Home Financial Advisor Episode #513: J.P. Morgan’s Gabriela Santos Likes Worldwide Shares for 2024 – Meb Faber Analysis

Episode #513: J.P. Morgan’s Gabriela Santos Likes Worldwide Shares for 2024 – Meb Faber Analysis

Episode #513: J.P. Morgan’s Gabriela Santos Likes Worldwide Shares for 2024 – Meb Faber Analysis


Episode #513: J.P. Morgan’s Gabriela Santos Likes Worldwide Shares for 2024

Visitor: Gabriela Santos is the Chief Market Strategist for the Americas on the World Market Insights Technique Staff at J.P. Morgan Asset Administration. Gabriela’s analysis focuses on rising markets, particularly China. She is liable for the event of the Information to the Markets, Information to China and Information to the Markets – Latin America, amongst different publications.

Recorded: 12/6/2023  |  Run-Time: 49:41

Abstract:  In at this time’s episode, Gabi shares her view of the world after a yr the place the Magnificent 7 has dominated the headlines. She hammers residence her excited concerning the alternative set outdoors of the U.S. She explains why she likes the arrange for Japan and India, why nearshoring is simply one of many the explanation why she’s bullish on Mexico, and why she thinks China has develop into extra of a tactical buying and selling market.

Feedback or solutions? Occupied with sponsoring an episode? E-mail us Suggestions@TheMebFaberShow.com

Hyperlinks from the Episode:

  • 1:15 – Welcome Gabriela to the present
  • 1:54 – Reflecting on 2023
  • 4:01 – Forecasting the funding panorama for 2024
  • 8:16 – Inflation traits
  • 11:43 – Figuring out areas of curiosity in present markets
  • 18:15 – Analyzing the dynamics of the Japanese market
  • 19:18 – Delving into numerous currencies
  • 23:24 – Deciphering the Chinese language market: Information to China
  • 32:46 – Investigating different compelling markets
  • 34:58 – Why nearshoring has Gabi enthusiastic about Mexico
  • 38:45 – Evaluating potential future dangers
  • 41:54 – Gabi’s most memorable funding
  • Be taught extra about Gabriela: LinkedIn; J.P.Morgan; J.P. Morgan’s Information to the Markets



Welcome Message:

Welcome to the Meb Faber Present, the place the main target is on serving to you develop and protect your wealth. Be a part of us as we focus on the craft of investing and uncover new and worthwhile concepts all that can assist you develop wealthier and wiser. Higher investing begins right here.


Meb Faber is the co-founder and chief funding officer at Cambria Funding Administration. As a consequence of trade rules, he won’t focus on any of Cambria’s funds on this podcast. All opinions expressed by podcast members are solely their very own opinions and don’t mirror the opinion of Cambria Funding Administration or its associates. For extra data, go to cambriainvestments.com.


What’s up all people? We bought a rocking present at this time. Our visitor is Gabriela Santos, chief market strategist for the Americas at JP Morgan Asset Administration. Right this moment’s episode, Gabi shares her evaluation of the world after a yr the place the Magnificent 7 has dominated the headlines.

She hammers residence how excited she is concerning the alternative set outdoors the US, and he or she explains why she likes the setup for Japan and India; why nearshoring is simply one of many the explanation why she’s bullish on Mexico, and why she thinks China has develop into extra of a tactical buying and selling market. Please get pleasure from this episode with Gabriela Santos.

Gabriela, welcome to the present.


Superior, thanks a lot, Meb. Thanks for having me.


The place do we discover you at this time?


I’m in a getting colder New York Metropolis on the JP Morgan workplace right here.


Superior. Love the town throughout the holidays, I’ll be there the primary week of April, listeners. Perhaps we’ll must do a meetup or one thing. I’ve by no means seen a Yankees or a Mets recreation, so in the event that they’re on the town opening week, perhaps we’ll do a meetup there.

We’re winding down the yr. 2023, quickly to be 2024. How’s this yr play out to you? Two surprises? Completely, precisely as anticipated? What’s it been like for you as we begin to wind down 2023?


Tis the season of yr forward outlooks, so we’ve got been doing a bit little bit of a glance again at this yr and a glance forward, after all, most significantly, I feel the primary factor I might say this yr is we’ve got been very pleasantly shocked from a macro standpoint, in order that a lot overrated talked about arduous touchdown positively by no means materialized. If something, we bought above pattern progress this yr, on monitor of one thing near 2.5% progress.

We’ve additionally been pleasantly shocked, I might say, particularly by the provision facet of the financial system. We’ve had enhancements on the subject of the labor market, productiveness, and because of this, we’ve got had the anticipated fall in inflation, however for an excellent purpose, which is provide facet enchancment, not demand facet weak point like we had anticipated.

We’ve additionally had some surprises, I might say, on the subject of market efficiency, most particularly on the unfavourable facet by mounted revenue. We had anticipated a significantly better yr for yields to have already peaked in 2022 and for this to have been a excessive single digit return sort of yr. As a substitute, we bought much more volatility and, to this point, low single digit constructive returns.

