Thornburg PM Josh Rubin on Frontier Markets News with Dan Keeler

Thornburg PM Josh Rubin on Frontier Markets News with Dan Keeler

Welcome to another episode of Away from the Noise, Thornburg Investment Management’s podcast on key investment topics, economics and market developments of the day. In this special episode, Dan Keeler, founder of Frontier Markets News, interviews Thornburg Portfolio Manager Josh Rubin for an insightful conversation about emerging markets investing, including reports from Josh’s recent visits to Saudi Arabia and China.

Dan Keeler:     Hey, everyone.  Dan Keeler here, founder of Frontier Markets News.  Bringing you another heaping helping of insights of what we like to think of the world’s most exciting markets.  I’m joined on this episode by Josh Rubin, who is a Portfolio Manager and Managing Director of the Thornburg Developing World Fund, which is part of the $40 billion dollar plus Santa Fe, New Mexico based Thornburg Investment Management.  I’m particularly excited to hear from Josh, as we approach the midpoint of a year that was promised to be a good one for emerging market investors.  We’ll be taking a long stroll through key emerging markets in Frontier Markets regions with a particular focus on the impact of recent developments in China, investment opportunities in the middle east, why Saudi Arabia appears to be tightening its friendships with a host of nations that are not considered exactly friendly to the west, and how a slight change in sentiment among global investors could tip off much greater changes in emerging markets.  All right, so Josh, uh, thank you so much for joining me.  It’s, uh, a pleasure to have you on the podcast.

Josh Rubin:     I, I appreciate the chance to get to speak.

Dan Keeler:     Great.  So, we’re almost halfway through a year that started off very strongly for emerging markets, but it seems that conditions have become a little less favorable, prospects have perhaps, dimmed a little.  How do you see the rest of 2023 playing out?

Josh Rubin:     I, I, I actually might, uh, reposition your question a little bit, first, because I think –

Dan Keeler:     Sure.

Josh Rubin:     – lots of times, we talk about emerging markets as the single asset class.  But, the truth is, it’s three different major regions of the world, and 20 plus different countries, and so, I, I do think certain parts of emerging markets have been decelerating, or, or have, you know, that the growth acceleration has been lower than we expected, but then, other parts of emerging markets, I would say, is sort of steady as she goes.  So, if we, if we do look across emerging markets, uh, year to date, I think China started out very strong.  Um, but the acceleration, the acceleration continues, but I would say the momentum of acceleration or the quantum of acceleration is no longer as robust as it had been in the first quarter of the year, and as maybe people got excited about that, at that time.  But I, I don’t think the outlook for the back half of the year, from a China perspective is weakening.  It’s more along the lines of just not strengthening as much as people got excited about when the surprise reopening began late last year.  Um, there’s some derivative impact to that, for, uh, both China’s major trading partners, either sort of commodity oriented companies that will be exporting to China, or some of the industrialized north Asian economies that, also would be selling into China, um, you know, for construction equipment, things like that.  So, I’d say north Asia not falling apart by any means, but accelerating less than you would have originally thought.  And then, you know, on the other side of the world, Latin America has been, sort of been a holding pattern, I, I would say, for really the last year to 18 months, which is more than anything, a function of particularly high interest rates and, you know, more limited dependence on China, greater dependence on, uh, the western world, and so, I think, Latin America’s more steady as she goes at a lower level, as opposed to the Asian economies where people got particularly excited and then they’re kind of rebasing expectations now.

Dan Keeler:     Right. Right.  Well, so, um, I focus on the, the sort of smaller of the emerging markets.  And obviously, many of those countries, in the sort of frontier and, um, growth market end of the, the scale, really depend heavily on the other, bigger emerging markets, and, as, as growth sort of, acceleration reduces slightly in places like China, that can have a pretty profound impact on, uh, other countries, particularly like the Vietnams or the Bangladesh, or some of the African countries.  Um, what sort of affects do you expect to see of that sort of smaller end of the emerging market scale?

Josh Rubin:     I, I think I would also separate that into two different groups.  One would be –

Dan Keeler:     Mm hmm.

