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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 International Market Insights Technique Group at J.P. Morgan Asset Administration. Gabriela’s analysis focuses on rising markets, particularly China. She is accountable 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 dwelling her excited in regards to the alternative set exterior of the U.S. She explains why she likes the arrange for Japan and India, why nearshoring is simply one of many explanation why she’s bullish on Mexico, and why she thinks China has grow to be extra of a tactical buying and selling market.

Feedback or options? Involved in sponsoring an episode? E-mail us

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 varied 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 talk about the craft of investing and uncover new and worthwhile concepts all that will help you develop wealthier and wiser. Higher investing begins right here.


Meb Faber is the co-founder and chief funding officer at Cambria Funding Administration. On account of trade rules, he won’t talk about any of Cambria’s funds on this podcast. All opinions expressed by podcast contributors are solely their very own opinions and don’t mirror the opinion of Cambria Funding Administration or its associates. For extra info, go to


What’s up everyone? We acquired a rocking present at this time. Our visitor is Gabriela Santos, chief market strategist for the Americas at JP Morgan Asset Administration. As we speak’s episode, Gabi shares her overview of the world after a yr the place the Magnificent 7 has dominated the headlines.

She hammers dwelling how excited she is in regards to the alternative set exterior the US, and she or he explains why she likes the setup for Japan and India; why nearshoring is simply one of many explanation why she’s bullish on Mexico, and why she thinks China has grow to be 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 town in the course of the holidays, I’ll be there the primary week of April, listeners. Possibly we’ll must do a meetup or one thing. I’ve by no means seen a Yankees or a Mets sport, 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 been doing a little bit little bit of a glance again at this yr and a glance forward, after all, most significantly, I believe the primary factor I might say this yr is we’ve been very pleasantly shocked from a macro standpoint, in order that a lot overestimated talked about arduous touchdown undoubtedly by no means materialized. If something, we acquired above development 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 in terms of the labor market, productiveness, and because of this, we’ve had the anticipated fall in inflation, however for a very good cause, which is provide facet enchancment, not demand facet weak spot like we had anticipated.

We’ve additionally had some surprises, I might say, in terms of market efficiency, most particularly on the adverse 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 an alternative, we acquired much more volatility and, to date, low single digit constructive returns.

On the fairness facet, as nicely. On paper, it’s been a robust 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 normal alternative set. This yr, I believe folks will probably be ingesting a little bit extra champagne than glowing water or no matter it might 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 kind of yr the place folks may have rapidly acquired all this yield they by no means had earlier than and so they’re simply going to sit back out? Or as we glance round, let me begin with the US, what are we considering?


So we’re considering if 12 months from now the technique continues to be T invoice and chill, then they’re going to want they’d carried out one thing completely different at this time, and that’s as a result of we actually suppose we’re at peak charges in terms of fed funds fee and in terms of simply the entire yield curve, and what you usually see 12 months after these transition moments is that you’ve length outperform and you’ve got equities outperform, simply pure money.

That is one in every of our largest challenges, is getting traders 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 price we might have by not having locked within the yields the place they’re in mounted revenue and benefiting from some discounted valuations inside pockets of fairness markets.


We have been speaking about bonds, we mentioned, and you may’t clearly put an excessive amount of weight on this, nevertheless it’s fairly uncommon for an enormous asset class like US shares, 10 yr bonds, commodities, REITs to say no a number of years in a row, that means three years in a row. It’s truly fairly uncommon and it seems to be like we’re on tempo for the lengthy bond to print three down years in a row if we’re taking a look at 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 might be a little bit squeamish for many of us, however bonds, definitely for the primary time in a few years, rapidly have this yield once more, which is one thing that I believe lots of people welcome, but in addition is a little bit completely different than that very unusual interval of zero and adverse yielding charges.


Completely, and I believe what’s attention-grabbing is fortunately with the drop in yields in November, when you take a look at the US Mixture, the Bloomberg Barclays US Mixture as a measure of length or core mounted revenue, it’s now mildly constructive of two.8%, so we hopefully solely noticed two adverse years in terms of core mounted revenue adverse returns, however very, very uncommon nonetheless.