On the fairness facet, as effectively. On paper, it’s been a powerful yr of restoration for equities like we anticipated, however very a lot focused on these Magnificent 7 shares, and we had not anticipated that stage of AI enthusiasm and that concentrated efficiency.


It was a fairly nasty 2022 for the standard alternative set. This yr, I feel individuals will likely be ingesting a bit extra champagne than glowing water or no matter it could be, NA beer from final yr.

This yr is quickly to be within the bag. Let’s have a look out to the horizon. Is that this going to be one other T payments and chill form of yr the place individuals may have hastily bought all this yield they by no means had earlier than they usually’re simply going to sit back out? Or as we glance round, let me begin with the US, what are we pondering?


So we’re pondering if 12 months from now the technique remains to be T invoice and chill, then they’re going to want that they had performed one thing totally different at this time, and that’s as a result of we actually suppose we’re at peak charges on the subject of fed funds fee and on the subject of simply the entire yield curve, and what you usually see 12 months after these transition moments is that you’ve period outperform and you’ve got equities outperform, simply pure money.

That is certainly one of our largest challenges, is getting buyers to understand reinvestment threat. It’d look nice to have money at 5.5% at this time, however the place will or not it’s six months from now, 12 months from now? On an absolute sense after which additionally in a relative sense: the chance value we may have by not having locked within the yields the place they’re in mounted revenue and making the most of some discounted valuations inside pockets of fairness markets.


We had been speaking about bonds, we mentioned, and you’ll’t clearly put an excessive amount of weight on this, however it’s fairly uncommon for a giant asset class like US shares, 10 yr bonds, commodities, REITs to say no a number of years in a row, which means three years in a row. It’s truly fairly uncommon and it seems like we’re on tempo for the lengthy bond to print three down years in a row if we’re say the 30-year in, which actually solely occurred as soon as: the late ’70s, early ’80s.

Now, I don’t understand how many individuals are saying, “All proper, I’m going to place all my cash in zero coupon bonds on the finish of the yr,” as a result of they’re down 50% or one thing. It seems like a commerce that will be a bit squeamish for many of us, however bonds, definitely for the primary time in a few years, hastily have this yield once more, which is one thing that I feel lots of people welcome, but additionally is a bit totally different than that very unusual interval of zero and unfavourable yielding charges.


Completely, and I feel what’s fascinating is fortunately with the drop in yields in November, when you have a look at the US Mixture, the Bloomberg Barclays US Mixture as a measure of period or core mounted revenue, it’s now mildly constructive of two.8%, so we hopefully solely noticed two unfavourable years on the subject of core mounted revenue unfavourable returns, however very, very uncommon nonetheless.

And once we look ahead, I do suppose there’s a powerful argument for us not to return to 0% charges. We’re not speaking about big double-digit returns sort of years for mounted revenue. There’s some normalization in charges, although, to a brand new regular state, which we’d suppose could be yields round three, 4% alongside the yields curve, and that’s only a higher setting for revenue.

The opposite pitch I’d make for bonds is the simply in case threat of some sort of recession, some sort of disaster. That’s nonetheless there. It doesn’t imply every little thing is ideal and it’s all Alice and Wonderland at this level. It’s actually nonetheless an setting the place there’s draw back threat to progress, and in that setting, bonds can work. It was in that peak inflationary concern setting that it actually didn’t serve any sort of function in a portfolio.


For a very long time present investor horizon, so quarters, months, even a pair years, inflation was a subject that got here to the forefront that basically hadn’t been a priority for arguably a long time for People. Round the remainder of the world, totally different story. However People actually have had one setting for almost all of my lifetime, which is declining rates of interest, disinflation, no matter you need to name it, after which hastily, increase, we had this inflation once more.

Are we pondering that is, I don’t need to jinx it, conquered? Is that this one thing that’s again to our regular two, three, 4% form of scenario? Or is that this one thing that’s… We are saying on this podcast so much. I used to be like, “The one aim of the Fed is that this PTSD from the ’70s the place they don’t need to have this second ramp up they usually’ll do something to keep away from that.” However how can we really feel about inflation?


I feel the Fed is an establishment and has an extended reminiscence, in order that they have sure parallels to the ’70s, which clearly could be very a lot on Chairman Powell’s thoughts. He’s talked about Volker a number of instances. However I do suppose even they fell sufferer to a specific amount of recency bias, to pondering that the entire inflation push was short-lived, or what they name transitory on the time, and there was no motion wanted, and that ended up being maybe the mistaken transfer and a giant catch-up in charges wanted.

I feel going ahead, normally we have a tendency to speak within the funding world in absolutes. Both there’s inflation or there’s no inflation. I feel placing some numbers helps. Do we predict inflation will likely be structurally sticky at these elevated 3% ranges? No. However do we predict inflation will common under 2% prefer it did over the previous decade going ahead? Additionally no.