Josh Rubin:     – the more industrial, um, areas in, in frontier markets, or industrializing areas in frontier markets versus the really commodity exporters.  And so, uh, Vietnam or, uh, Cambodia or Bangladesh, my, my guess, and I, I focus less on those countries, but I certainly, uh, speak to a lot of companies who are investing in those countries right now.  But, I, I think the industrializing countries should probably see, um, fairly steady tailwinds for economic growth going forward.  Um, and I, I’ll talk about why in just a moment, whereas, on the African side or the countries that do have much more of a mining or extractive industries or agricultural industries spent, I, I think that’s where the headwinds are probably a little bit higher from a Chinese deceleration.  Because, you know, for China to accelerate, or what people were thinking would be the economic recovery, there’s a decent amount of fixed asset investment that would normally happen with that recovery.  And so that’s what’s going to be depending on the minerals or agricultural, um, production, being exported to China.  But, the, the other side of it, is, um, you know, and I’ll sort of use this as an indication, but I think it’s reasonably true.  China, you know, 1.4 billion people, uh, somewhere between, call it 100 and 150 million people employed in manufacturing, depending on how you might classify manufacturing, and the, the trend that we’ve seen for the last decade has been the lowest, uh, lowest sophistication, lowest and skill sets in manufacturing, have been moving out of China into other parts of southeast Asia.  A slower Chinese, uh, economic recovery doesn’t change that fact.  What China’s really trying to do is upscale its labor force and allow lower skilled manufacturing, you know, to move out of the country, or so they get priced out of the county from a labor **** standpoint.  So, uh, and, sorry, the one other dynamic within this, definitely Chinese exports have been decelerating really since about the middle of 2022.  That probably continues right now, just given, sort of the economic deceleration we’re seeing in the west, but, uh, given that the west has this, sort of geopolitical, uh, interest in reshoring, nearshoring, friend shoring, I, I think you’ll see multinationals from western, um, from the west continue to be interested in having more of their manufacturing base located outside China.  So for the China plus one strategy so to speak.  So –

Dan Keeler:     Yeah.

Josh Rubin:     – uh, you know, I, I was in China in May, and certainly what I heard from Chinese companies was, you know, certainly they’re working on better utilization or efficiency at their Chinese facilities, but they continue to invest in new production facilities outside of China, so that the Chinese companies can continue serving their multinational customers, but can do it from a location that’s more palatable to those customers.  And that, that should benefit employment in, you know, southeast Asia, Bangladesh, you know, has a benefit from India as well as sort of, that type of story.  So, I, I don’t see the Chinese deceleration squeezing those industrializing comp, countries the same was it does the extractive countries.  See?

Dan Keeler:     Yeah.  Yeah.  That’s interesting, um, and also when you mentioned that you had been speaking to countries that are, to, to companies that are investing in some of the countries that you were just talking to, what sort of general sentiment are you picking up from them, in terms of the prospects for their businesses?  Are they, are they positive, and excited or are they concerned about this looming global recession that we’re hearing about?

Josh Rubin:     I, I would say their balanced.  And I, I think they’re balanced because these companies, whether it’s a, a midsize company, or a particularly large, um, you know, outsourced producer of X, Y or Z.  Their corporate history generally is 20 years old.  You know, somewhere between 5 years old and 20 years old.  And a few of them lived through the 1990s, uh, financial crises, but, in general, you know, the age of these Chinese higher quality outsource companies are, um, since the, China entered the WTO in 2003.  So, number one, maybe there’s a **** bias for them, of, of things always kind of go okay.  But, I, I also think what’s really important for everybody to remember is the shift, um, or the, the move inside of China from a labor arbitrage, uh, manufacturing or production driven economy to a value add, and often higher quality value add economy.  You know, that’s been going on for ten plus years.  And so, a lot of these companies, really do tend to think of it in the context of, I’m best in class on a quality basis around the world.  A, you know if, if some company opens a factory in Germany or in the US or Mexico, they won’t be able to produce higher quality than I can.  The real question is, can they produce it more efficiently, or to lower cost?  And normally their expectation is no, they can’t.  So, I, I think their view is, even in a decelerating global economy, or recessionary western or global economy, that you should still remain market share gainers in whatever it is they do, because they are high quality and low cost, compared to whomever they’re competing, uh, producing, you know, country.  Basis of operations, etc. are.  So, I, I would say, that’s really the way they seem to be approaching.  I don’t hear, I did not hear on, on my recent travels, uh, talk about reducing Cap X, you know, for external growth initiatives, things like that.  I heard we, we think we have visibility into the demand, so we’ll continue investing in the capacity expansions outside of China.

Dan Keeler:     Yeah.  That’s, um, that’s really interesting, because, uh, I, and, and sort of exciting, actually, because it feels like we’re en, entering into uncharted territory here, where you’ve got, as you say, these, relatively untested, um, they haven’t gone through any kind of major crises, um, you know, the executive running companies, so, perhaps their, their robust expectations could become a self fulfilling prophecy.  They’re not going to be retrenching.  They’re not going to be pulling back.  They’re not going to be cautious about their investment plans.  And all of those things, of, of what contribute to, to getting recessions, really, you know, kicked off.  So, perhaps that will, um, that, that will be just the story that we see unfolding in a way that we haven’t seen before.  That, that could be really interesting.

Josh Rubin:     I, I do think we’re in, in new territory.  Both because of the health of demand, or the uncertainty about health of demand in the west, as well as the, you know, now much more proven capabilities of the China production economy to grow outside of, to grow the production base outside of China.  And, you know, but probably the final piece that it all does tie back to, is, what will domestic demand look like, inside of China?  Because in, you know, these, these are stale statistics.  We haven’t really gotten updated statistics since roughly 2018, but, um, from, you know, roughly 2007 to 2018, the number of Chinese employed for export manufacturing had roughly been cut in half.

