Michael Zeuner (11:17.228)
Hi, everyone. This is Michael Zeuner, one of the managing partners at We Family offices. Thanks for listening to the Wealth Enterprise briefing. I’m joined today by Sam Sudame, our global head of macro. And for our regular listeners, you’ll know for the last several episodes, we’ve been talking about the impact of the war with Iran on global capital markets, on global energy markets, and how investors might want to position their portfolios.
Given what’s going on, we’re gonna take a little bit of a different tact today. And while certainly, while we’re in the fog of war, it could cloud the short-term decision-making. Sam and I are gonna talk about a topic that we see as a much more fundamental and long-term, Sam would use the word secular, opportunity that subject to the war and its resolution,
and what happens with energy prices should be an interesting place for investors to focus attention on in the coming years. And that topic is the emerging markets. And Sam, you’ve recently done a deep dive in the emerging markets. Maybe give us a little bit of context as to why you did the deep dive, what you learned, and importantly, what the implications could be for investors.
Sam Sudame (13:06.743)
Sure, thank you, Michael. So since 2010, emerging market equities have largely been a difficult place to invest. There was a lot of risk and not all that much absolute return. And equities significantly underperformed US equities. But last year, outperformed US equities by its largest margin in years. So that led us to this question. Has there been a change
a secular change in EM? And will EM equities finally carry their own weight in a portfolio? That is the big question. So first, let’s go through a few reasons why EM returns were so low for that 15-year period. The first was during that time from 2010 to 2015, overall global economic growth was anemic. And this led to poor profit growth.
During that time, commodities were weak, which really impaired the complex. The US dollar was strong, which also affected returns for dollar-based investors. And another critical reason why underperformed was the dominance of China in the index. Now China was economically slowing during that 15-year period.
as it was undergoing a significant transformation of its economic model. And as it slowed, EM’s economic growth premium over developed markets started to fall as well. And then in addition, particularly since 2018, there was higher geopolitical risk which weighed on the EM complex. So overall, the question was, does EM always perform, underperform?
Sam Sudame (14:59.917)
But are there times when EM can outperform? What are these long-term cycles like? So note that EM does not always underperform as we saw from 2010 through 14. There was a time when EM significantly outperformed developed market equities. That happened from 2000 to 2010. This happened when China was growing very rapidly and pull the rest of upwards. So it does go through these long-term cycles. Now, has the equity cycle finally poised for a secular uptrend? And that’s really what we did our deep dive on.
Michael Zeuner (15:42.305)
Okay, and so I hear you and you know, certainly for the last 10, 15 years, the common thread through both the up and the down in the emerging markets was China. I have to believe that China is still the common thread in the emerging markets. But what is it that has changed as we sit here in the, you know, almost in the second quarter of 2026 that leads you to believe that perhaps there’s a change afoot in relative performance in emerging markets, developed markets for the better.
Sam Sudame (16:22.029)
So a lot has changed. So during that 25 year period, it was a China story. Now what we’re seeing is a lot of changes have occurred. We’ve started to see that it’s many different stories. But overall, what we’re seeing is the long term, we’re seeing that higher growth potential. So a growing middle class, relatively young population, particularly in India and continued economic development.
But then we also have attractive valuations. Absolute valuations are appealing and relative to US are extremely attractive. But then we also have, we’re supported by a solid economic backdrop driving improved earnings. So overall, earnings are expected to grow more than the US this year. And one of the main reasons is the theme of AI, where AI is really impacting the Far East, particularly South Korea and Taiwan. So the United States dominates in the development of AI software, but South Korea and Taiwan dominate hardware. As a result, compared to, let’s say 20 years ago, Asia is now 80 % of the index. 20 years ago, we talked about the BRIC countries.
Brazil, Russia, India, China, and South Africa. Now this is really an Asia story driven by China, India, and South Korea along with Taiwan. So there are many more stories in EM, not just a China dominated one. But then there was some very important things that have happened in these last 15 years.
Most importantly has been the quality improvement in leading to better profitability. So during that period of time, profit margins have risen meaningfully. Balance sheets have delivered significantly and business momentum has improved with higher sales growth. And this has now led to a structurally higher return on equity for stocks.
Michael Zeuner (18:43.006)
And again, we keep using the term but if I read through it, we’re not using as code for China, but essentially we’re saying that and the opportunity that you see going forward is emerging markets Asia, which includes China, but several other important economies. Given where we are in this war, one of the things that we read a lot about is that the impact of the energy shock and the energy crisis resulting from the war is being felt all over the world, particularly Europe, but most certainly in Asia, which relies significantly on Middle Eastern oil and energy in the Straits of Hormuz to power their economies. How do you see that impact in the short term affecting the thesis that you have, which is a more secular and medium to long-term outlook for Asia? Does it change anything for you?
Sam Sudame (19:57.048)
So when we look at the energy impact over the short term, it is really country by country. So it’s quite specific. China, for example, has stockpiled a lot of oil in its reserves. It can last several months. The estimate is maybe four to six months. China has also focused heavily on electric vehicles and generating alternative energy that is not oil dependent.
They’ve been depending heavily on solar power, for instance. China is better able to weather the energy shock compared to where it was, 10 years ago. India, on the other hand, is extremely vulnerable to Middle Eastern oil disruption. Given its geographic proximity, it tends to use more of a just-in-time inventory for energy. As a result, it also has not stockpiled.
much energy like China has. It is therefore very vulnerable. Now, we’ve seen in the news that Iran has let some energy transports get through and go to India, but India’s heavy dependence makes it very vulnerable. The same thing happens with South Korea and Taiwan. They’re heavily dependent on Middle Eastern oil, but just like China, they’re also able to rely more on
Malaysia and Indonesia for their energy as well.
Michael Zeuner (21:29.672)
So while you see it as a potential short-term challenge for those economies, your thesis remains intact for the medium to long-term, that there’s opportunity. I would also imagine that those economies, even if there’s a quick resolution, and certainly if there isn’t, will begin making significant investments in diversifying their sources of energy away from carbon, away from oil, away from Middle East generated oil to electrification and other sources of power, but that will take some time to play out. But there’s probably an opportunity for investors in that as well.
Sam Sudame (22:09.057)
Definitely.
Michael Zeuner (22:24.897)
Okay Sam, I think we’ll leave it at that. Thank you very much for your thinking and I look forward to talking to you again soon.