It’s an setting the place a whole lot of the latest inflationary push we actually suppose had so much to do with provide chain points or provide facet points, and they need to proceed getting unwound subsequent yr, after which we may finish subsequent yr our forecasted inflation nearer to 2%.

With that mentioned, over the following decade, we predict there’s a bit bit extra upside threat to inflation than draw back threat, which was the fact over the previous decade. What do we predict inflation will common over the following 10, 15 years talking of numbers? 2.5%, so it’s a bit bit extra inflationary strain, however it’s not this elevated inflationary interval, non permanent interval, we’ve lived via.

And there are issues to generate a bit bit extra upside strain to inflation, issues like geopolitical stress and this push in direction of rethinking provide chains, the place it’s not nearly the place we are able to produce one thing the most affordable, however it’s additionally about diversification, resilience, and barely dearer manufacturing of products going ahead. It’s additionally concerning the power transition, renewable power in all probability costing a bit extra, resulting in some spikes within the value of conventional power given our underinvestment, so a bit bit extra upside strain.

And I feel in that setting it’s not nearly shares, bonds, defending progress threat and that’s it. We’ll proceed needing that additional toolkit simply in case for the inflationary upside surprises alongside the way in which, and right here’s the place we’ve had much more dialog about actual property: issues like infrastructure, actual property, and fortunately, increasingly particular person buyers are having extra entry to these asset lessons, along with the same old entry establishments have had prior to now.


That typically is an space, once we have a look at conventional portfolios, people, but additionally advisors within the US, it tends to be, A, very US centered, and B, typically has little or no in actual property, though I really feel like the previous few years has form of reawakened an curiosity there.

Earlier than we depart the US, I feel this yr market cap weight, or mentioned otherwise, very particular massive shares actually helped out this yr. As we glance ahead, are there any areas, sectors, cap sizes, kinds, something that y’all suppose are extra fascinating, or mentioned otherwise, one thing to keep away from or are scary?


Talking of the nuance, I feel when it comes to small caps, their low cost to massive cap is on the highest we’ve seen for the reason that dotcom bubble, so when it comes to having an allocation to small caps in portfolios with that concept of getting some sort of premium over massive caps in the long term, we predict it is a good alternative to construct some publicity.

With that mentioned, if the dialogue is extra, “All proper, I have already got small caps. Tactically, ought to I begin truly overweighting them versus massive cap? There we’d say not fairly but, and that’s due to just a few issues that we’ll nonetheless maintain debating and discussing subsequent yr, that are extra headwinds to small cap than massive caps.

Issues like larger charges: we do count on charges to return down, however they’re nonetheless extra elevated, and small caps have the next proportion of their financing that comes from banks which are floating fee, versus their massive cap friends which have locked in very lengthy period or lengthy maturity sort of liabilities, and that’s one of many causes we predict small caps have been underperforming in 2023.

The second factor associated considerably to charges is this concept that if T payments aren’t trash, which means if there’s some value to cash, buyers suppose a bit bit extra about enterprise fashions, and practically half of small caps are unprofitable firms, so there’s extra of a hesitancy to finance that enterprise mannequin. That’s probably not going away.

After which the third one is I feel we’ll nonetheless have moments subsequent yr the place some arduous touchdown fears will percolate, or at the very least late cycle fears percolate, and small caps are much more cyclical. They particularly have a whole lot of regional banks that are actually not out of the woods fairly but, so an excellent second to construct a strategic allocation of small caps, however in our thoughts, not the second to be overweighting them. Would nonetheless choose their massive cap brethren given their higher high quality.


All proper. Effectively, one of many stuff you discuss so much is XUS, which is certainly one of my favourite matters. I feel most of my American associates put nearly all their cash in US shares. In the meantime, pat your self on the again this yr, drink some extra champagne as a result of that’s been…


Sure and no. Sure and no.


I used to be saying it has been an amazing place for 10, 15 years, however I’ll hand you the mic. What does it appear like going ahead?


I’m so lastly actually excited concerning the worldwide story. We’ve had so many false dawns over the past 15 years. I fully perceive the frustration with the factor altogether.

The one factor we at all times point out to buyers right here within the US is once more going again to that concept of recency bias. It has been an amazing 15 years of outperformance of US versus worldwide, an amazing 15 years of versus different currencies, however that’s not at all times the case. The seven years earlier than that, you truly noticed a global outperformance. You truly noticed the greenback declining. It tends to alternate. We undergo these lengthy regimes or lengthy cycles, and the query was actually simply when would we hand over the baton?

And I feel, in a means, the pandemic was like a brand new race began. It allowed for a change within the setting that’s truly extra helpful to worldwide than it’s the US, and it’s the identical discussions we’ve been having. Inflation. You lastly have inflation in Europe and Japan. That is what they’ve been hoping for, praying for, working in direction of 15 years.