Dan Keeler:     Mm.

Josh Rubin:     But, that did not imply that manufacturing employment had been cut in half.  That was simply the incremental wealth inside of China consuming more of domestic manufacturing for domestic purposes rather than for export purposes.  And so I, I think that’s another part of the calculus for these Chinese companies, is, okay, to serve global demand, I will add a factory outside of China, but my existing, uh, capacity inside of China, will actually just be, you know, served, or, or will fulfill domestic Chinese consumption, because, sort of, you know, if you do think of the history of Chinese exporting, it’s 1.4 billion people serving an export market of maybe 4 or 500 million people in the west, but if you’ve got 1.4 billion people, if another 100 million can afford tee shirts, or, or whatever it is, you know, that offsets a lot of demand weakness, or a lot of capacity, capacity rebasing to other countries just because you’re, you’re now serving more demand domestically.

Dan Keeler:     Yeah.  Yeah.  Um, interesting.  Um, it also, I, I was thinking just before you started talking about that, the domestic demand.  Um, what about South-South trade?  I mean, we’ve been talking about and hearing about South-South trade and the impact of that, uh, for, well over, a decade now, I think.  Um, as, as this kind of shift in, um, global economic dynamics continues, will this sort of growth in South-South trade have an impact on how this unfolds and how, uh, comp, companies, particularly in the emerging markets, um, develop their businesses going forward?

Josh Rubin:     Um, maybe, maybe just to make sure, when you’re saying South-South trade, that sort of **** Road, or enter in emerging markets?

Dan Keeler:     Yeah, in enter emerging market trade, yeah.

Josh Rubin:     Mm hmm.

Dan Keeler:     Yeah.

Josh Rubin:     Okay.  Perfect.  Perfect.  Um, we, we definitely do think that that is an incremental leg to the emerging market story going forward.  And, if you look at, uh, global trade data, and you break it into a few of the, the major regional blocks, so if, if you’re taking of the US, certainly has been a net importer for a very long time.  But, uh, Europe and Japan have always had a pretty large net trade surpluses.  And, you know, within Europe, that’s a little bit of a mix between northern Europe and southern Europe, but you can see northern Europe and, or sorry, all of Europe in total, plus Japan being very dependent on the net trade surplus.  You saw emerging markets trade surplus peaking, going into the financial crisis.  And then, declining after the financial crisis, which was really the result of, of two things.  One was, um, to a degree, commodity prices came down, and that had been part of the emerging markets trade surplus, but the bigger reason is western, or develop market demand decreased after the financial crisis, and so exports to the west, uh, merging develop markets declined as well.  And, actually from about 2015, 2016, through COVID, the trade surplus or deficit for emerging markets was about flat.  And what that actually reflected, was not specifically less export, or less trade within emerging markets, but it reflected more intra emerging markets trade as the demand from develop markets had declined by that point in time.  Through COVID, uh, the trade surplus rose again from emerging markets, which, I would say, was two parts.  Depressed demand in emerging markets and then also a higher commodity prices, once, once they recovered as well as, you know, sort of, all of the stimulus that happened in develop markets led to greater consumption of manufactured goods.  Going forward from here, you know, our expectation would be that the sort of net trade surplus within the emerging markets block, trends back towards about zero, both because the develop markets stimulus has now worn off, emerging markets never had that stimulus, but with the economies reopening, they should sort of get the demand recovery, both from within China, but elsewhere, uh, over time.  And then, commodity prices seem to sort of be, you know, renormalizing, maybe at high or lows, but not at, sort of peak levels.  So, you know, our real expectation going forward is exactly what you said.  That South-South trade or intra EM trade, is the real driver for almost every emerging markets country from going forward.  And, and that goes a little bit back just to the simple population dynamics where, again, maybe one billion people in total, spread across every county you can consider a developed market and seven billion people across emerging and frontier markets, and so, purchasing price parody may be different, but the sheer volume of consumption across emerging and frontier markets should be a very nice tailwind for, you know, volume of production and or, or buying, and then, you know, prices will normalize with rising incomes and so on, over time.

Dan Keeler:     Yeah.  Yeah.  Um, and of course, within that, um, as you mentioned earlier, there’s going to be vast differences between different regions and between, um, uh, commodity producers and manufacturers and so on.  Um, but the overall picture is, it seems, pretty, pretty strong really.  Um, so back to my, kind of original question about, um, you know, how the year’s going to play out, and how investors should approach it.  Um, I definitely picked up, the beginning of this year, quite a lot of enthusiasm, uh, and excitement really, from emerging market fund managers who were seeing more interest from potential investors than they had for a long time.  Um, really for quite a few years.  Uh, are you seeing that still sustain?  Are you, did you see it at all and now are you seeing it sustain, or, um, did investors perhaps get a little ahead of themselves when, uh, they were super excited about China?

