a long way away. But there are very good companies in Chile and the Chilean economy will definitely benefit when copper prices start to rise. We’ve seen that historically, and we believe it will do so again. We can also invest in copper miners, of course, and we do. Some of those miners have substantial mines in Latin America, and we invest in mining equipment companies because ultimately, we’re going to need more picks and shovels, we need to dig more holes, and we need to get more copper out. So those mining equipment companies are also important pieces of the puzzle and the one that we own is in the EMEA region. So, copper has to stand in for many examples, actually, of what we can get when we invest outside Asia.
Maybe just to mention a couple of others. Mexico, for example, has a great economic tailwind coming from near shoring and there are brilliant businesses in Mexico that we can invest in. We’re also fans of the UAE economy. Another small country, but it’s benefiting a great deal from diversification into services. We all know that Dubai is booming at the moment. Again, without the ability to invest outside Asia, we wouldn’t have access to these kinds of stories, and they provide some diversification of the returns that we can generate for our investors.
The fact that we can invest in Latin America and EMEA gives us opportunities to invest behind that; opportunities we wouldn't have if we were just investing in Asia.
Does the EM team’s portfolio benefit from the trend towards greater AI adoption?
One of the happy outcomes of having a process that focuses on good-quality companies that can grow on a structural basis is that we tend to have a very large overweight in technology stocks. I think at any given time, hardware and software companies are going to make up over 40% of our portfolio.1
To be blunt, that allocation hasn’t helped us a huge amount over the last couple of years because we’ve been in a down cycle, and we’ve seen this for hardware in particular. But now that we have this wave of AI hype and we’re starting to see real adoption of AI software, we’re seeing a lot of companies invest a lot of money behind new AI devices and tech. I think that headwind for our portfolio is definitely becoming a tailwind. The companies that we invest in are clearly beneficiaries of the fast growth of AI chip designers in the US. But these guys cannot produce what they produce without their partners in Korea and Taiwan. And it’s important to say that these partners, which are in our universe, are not low-quality companies but very high-quality companies. With the wind at their backs, these companies are going to generate very fast rates of growth as well. So yes, because we have a structural overweight in technology, there is no doubt that our portfolio will benefit from AI.
You can watch the first half of this interview here: Your Questions Answered: Global Emerging Markets | Federated Hermes Limited (hermes-investment.com)
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