And to them, to an extent, it’s welcome. Give it some thought. Inflation means larger costs. It means firms are elevating costs. It means higher income progress, higher earnings progress. That’s a key ingredient that wasn’t there. That’s now there.

Quantity two, larger rates of interest. We’re performed with unfavourable rates of interest. That’s additionally an enormous change. And do you know the SMP is up 20% this yr? What else is up 20%? Japanese banks. This can be a big recreation changer for Japanese and European banks. Greater rates of interest. It means they’ll earn curiosity on their extra reserves with central banks, which they haven’t for practically a decade. It means they’ll cost larger spreads on the credit score or the loans that they make. So big, big, big recreation changers there from the nominal progress setting, the rate of interest setting.

One last item I might say is lastly, after a decade, European firms, Japanese firms have began listening to shareholders. Once more, I don’t know that everybody is aware of that Europe and the US have the identical buyback yield. Europe has found the magic of returning capital to shareholders, not simply through dividends however through buybacks. Japan, report excessive variety of buybacks bulletins, so there’s additionally simply far more give attention to realizing worth for shareholders, which is a big change.

And that is simply within the worldwide developed area, however one which’s been simply left for lifeless for a very long time, and we’re lastly beginning to see issues flip round. Flows have began to show across the previous few months.


Yeah, we’ve definitely seen that within the knowledge and discuss how a few of these historic dividend yielding international locations, firms, sectors, XUS, have actually embraced this pattern in direction of governance, and fascinated with the right way to finest use shareholder capital. Japan definitely sparked the eye of Uncle Warren Buffett and others.

It’s a enjoyable story. We’ve seen Japan come full cycle. My goodness, what an odd 30 years it’s been there, and hastily they’re low-cost and no one cares, together with most of my associates in Japan. However that appears to have turned the nook within the final yr or two, so we’ll see how the sentiment shifts if they begin.


And wonderful that, to your level, Japan, the rationale I mentioned nearly is Japan is up 28% this yr. After all, it has had yen weak point, so in greenback phrases, it’s barely underperforming the US of 15%. But when certainly lastly the Financial institution of Japan will get going subsequent yr and begins elevating rates of interest, for which there’s a whole lot of strain in Japan for them to do as a result of there’s a slight quantity of panic from the Japanese that lastly there may be inflation and that the yen’s fairly weak, then that implies shrinking rate of interest differentials with the US, stronger yen, and you then get a pleasant cherry on high from the forex for a US-based investor.


Talked concerning the greenback. How do you concentrate on it? How ought to buyers take into consideration currencies generally as we’re fascinated with these markets, as we’re fascinated with mounted revenue, as {dollars} had, they appear like this huge run and it regarded like no matter it was, a yr or two in the past it sort of peaked, however then it sort of appears to have coming again. What are you guys fascinated with right here? I bought some journey to plan, so what do you suppose goes to occur?


We have now this superior graph in our information to the markets that I feel is… You’re taking the greenback actual efficient trade, so one of many indices of the greenback versus the main buying and selling companions adjusted for inflation. You’re taking all of it the way in which again to the ’70s, and it’s wonderful. It goes a decade the place the greenback will get stronger, adopted by a decade the place the greenback will get weaker and on and on and on we go. It’s wonderful and it aligns with these adjustments, and the macro setting, capital flows, and simply valuations.

We do consider that October of final yr was one such turning level, the place the greenback peaked and that we’re within the very early innings right here of this ball recreation, different facet of the greenback weakening. I feel in the long term, once we mannequin out currencies, it’s all about inflation differentials, GDP per capita, buying energy parity, and that’s all advantageous and good, however you want a catalyst.

By these measures, the greenback is pricey. What was lacking was a shorter time period catalyst, and I do suppose we’ve got that now. We discover that issues like rate of interest differentials are tremendous essential, so this concept that the Fed can begin chopping charges subsequent yr forward, in our view of European central banks, the Financial institution of Japan has but to get going, and by the way in which, we received’t see these international locations take their charges again into unfavourable territory, means shrinking rate of interest differentials, decrease greenback.

And there’s been volatility up and down this yr, however it was wonderful to see November once we did have this 70 foundation level drop within the 10-year yield. The greenback weekend three and half p.c in a single month, so issues can change in a short time associated to rate of interest differentials from an costly start line to us, means the greenback generally is a very nice tailwind for forex returns.

And usually we take into consideration unhedged in our worldwide publicity on the fairness facet. Don’t suppose it’s value it on the bond facet, it simply provides volatility and that’s probably not the purpose. However for equities, we do have a tendency to think about it unhedged, and that will assist total returns.


You guys have certainly one of my favourite… Everybody loves the information to the markets, however certainly one of my favourite charts within the guides to the markets, and we’ll put this within the present be aware hyperlinks, listeners, it’s like an Alps mountain vary the place it’s the US versus overseas inventory efficiency for the final 100 years. And you then see the Mount Everest of returns being this final cycle in US shares, after which JP Morgan has determined, I’m agreeing with them, that cycle’s over, and you’ve got a tiny little sand dune of overseas efficiency. We’ll see if that reverses once more. We’ll see how lengthy that lasts.