Josh Rubin:     Emerging market investors are waiting for global investors to get excited in, for emerging markets again.  And, so, you know, I, I think the, the transition maybe over the last decade is that, uh, into the financial crisis, or even for the first few years afterwards, emerging markets were absolutely one of the places to be, if not the place to be.  And then we’ve just had this decade where US markets were always the best place to be.  If you were an equity investor, US equity markets were always rising the most and if you were a fixed income investor, the dollar was stronger than any other currency and so, it was easy to lean into safety and get paid for it.  Um, so right now, and, and we can go into this, but we, we do think a lot of elements of the macro set up are very favorable to emerging market investors, um, both from a currency strength and intra trade standpoint, or potentially, you know, equity valuations and, and earnings growth perspectives.  But there is very much an element where global investors who are not focused only on emerging markets are re, remain much more comfortable with, you know, what they perceive to be low risk, lets just lean into the United States.  Or, maybe lets lean into Japan right now.  So, I think, we, we sort of began to get some good news in Latin America the end of last year, we got the news in China beginning this year, but we just have not seen global investors lean into emerging markets at all.  And I think, um, not only did it come from the China sort of acceleration soften, but, as we had the, the multiple bank failures, in develop markets, whether Credit Suisse or the California banks, that led a lot of global investors to say, oh my gosh, if there’s a financial crisis, then I’m going to be afraid of emerging market financials as well, and, and consequently, they’ve tapped on the brakes from like, looking outside of, of develop marketer just the US exposure so far.  So, yeah, right, when I was in, uh, when I was in China, I basically bumped into a western investor, maybe once every 3 or 4 days.  I, I conducted meetings with, you know, over 75 companies, and, and investors based in the west, were just not present across multiple, major Chinese cities, you know, speaking to the companies, oh, hey, who are you talking to right now?  Um, I would say, western investors have just not been engaging with China and on the other side, I had a number of Chinese investors saying, what is it going to take to get global investors interested in China again?  So I, I, think from both of those, as we look at the back half of the year, there’s a lot of low hanging fruit, if there’s just a little bit of hint of interest from global investors to reengage with emerging markets, or Asian markets, as well.

Dan Keeler:     Yeah.  Yeah.  I was going to ask you the same question that the, uh, the Chinese, um, company managers were asking actually, which is what would it take to tip those global investors over.  Um, but I think we’re, you know, we’re also talking about China, which really is a special case at the moment.  That people are very nervous about what’s going on with China, but, um, you know, given the sort of tense geopolitical relationships around that, the potential for, um, unexpected moves being made, um, I, I think that that might be having more impact on people’s interest in China, than it would on other emerging markets.  Is that fair to say?

Josh Rubin:     I do.  I, I think I would say, you know, when, when time’s are good or in a bull market, that’s when, you know, – the, the reason bull markets get going and then ultimately have trouble is because when, when times are good, people get comfortable with incremental layers of risk and then on the other side what, in, in, you know, scarier markets, nobody wants any element of risk and so, you know, right now, I think China has a, it certainly has geopolitical complexity.  So that, that’s one layer of risk that people need to figure out if they want to unpack.  It’s got some macro uncertainty.  That’s another layer they need to, uh, figure out if they want to unpack.  Um, you know, they’ve got what is happening from a developmental market demand perspective and how they may want to think about China’s economic risk to develop market.  So I think China’s sort of a country that has three or four incremental layers of risk, and that’s one of the reasons that a lot of global investors are just saying geez, for the first time, I can go buy US investment-grade bonds and get paid 4 or 5 percent, you know, wi, without three or four layers of complexity.  That, that seems easier.

Dan Keeler:     Yeah.

Josh Rubin:     And, and so I, yeah, so I think that’ll take, you know, multiple proof points to get global investors comfortable again that it’s worth figuring out those incremental complexities.

Dan Keeler:     Yeah, yeah.  Um, which also could, could have its own, um, sort of circular effect as well as sort of self-fulfilling prophecy be the absence of investment that all, all that that will entail.  Um, so I, I’d love to actually drill into, um, one or two regions.  Um, I read a note that you wrote recently where you made a fairly compelling case for investing in the middle east, and that echoed some of the things I’d been hearing from individuals and just, uh, just sort of picking up thru the, the, the general ****.  Um, what are the most interesting opportunities that you see in the middle east and what are the key characteristics you’re looking for, for an, from an investment perspective?

Josh Rubin:     Sure.  Ma, maybe I’ll segment that into two parts.

Dan Keeler:     Sure.

Josh Rubin:     Um, uh, you know, at a, at a high level, I think the, um, the GCC countries which are sort of the, the core of the Arabian peninsula and the, the core of OPEC oil production, uh, I, I think all of those countries from a macro perspective are quite interesting.  Um, the deeper markets from a capital markets or equity markets, um, basis to, to invest in would be Saudi Arabia and the UAE.  Some of the other countries like, uh, Qatar or, uh, Oman do have public – or Kuwait, do have publicly listed companies, but they, they have fewer publicly listed companies, and those companies have less training liquidity.  Um, but, but what each of those countries has is cer, certainly a low cost of producing oil, generally healthy government budgets and because they have healthy government budgets, they are able to sort of balance the domestic demand where they’re largely importing goods against exporting oil.  Um, so, so that just sort of sets up a, you know, a backdrop of stability, economic stability overall.  The next thing which is, which is different, um, and I would say different over the last 5 to 7 years and sort of hidden or forgotten about during COVID but is a, a key part of many of these governments long-term planning is the interest in diversifying the economies away from just being petrostates.

Dan Keeler:     Mm hmm.

Josh Rubin:     And in, in all cases, no, nobody is under the illusion that this happens in 1 year or 5 years or even 10 years, but I think the, the general idea of we need, need to do this, we need to be committed to it, and we need to be committed to it for the long term is something that they’ve all internalized, all of the, you know, different leadership groups across the countries is on board with.  What, what’s important from there is historically the outflow of consumption dollars to the rest of the world has just been absolutely enormous and if you shift some of that, um, le, country consumption locally instead of it happening in London or Europe, um, or the US, not only is that a virtuous cycle for domestic stability, but it changes the employment landscape in these countries.  It changes the breadth of the economy in these countries and so it, it actually has a, a number of different angles that, that are also, um, fulf, you know, self-fulfilling virtuous cycles rather than being challenges where you always need oil price to buffer do, domestic complexities.  Um, so within the Saudi and the UAE specifically, we, we see them both having an intention for a domestic industrial base rather than sort of importing industrialized goods from around the world.  We see intentions for diversifying the, um, external tourism economies where, you know, I think historically for Dubai, it was much more of a come in for a few days to move, move money into the country or, you know, spend a little bit of time on the beach but not truly have a, what we would consider a tourism experience like the rest of the world would see and, and for Saudi, they’ve had pretty large international visitation, but it’s always been almost solely related to, uh, the Hajj, sort of re, religious tourism as opposed to actually experiencing what is pretty amazing natural beauty –

Dan Keeler:     Mm hmm.

Josh Rubin:     – around Saudi Arabia.  And if you think of Egypt, uh, they have a very robust tourism economy along the Red Sea because the Red Sea’s beautiful.  The other side of the Red Sea which is Saudi Arabia is also beautiful, but Saudi Arabia’s never had resorts or any, any reason to go visit it and so Saudi’s sort of looking at things to say how, how can we attract, um, generally regional tourists who are already doing things that we have the ability to allow them to do here.  You know, we just need to build the ability for them to do it.

Dan Keeler:     Um, it, it is interesting hearing your thoughts about the, the way that they are trying to diversify their economy, Saudi Arabia and the other countries in the region.  Um, do you th, uh, candidly, do you think it can be enough because, you know, as you say, it’s a very long-term prospect to try and build your own industrial base essentially, to build your own tourism industry from scratch, and you’re not doing it into a vacuum.  You’re doing it into a crowded world with lots of other countries that are busy doing this already.

Josh Rubin:     Yeah, um, I, I do think it’s a question of timeframe.  To your point, um, across emerging markets or frontier markets, you know, a lot of what we’ve tended to see are good looking cycles that then fall apart because either capital does not have a long enough, um, investment cycle, you know, so, so capital flows out before the, the benefits of the investment really happen or the political cycle changes in a different direction.  And, you know, I, I think in, in Saudi Arabia, the most likely outlook for the political cycle is, you know, stability and not, not diverging because of what the nature of politics or the royal family is in Saudi, so I think that’s one where we talk about, you know, China having 5-year plans, but it, it really is possible for the royal family to have a 15-, 20-, 30-year plan and be able to stick to it and finally, m, usually in emerging markets, um, you know, emerging or frontier markets, they never began with what I would call stable government finances or government finances that could invest for the future.  You know, they really needed external capital to build the infrastructure or do the basic things to kinda get things going and in the case of, of the middle eastern countries, Saudi, UAE or, or the smaller countries, low or no debt to GPD ratio, you know, ratios, so they, they definitely can attract foreign capital pretty easily.  Um, the, the general expectation is that for Saudi Arabia to run the government and sort of do straight out-of-pocket cash investing into infrastructure other initiatives around $75 probably gets it there, and that number is a little bit lower for the UAE or the smaller countries that don’t have as large of a population base they need to support.  So I think that the countries of the middle east have the domestic capital to make these long-term investments.  They have the balance sheet that won’t get stretched if there’s some volatility in commodity prices, and they all sort of have the political stability to make a 10- or 20-year, you know, in, investment cycle but ha, having said all of that, uh, you know, the, the history of economic development is, is, you know, wa, one of a few successes and a lot of failures so, you know, you, you can’t bet on anything but, um, but I, I do think capital stability and political stability are very helpful for these middle eastern countries as compared to some of the Latin American or southeast Asian countries in the past.