We’re hopeful, we’re. And it’s fascinating, Meb, I don’t know if everybody is aware of, however we have a look at the Morningstar classes for flows and it was by no means worldwide. It was all types of different issues main the pack. This yr, the fifth class, that’s how essentially the most inflows, is overseas massive mix, so I feel that’s an indication that mentality shifting, flows are shifting. We talked about worldwide develop, however there’s a really robust argument for the rising market facet, as effectively.


Effectively, that looks like an excellent segue into one of many matters you speak so much about. It varies through the years on individuals’s curiosity with China. Generally individuals are euphoric and China is that this juggernaut that’s going to make Japan within the ’80s appear like a small alternative set in nation; after which different instances, like in all probability now or the final yr, the place China looks like it’s universally hated and the sentiment is low and PE ratios are scraping the underside, how ought to buyers take into consideration China? It’s been a little bit of a basket case for the previous 10 years. What are you guys fascinated with?


Yeah, and it’s been an particularly powerful three years actually for the reason that peak of the market in February of 2021. The fascinating factor is it’s a market of very excessive [inaudible 00:23:36]. We discuss within the US, a correction is a ten% drawdown. A bear market is 20%. For China, a correction is a 20% drawdown. A bear market is a 40% drawdown, so it’s doubled the ball of the US.

And really, these moments the place the market falls 40, 50%, they’re very aligned with turning factors when it comes to coverage and course or the five-year plans. And this was what occurred in early 2021. It’s China re-pivoting the place they need capital to go for the following part of their financial system’s growth. And this time round particularly, it affected a really massive piece of the fairness universe in China, which was the web firms. What you additionally see is ultimately buyers get the purpose, they readjust the funding and also you get a rebound in Chinese language markets.

What I feel is going on is there’s a shift in mentality in direction of investing in China from, “All proper, I’m keen to tolerate this volatility that you just’re speaking about, however I’m going to have a strategic massive allocation to China and I’ll simply surf it out.” I feel it’s turning into regarded as extra of a tactical buying and selling market that goes past simply the turning factors round reform and coverage.

And what I imply by that’s you might be seeing these large swings within the pendulum of a whole lot of optimism and a whole lot of pessimism, and relying on the place you might be when it comes to that pendulum and valuations, then buyers really feel extra comfy dialing it up a bit after which dialing it again down a bit. I feel that’s sort of the place we’re. It’s simply much more unpredictable going ahead, geopolitical tensions in addition to a whole lot of competing priorities Chinese language policymakers have now, and it’s not nearly progress for them anymore.

The place we at the moment are going for subsequent yr is, I feel, on that pessimism finish of the pendulum. You have a look at Chinese language valuations. They’re at 9.8 instances. That’s 15% under long-term common. It’s the identical valuation we had been at October of final yr, which was adopted by China rebounding 60% from the lows, so a whole lot of conversations we’ve been having about buyers is lack of conviction to be strategically obese China anymore.

But additionally, a conviction that it’s harmful at this level to be too underweight, as a result of we’re in all probability on the cusp of issues turning round, particularly now that there’s a much bigger give attention to placing a flooring on progress for subsequent yr; in the intervening time, dialing down some geopolitical tensions; and clearly there’s simply a whole lot of pessimism and below allocation.


Let me attempt to get these in perspective. Even from the JP Morgan information to the markets weight, that’s roughly 60% US simply shares. Rising might be… I don’t know, it’s normally round 12% of the full, of which China is a 3rd or half. 4% place of the equities, that doesn’t look like a lot for most individuals, though I wager if I had been to ballot what the typical allocation of China is, it’s in all probability going to spherical to zero for many People.

Though the clips that I exploit from y’all’s booklet greater than something are the varied residence nation bias around the globe, not simply the People placing 60% in, notably in Asia, but additionally geography inside the US, the place the individuals within the northeast put most of their cash in financials. Out right here in Cali, it’s tech. In Texas, it’s power.

You guys do now all types of thematic ones. You’re doing a complete China… Is it China or Asia information to the markets? It’s like a complete part or is it a standalone?


Information to China, yeah, so a means for foreigners to grasp what’s occurring there. That is fascinating, Meb, as a result of I feel once we first launched that publication three years in the past, I feel the course of journey we had been going with institutional purchasers, large pension funds, endowments, was they had been beginning to suppose perhaps a 3rd of EM for China’s not sufficient.

If we truly regarded on the dimension of China’s markets, they’ve the second-largest markets on the planet. The actual weight for China needs to be half of all of rising markets, and perhaps it doesn’t even make sense to place it in that bucket. That was sort of the pondering on the time.

I feel the pondering now’s, “No, truly. That’s sufficient.” And perhaps we even take into consideration methods that assist diversify that China threat or that China motion, and we begin different components of rising markets.