Dan Keeler:     Yeah, yeah, I can imagine the numbers do stack up in a much more, um, appealing way.  Uh, just as you were talking though, it made me wonder is there actually room for foreign investors in there or is the domestic investment enough?

Josh Rubin:     No, there, there’s definitely room for foreign investment, and I would say the, the Saudis for sure are very actively courting for an investment, and the other countries may, may be a little, um, a little hit or miss but, but I think there’s two, two things that we’re seeing particularly in, in Saudi Arabia and then somewhat in the UAE, um, in the equity, public equity markets, we are seeing fairly frequent public listings of con, companies that either have historically been a government entity or were controlled by a sovereign wealth fund.  And, um, to mention two things about this, uh, I, I do think there’s a political or social stability element of this which is historically, you were in countries where the royal family owned 99 percent of the wealth or 90 percent of the wealth and if you’re taking companies that used to sit under the royal family exclusively and making them available for everyone to invest in, just like homeownership, that’s another way for, um, social stability or political stability because everybody feels that they have access to the wealth creation, um, in the country.  But, uh, on these listings, uh, certainly domestic investors are participating, but they are actively courting global investors as well and, um, some of that is sort of through the normal IPO process that happens with investment banks but, you know, the Saudi exchange or the UAE exchanges are hosting their own types of events to try to educate foreign capital about the investment opportunities available to public equity markets in both countries.  Um, on the private side, Saudi Arabia is also courting private equity, and the UAE is doing some of that as well and, you know, I think historically, private equity’s relationship with middle eastern countries has been taken, taking sovereign wealth month and investing it in develop markets, buying commercial real estate in develop markets but now, uh, these middle eastern countries are working with private equity to say great, we also want to build industrial warehouse space across our region for, you know, an industrial hub.  You do that very well in the US, we’d like you to partner with us for doing it domestically also.  And so that is private equity firms not only taking middle eastern money but also global money and investing it in projects a, across the middle east.

Dan Keeler:     Yeah.

Josh Rubin:     Um, I, I would say, you know, we’re, we’re definitely early days on the foreign private capital in, investment in the middle east but the, the governments and sovereign wealth funds are very interested in doing that.

Dan Keeler:     Yeah.  And it’s interesting the timing of that as well because it’s coming at a time when private equity firms are looking for good opportunities and looking for new sources of capital.

Josh Rubin:     I, I think that’s right, and I think, um, certainly the argument that the middle eastern countries are making are we’re dollarized economies, so they all have local currency, but the local currency’s pegged to US dollars, so you’re not taking the same currency risk that you’re taking in many other emerging or frontier countries.  Um, but if though they’re dollarized, even though they governments have very low debt to GDP ratios, the, you know, sovereign bonds of those countries trade at a, you know, spread to US or European so okay, you, you can have a 30 percent debt to GDP country where you can get an extra 50 or 75 basis points of sovereign yield and then, uh, you know, stack a commercial cap rate on top of that and so the, the pitch to private equity or, or public equity is buy very attractive business and get 2 or 3 or 400 basis points of extra spread or extra yield compared to what you’d be getting on, you know, development market assets that are equivalent and, you know, so I think the idea for private equity is make the investments today and if the middle east continues on the current trajectory, those spreads will compress and, you know, the, the exits that private equity would get from middle eastern investments, you know, we’ll, we’ll see an attractive revaluation in addition to underlying growth.

Dan Keeler:     Yeah and as the, uh, as the middle east develops its tourism industry, presumably it becomes not a bad place to go and visit your portfolio companies as well.

Josh Rubin:     I, I do think that’s right.  Um, a, you know, at, at least for 7 or 8 months of the year.

Dan Keeler:     Yes, yes.

Josh Rubin:     It, it, it’s a little hot the rest of the time but it’s –

Dan Keeler:     That’s right.

Josh Rubin:     – it’s a good place to visit the rest of the year.

Dan Keeler:     Right, right, when it’s not 120 degrees.  Um, so, you know, uh, with all investing in frontier and emerging markets, geopolitics is never far away, um, and particularly so with the, the middle east.  Um, from an investor’s perspective, is Saudi Arabia no longer potentially sensitive?  Do you have to be mind, mindful of that?

Josh Rubin:     My, my pretty strong impression is that even though, uh, the relationship has been sort of rocky over the last 10 years with some ups and some downs that Saudi Arabia and the United States and Europe all continue to consider s, Saudi Arabia is really a key partner to achieving a number of global goals so, you know, I, I don’t see that, that part changing.  The, the other side which is not just about Saudi Arabia, I think it’s a real question for the US and Europe about emerging and frontier markets in general, um, and I think India has really been the poster child of this throughout the Russia Ukraine war where India has said hey, we’re, we’re a country, we need cheap oil and so we’ll go buy cheap oil wherever we can get it.  But when they’ve been pushed on it, um, you know, their government has made comments like developed markets have told the emerging markets that we need to solve our own problems, um, or that emerging markets problems are not development market problems, so why should develop market problems be emerging markets problems.