I feel one of many actually unimaginable issues this yr has been the decoupling of the remainder of EM to China. We used to suppose EM is all China as a result of it’s large and since it strikes every little thing. That’s beginning to change. China, as we talked about, is down practically 15% this yr. EMX China is up 12%.

There’s simply different tales occurring there that assist to diversify a few of that China publicity, if there may be any, or simply the overall publicity one has, even with multinational firms, to China. A number of pleasure. We talked about Japan. One other one in Asia is India. On the EM facet, it’s about to develop into probably the second-largest market in EM fairness universe. It’s about to move Hong Kong.


Oh, wow. Okay. Yeah, you’re proper. I used to be this China, X China, how a lot of this do you suppose is expounded to… And it could possibly be zero reply could possibly be zero, it could possibly be so much, it could possibly be none, since you speak in all probability to a whole lot of establishments. Russia, so far as a proportion of inventory market cap in EM or the world is tiny. China’s not. China, you talked about a 3rd of EM.

How many individuals do you suppose sort of regarded on the Russia scenario and mentioned, “Hmm, this offers me pause. The China Taiwan dialogue that’s been occurring eternally, my Russian property getting frozen or shares getting marked to zero, that’s one factor. If that occurred to China in my portfolio, that will be an enormous, not solely portfolio punishment, however behavioral profession threat the place purchasers, notably for advisors, be like, ‘Oh my God, you kidding me? We personal this a lot China now it’s zero?’”

Is that one thing that you just suppose is entrance of thoughts, it’s not a lot an institutional world? Or how are individuals fascinated with it?


I do suppose it’s. I feel there’s a want to at the very least mannequin out what would occur if certainly one thing much like Russia occurred and the worth of these property went to zero, or if there was, associated to that, an precise battle that emerged between China, Taiwan, the US. I don’t suppose it’s anybody’s base case or excessive likelihood occasion, however we’ve had a whole lot of conversations about modeling the non-zero likelihood of that taking place.

I do suppose the invasion of Ukraine was essential for that threat facet, however I additionally do suppose that what occurred in China had itself unrelatedly additionally led to that and this concept that coverage makers in China have totally different priorities that aren’t nearly boosting progress. Confidence is low, and it’s taking longer to get better. I feel that is also feeding into that.

The one factor I might simply say once we do have these conversations about geopolitical threat is we’d nonetheless put the likelihood of that occurring as very low, and I feel that is from China’s personal curiosity. President Xi Jinping does very totally different calculations, I might say, than President Putin. There’s nonetheless a giant give attention to some financial stability, political stability.

There’s a whole lot of dependency on Taiwan for semiconductors. Taiwanese firms are one of many largest employers in China. There are a whole lot of interdependencies there, and within the occasion that that occurs, it’s very powerful to mannequin out due to the dependence on Taiwan for superior semiconductors. All these chips that we want for AI and quantum computing are made there. The pressure of Taiwan’s additionally an enormous zone for world commerce, and we’d be speaking concerning the largest and second-largest financial system on the planet, so it’s powerful to mannequin out, however I do suppose it provides into the danger of the allocation.


As we glance XUS, are there another areas that we haven’t actually talked about which are notably fascinating or fraught with threat and also you’re going to get coal in your stocking this yr when you put money into them?


Attention-grabbing story, we talked about Taiwan and semiconductors. One other place that’s vastly benefited from AI and the entire enthusiasm and funding there may be Taiwan, which is up 23% this yr. EM can also be about tech innovation and likewise a technique to put money into the AI theme.

India can also be one other story we’re alluding to right here. India is up 17% this yr. Indian firms even have the identical return on fairness as US firms do. It’s not simply an EM financial promise sort of story, it’s additionally a top quality of precise company ability and company execution story, and India has delivered the returns over the past 15 years, in contrast to different rising markets, in order that’s one other actually thrilling story for us. And it very a lot advantages from a pondering of China plus one going ahead: producing in China but additionally elsewhere. India’s one. Investing in China, but additionally in one other large EM like India.

After which the very last thing I might say, Meb, is Latin America. That’s my residence area. It’s confronted a whole lot of points over the past 10 years or so, publish bursting of the commodity tremendous cycle, however I feel it’s bought extra tailwinds going ahead. It’s bought a few of that China plus one profit. Mexico seeing big funding as one thing near the US to arrange manufacturing.

We’d even be in a brand new commodity supercycle associated to crucial minerals that [inaudible 00:34:24] has a whole lot of which are utilized in semiconductors, in addition to in electrical automobiles and batteries. There’s a whole lot of good things I feel occurring in EM past simply the China story


As you look in [inaudible 00:34:38] any favorites?




Mexico. Okay, let’s hear it. There’s a phrase by the way in which, if we had performed phrase Gabi bingo firstly or phrase cloud, nearshoring would’ve been means ahead of 50 minutes in, so is that this a nearshoring alternative? And clarify to listeners what that even means.


Nearshoring is the Scrabble phrase in Latin America proper now. It’s all anyone talks about. This concept with first it was a commerce struggle, then the pandemic, then geopolitical tensions with China, firms are simply rethinking provide chains, and nearshoring refers to bringing manufacturing nearer to the top shopper, wherever it could be, and Mexico is simply the pure vacation spot for manufacturing the place the customers within the US.

Mexico’s part of the USMCA. I Preserve making an attempt to think about the brand new identify for NAFTA. USMCA is a part of the free commerce settlement with the US. It’s very deeply built-in into US provide chains on the subject of electronics, autos, definitely it’s bought low-cost manufacturing wages, which China, by the way in which, not ha,. So it’s extra aggressive from that standpoint as effectively. So many the explanation why Mexico is sort of the go-to place for lots of manufacturing.

The opposite factor, if we take into consideration one of many large traits within the US associated to those change in provide chains is there’s far more of a push to make issues domestically associated to the power transition, to semiconductors, throughout provide chains.

However a technique firms can sort of decrease the associated fee and nonetheless adjust to the spirit of that’s to have a few of that manufacturing in Mexico, the place at the very least it’s a part of the commerce settlement, however it doesn’t improve your value to a prohibitive stage like producing every little thing within the US would.

There’s many, many tailwinds from Mexico, and after I go to Mexico, I am going there so much, purchasers inform me the north of the nation, Monterrey, which is the manufacturing hub, is booming, booming, booming with US firms, European firms, Chinese language firms establishing manufacturing there. It’s not simply an concept of nearshoring, it’s very a lot occurring in observe.

Now how do put money into that In Mexico, the primary large winners this yr have been building firms, so all the fabric wanted to construct all these manufacturing vegetation, however I feel there’s a much bigger story there. Extra Mexicans will likely be employed. Ultimately, their wages will slowly drift larger. That’s a giant enhance to the consumption and shopper firms, even monetary firms would profit from that. So to me that’s truly a extremely thrilling pattern for the area, particularly Mexico.


There’s so much occurring. We’ve seen a whole lot of pleasure on the startup scene in [inaudible 00:37:44], but additionally rising markets over the previous few years the place we’ve seen a whole lot of firms actually graduate into what individuals would name the unicorns, however bigger personal firms and hopefully will circulation via to public markets, as effectively.


Yeah, associated to e-commerce, associated to digital banking, I feel [inaudible 00:38:04] very superior on this concept of digital banking, sort of skipping over the standard banking technique, and simply having apps the place you do every little thing, together with banking, monetary recommendation. We expect we’ve bought the lead right here within the US. I feel they’re much more superior truly in some rising markets, as a result of they’ll skip the standard banking technique and leapfrog it in some methods.


This has been a whirlwind tour of every little thing to this point. As we glance out to 2024, what else is in your mind that we didn’t discuss? Is there something you’re notably excited or fearful about as we glance out to the horizon?


We at all times do take into consideration dangers. I feel we’ve laid out a base case of a gentle touchdown, fee cuts ultimately starting. This will likely be supportive for mounted revenue, for broader equities, that there are constructive tales occurring around the globe. However after all, that’s sort of the bottom case.

One of many dangers we talked about was reinvestment threat, however one other one which we predict so much about is credit score threat. I feel even in an setting the place a gentle touchdown could be the bottom case, we’re nonetheless right here to start with of a credit score cycle and that’s simply due to how elevated rates of interest are.

By the center of subsequent yr, we are going to begin actually seeing the quantity of refinancing for firms decide up, particularly excessive yield, which tends to have shorter maturities, but additionally funding grade. And it’s a bit crucial for us to start out seeing rate of interest cuts as that refinancing wall is selecting up. That’s how you find yourself with a gentle touchdown, is firms don’t must refinance at these ranges. Excessive yield firm at 9.5, they’ll hopefully refinance at barely decrease and decrease rates of interest. That’s why rates of interest are nonetheless crucial variable subsequent yr associated to this concept of credit score threat.

Associated to that, one other threat is simply enterprise warning. Proper now, we’re on this, what some individuals have been calling, I feel Neil Deta of Renaissance [inaudible 00:40:13] Gentle Touchdown Nirvana. We’re on this setting of progress is cooling however not an excessive amount of. What if companies hastily simply get very cautious, cease hiring, and even begin laying individuals off? That’s an setting then the place you get a conventional recession, the unemployment fee goes up after which consumption contracts, so we’ll be watching enterprise confidence rigorously.

After all, there’s at all times a salient threat of geopolitical tensions, right here particularly wanting on the evolution of the tensions within the Center East, whether or not the market studying to this point is inaccurate and we truly begin seeing precise power manufacturing be impacted and also you get some sort of spike in particularly oil costs. All of those are extra draw back dangers to progress, I feel, slightly than issues about inflation, even the power one.