Dan Keeler:     Hmm.

Josh Rubin:     And, and I think that, that’s a, an, you know, a fair question for emerging markets which are trying to develop, um, to ask develop markets, uh, you know, is if, if you’re not willing to take pain on our behalf, why should we be taking pain on your behalf.  Um, so I think in, in terms of Russia or China going forward, you know, the US and Europe really need to triangulate what are the best ways to serve everyone’s best interests and not to approach those, you know, kinda foreign relationships solely through the lens of we need you to do what’s best for the US without thinking of also how it’s, how it can be a win-win outcome.  Um, you know, I, I ;think Saudi Arabia and Russia is a much less meaningful, uh, question than Saudi Arabia and China because for a very long time, the US was Saudi Arabia’s biggest buyer of oil, and China knows without a doubt – or sorry, Saudi Arabia knows without a doubt that China and India will be Saudi Arabia’s largest buyers of oil over the, you know, long term and so we need to figure out how to make that transition or that balance a win win, you know, or maybe a win, win, win, win for, for all of the countries not just thinking of how, why a country that no longer sells us much oil, uh, you know, should be doing all of the things that we ask from a geopolitical standpoint.

Dan Keeler:     Yeah, yeah.  Yeah, that’s really interesting.  Puts into context, uh, to an extent this sort of flurry of recent diplomatic activity that Saudi Arabia’s been engaged in with, you know, as you mentioned Russia and China but also, you know, developing a relationship with or deepening its relationship with Iran which was obviously extremely difficult before, um, working to get Syria back into the Arab League, um, all of these other things that are going on that, um, I think have left some sort of questions about what Saudi Arabia’s endgame is, but it totally makes sense that, that they’re playing a long game on where their friends need to be or where they need to make friends in order to ensure their continued sort of economic stability.

Josh Rubin:     I, I think if, if you look at the last 70 or 80 years of global economic history, stability is generally good for pretty much everybody, and stability is definitely good for capitalism.  Um, what we tend to see is when countries are weaker, the, the thing, the games they play are how do I create some instability for my adversary because I’m, I’m already weak, so how do I make them a little bit weaker and usually, it’s sort of a low cost put to try to make your adversary a little bit weaker by destabilizing something or other around them.  And, um, a different angle besides just thinking oh, what is Saudi doing cozying up to Iran which, which I would, you know, I would say all they’ve done is reestablish formal diplomatic relationships for the, you know, for the first time in 7 or 8 years or what are they doing trying to bring Syria back into the Arab League is also could be viewed as simply improving stability in the region, and stability in the region should be good for global economic growth because there’s just more predictability around both a vital resource which is oil or around, you know, refugees flooding into Europe or, you know, terrorist events that could destabilize something or create more instability, so that’s really how I perceive a number of Saudi activities are the region is actually in pursuit of stability rather than, you know, pursuing a, a policy that is, you know, backdooring some other goals they’re trying to achieve.

Dan Keeler:     That’s actually a really super interesting perspective and, you know, that to me sort of makes sense of Saudi Arabia, um, deepening its relationship with Russia or be, you know, including Russia in those conversations because I think Russia has been selling some instability in the region and perhaps the Saudis were able to say la, you know, if you can stop, uh, creating instability, we can help you with your current problems too.  I wonder if there was a element of that.

Josh Rubin:     Yeah, I do, I do think that’s right.  I, I think the really complex thing about international politics is achieving things internationally is very different than achieving things with your domestic base and, you know, what, what sounds goods on a, you know, on a stump speech in the United States or in China or whatever is, you know, that’s never a win-win situation and so international politics is about finding a balance that’s palatable for both sides.

Dan Keeler:     Yeah.  Yeah.  Um, one of the things that I’ve seen more recently is a number of stories about countries experimenting with possibly even adopting using different currencies than the dollar for international trade.  Um, we’ve seen obviously, China’s been pushing the yuan pretty strongly, the renminbi, um, and now we’ve seen India toying with that on a number of occasions.  Um, I think they’re talking about doing oil deals with Iran possibly denominating rupees.  Um, how do you see that playing out?

Josh Rubin:     My, my best guess is it’s slow progress and, and nothing particularly material for the foreseeable future.  What we, you know, bilateral trade in a different currency is much easier than making that currency be a global hard currency and so I, you know, I think we began to see China doing some RMB trade around the financial crisis when it was the equivalent of grain for RMB or oil for RMB from Latin American countries and, you know, that’s more straight forward when, when those countries need Chinese manufactured products and China needs their products.  I think you can definitely, you know, potentially see the same thing between an India and Iran, th, things like that.  Um, the, the dollar, you know, is the reserve currency because the US was on the winning side of World War 2, has more aircraft carriers than anyone else in the world, is self-sufficient in food and has nuclear weapons and, you know, those things aren’t really changing, um, so I, I think it’s more until the Chinese economy is at least equivalent to the US economy, that, that’s gonna make it more complex for China to do anything.  The Indian economy obviously is so much smaller, you know, I, I think other than small bilateral trade for India we, we won’t see anything but the, you know, the final piece actually going back to this question of stability, as long as countries can conduct trade on a global valued, on a global supply chain with known quantities, that, that’s the real solution of the US dollar and so maybe potentially the, the, the question for RMB becoming a global currency is in the China plus one strategy if we do see more of these Chinese companies going global and having a supply chain that goes from China to southeast Asia to Mexico run by Chinese companies, that could be operated an RMB and suddenly, that’s part of the global economic enlargement –

Dan Keeler:     Mm.

Josh Rubin:     – that, you know, drives a second reserve currency or a second trading currency but as long as what’s actually easier is for Volkswagen to have a global supply chain from China to Germany to the United States and to sell vehicles around the world but to price all of it in US dollars, you know, I, I think the dollar will remain the, the primary trading currency –

Dan Keeler:     Right.

Josh Rubin:     – um, un, until you either have China that big or the Chinese supply chain be, being just as big as the US supply chain has become.

Dan Keeler:     Yeah.  Yeah, that’s interesting.  Well, so, um, one of the things that, um, successful investors in the international space have to do is to keep an eye on politics and to look for developments around the world that perhaps are going to be either risk drivers or opportunity drivers, um, when you’re sort of casting your eyes around the world, where do you see the biggest opportunity right now?  What’s, what’s getting you excited?

Josh Rubin:     So what we try to do is be equal opportunity investors where we, we really don’t take anything, um, off the table.  We just want to make sure we’re compensated appropriately for the risks we’re taking when we do it and, you know, so I, within that context, um, in, in China or in certain parts of Latin America, we would expect to be compensated more today compared to for instance in the middle east because of currency risk or economic risk or some political risk, but I, I do think in, um, Brazil, we see very attractive equity valuations.  Uh, interest rates are particularly high.  Real interest rates are, uh, perhaps higher in Brazil than an, anywhere else in the world that has a, you know, kind of reasonably capitalistic economy.  Um, so we, you know, high interest rates have really depressed equity valuations in Brazil.  In Mexico, valuations are not as cheap as they are in Brazil, but Mexico’s sort of on the final year of a more leftist president and so Mexican valuations have been, you know, uh, pre, the pretty low end of the long-term range since he’s been in office.  Um, you know, so, so that’s pretty interesting both because of, of nearshoring and just where valuations sit and then I do think, uh, as we started this conversation, China started the year, uh, where valuations were moving into a higher level of confidence in the economic outlook or pol, or, you know, sort of the way the government’s involved in the economy from a stability perspective but, you know, we have a lotta companies that were up 50 or 75 percent call it from October into January and now, they’re almost back to the same levels where they were in September, October, November, um, across China and that would both be in Hong Kong listings as well as companies listed in, um, you know, the, the A share markets in Shenzhen and, and Shanghai so and, and we don’t think you need sort of to be investing in cyclicals in, in China or in Brazil specifically.  You know, there’s sort of high quality consumer companies, healthcare companies, uh, consumer staples companies that have had this sort of valuation retrenching as well, but we, yeah, we would just say, we, I don’t want to call it peak bearishness, but the degree of bearishness on China and Latin America is particularly high.  Um, South Africa, there is a lot of bearishness, but I, I think you could argue it’s, it’s much more justified or, or, you know, being cautious is, is much more justified, uh, so I, I would say those are the areas that seem to be particularly dislocated right now.

Dan Keeler:     Well that is, that is super helpful and, uh, very thought provoking and, um, I think that’s probably a, a good place to wrap this up.  I really appreciate your taking the time to talk to us.  I’ve been talking to Josh Rubin at Thornburg, Portfolio Manager and Managing Director.  Um, Josh, thank you for joining us and thanks for sharing your insights.

Josh Rubin:     My, my pleasure to have the chance to connect with you.  Thanks a lot.

Dan Keeler:     So thank you for listening to this episode of the New Frontier’s podcast from Frontier Markets News and thank you to our guest, Josh Rubin, Portfolio Manager of the Thornburg Developing World Fund for sharing some fascinating insights.  As always, if you want to learn more about what’s happening in the world beyond the glare of global media, check out FrontierMarkets.co and that is .co, not .com.  You can also sign up there for our weekly newsletter which will land in your inbox every Saturday and provide you with a smorgasbord of the week’s key news from smaller emerging markets.  The music on this podcast is What’s The Angle by Shane Ivers from SilvermanSound.com.  If you’ve enjoyed this podcast and you want us to be able to produce more of them, please share it with your friends, your colleagues and your followers on social media and make sure you subscribe to this pod wherever you get your podcasts.  If you have any feedback, we’d love to hear it.  Send me an email at Dan@FrontierMarkets.co, and that’s a wrap until next time.

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