And in that state of affairs, I feel it brings us again to only having a bit little bit of core mounted revenue for these draw back dangers to progress.


As we discuss winding this down, we bought a pair questions that I’d prefer to spark a bit bit of debate. One is, what’s one thing that Gabi believes, that if you sit down with your folks in New York over a espresso or some meals, come out right here to Cali and also you’re doing an concepts dinner, and also you say this, it could possibly be an idea, it could possibly be a press release, it could possibly be a place, that three quarters of the desk goes to disagree, shake their head, not agree with.

What do you consider, and that is skilled friends, that almost all {of professional} friends on one thing they wouldn’t agree with you with?


I do suppose a whole lot of the dialog we’ve had to this point, this complete worldwide dialogue, is one thing that almost all of individuals are nonetheless not satisfied by, and I feel it’s that recency bias, but additionally the truth that it’s been in the fitting place and we’ve got had many false dawns the place Gabi has come to Southern Cali to do a presentation and talked about worldwide after which it fizzled out, so I do suppose that that’s nonetheless a non-accepted or non-consensus view, essentially.

However I really, actually, actually consider that there’s a whole lot of worth, alpha available by having that worldwide publicity. However particularly that there was an actual shakeup right here, that we’ve been ready to really really feel like we’re in a brand new regime, and I do consider that began in October of final yr and that we’re within the early innings right here of this new ball recreation.


This has been a Twitter battle that I don’t know why I proceed to have interaction in, however worldwide investing, we had a tweet the opposite day as a result of somebody heard somebody say, “Worldwide investing hasn’t labored.” And I mentioned, “Okay, maintain on a second. What you imply by that is worldwide investing hasn’t labored for American buyers throughout this previous cycle,” as a result of for, I don’t know, the opposite 40 ish international locations on the planet, when you had been a global investor, which means you diversified globally, of which the most important market cap is US, it was by far one of the best determination.

The pattern dimension of 44 out of 45, it is only one nation the place worldwide investing didn’t work, however we love to provide a few of these examples. Falls on deaf ears, after all, however nobody’s thinking about my worldwide dialogue.


One other instance, Meb, that I at all times level out can also be, at an index stage, worldwide has not labored for a US investor, however that doesn’t imply that sure pockets of it haven’t labored, and we’ve got an fascinating slide in our information to the markets that exhibits, “Let’s evaluate it to one of the best performing factor the previous decade, US progress.”

Truly, you do have pockets of worldwide which have both stored tempo or outperformed. European luxurious, Asia tech, Europe biotech, and Europe renewable power. It’s simply been very, very concentrated within the growthy bits, that are barely decrease components of the index, however at a broader idea, I feel now there’s extra of an argument truly, not only for the growthy bits, the worth bits, and therefore for broader outperformance.


What’s been Gabi’s most memorable funding? Good, dangerous in between? Something come to thoughts?


China’s definitely been a wild experience, I might say. I do proceed believing so much in particularly A shares. I do suppose from China’s curiosity, that’s the market they need to develop for their very own Chinese language buyers to take a position their pool of wealth. That’s the place they’re going to encourage the brand new precedence sort of firms to go public, and that there’s nonetheless fascinating tales there: software program, automation, home consumption, particularly these sort of quick trend low cost retailers you have got in China, renewable power.

I feel China, for me, by far is essentially the most memorable, however I proceed having conviction in choose components of the A share story. We have now such an amazing staff there, and I used to be only recently in Shanghai visiting them, and I feel we’ve got a notion within the US that China’s a catastrophe, however you realize what? Streets are busy, planes are busy, individuals are going about their enterprise. There’s nonetheless alternative in sure pockets of it.


That must be on my 2024 journey schedule. I’ve by no means spent actual time in China, solely Hong Kong, so I have to…


Shanghai would blow your thoughts.


On the to-do listing. I bought a whole lot of international locations on my world Jim Rogers journey capitalist, funding biker schedule that I have to go go to, and China’s on high of the listing. I’ll hit you up for some suggestions after I make the journey.


Please do, please do.


Gabi, we’re going so as to add a whole lot of the issues we talked about at this time to the present notes, all the varied guides, which I’m truly going to go redownload after which flip via after our chat at this time. The place’s one of the best place to search out you, your writings, your numerous TV appearances? Folks need to discover Gabi, the place do they go?


Gabi’s LinkedIn has a whole lot of it. Additionally, jpmorganfunds.com.


Excellent. We’ll added to the present notes.


I confer with myself within the third individual, however yeah.


Gabi, thanks a lot for becoming a member of us at this time.


Thanks, Meb. I actually respect it. I’ll maintain listening.

Closing Message:

Podcast listeners, we’ll publish present notes to at this time’s dialog at mebfavor.com/podcast. When you love the present, when you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the opinions. Please evaluation us on iTunes and subscribe to the present wherever good podcasts are discovered. Thanks for listening, associates, and good investing.



Please enter your comment!
Please enter your name here