And after we look ahead, I do suppose there’s a robust 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 might suppose can be yields round three, 4% alongside the yields curve, and that’s only a higher atmosphere 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 all the things is ideal and it’s all Alice and Wonderland at this level. It’s actually nonetheless an atmosphere the place there’s draw back threat to progress, and in that atmosphere, bonds can work. It was in that peak inflationary worry atmosphere that it actually didn’t serve any sort of goal 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 many years for People. Round the remainder of the world, completely different story. However People actually have had one atmosphere for almost all of my lifetime, which is declining rates of interest, disinflation, no matter you need to name it, after which rapidly, increase, we had this inflation once more.

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


I believe the Fed is an establishment and has a protracted reminiscence, so that they have sure parallels to the ’70s, which clearly may be very a lot on Chairman Powell’s thoughts. He’s talked about Volker a number of occasions. However I do suppose even they fell sufferer to a specific amount of recency bias, to considering that all the 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 incorrect transfer and an enormous catch-up in charges wanted.

I believe going ahead, often we have a tendency to speak within the funding world in absolutes. Both there’s inflation or there’s no inflation. I believe placing some numbers helps. Do we predict inflation will probably 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 atmosphere the place quite a lot of the current inflationary push we actually suppose had quite a bit to do with provide chain points or provide facet points, and they need to proceed getting unwound subsequent yr, after which we might finish subsequent yr our forecasted inflation nearer to 2%.

With that mentioned, over the following decade, we predict there’s a little bit bit extra upside threat to inflation than draw back threat, which was the truth 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 little bit bit extra inflationary stress, nevertheless it’s not this elevated inflationary interval, momentary interval, we’ve lived by way of.

And there are issues to generate a little bit bit extra upside stress to inflation, issues like geopolitical pressure and this push in the direction of rethinking provide chains, the place it’s not nearly the place we are able to produce one thing the most cost effective, nevertheless it’s additionally about diversification, resilience, and barely dearer manufacturing of products going ahead. It’s additionally in regards to the vitality transition, renewable vitality most likely costing a bit extra, resulting in some spikes within the worth of conventional vitality given our underinvestment, so a little bit bit extra upside stress.

And I believe in that atmosphere 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 belongings: issues like infrastructure, actual property, and fortunately, increasingly more particular person traders are having extra entry to these asset courses, along with the standard entry establishments have had prior to now.


That typically is an space, after we take a look at conventional portfolios, people, but in addition advisors within the US, it tends to be, A, very US targeted, and B, typically has little or no in actual belongings, though I really feel like the previous few years has kind of reawakened an curiosity there.

Earlier than we go away the US, I believe 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, types, something that y’all suppose are extra attention-grabbing, or mentioned otherwise, one thing to keep away from or are scary?


Talking of the nuance, I believe by way of small caps, their low cost to massive cap is on the highest we’ve seen for the reason that dotcom bubble, so by way of 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 this can be 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 might say not fairly but, and that’s due to a couple of issues that we’ll nonetheless hold debating and discussing subsequent yr, that are extra headwinds to small cap than massive caps.

Issues like larger charges: we do anticipate charges to come back down, however they’re nonetheless extra elevated, and small caps have the next share of their financing that comes from banks which might be floating fee, versus their massive cap friends which have locked in very lengthy length 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 are usually not trash, that means if there’s some price to cash, traders suppose a little 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 believe we’ll nonetheless have moments subsequent yr the place some arduous touchdown fears will percolate, or not less than late cycle fears percolate, and small caps are much more cyclical. They particularly have quite a lot of regional banks that are actually not out of the woods fairly but, so a very good second to construct a strategic allocation of small caps, however in our thoughts, not the second to be overweighting them. Would nonetheless want their massive cap brethren given their higher high quality.


All proper. Nicely, one of many stuff you discuss quite a bit is XUS, which is one in every of my favourite matters. I believe most of my American mates put virtually 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 important place for 10, 15 years, however I’ll hand you the mic. What does it seem like going ahead?


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

The one factor we all the time point out to traders right here within the US is once more going again to that concept of recency bias. It has been an important 15 years of outperformance of US versus worldwide, an important 15 years of versus different currencies, however that’s not all the time the case. The seven years earlier than that, you truly noticed a world 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 believe, in a manner, the pandemic was like a brand new race began. It allowed for a change within the atmosphere 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 the 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 carried out with adverse 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 sport changer for Japanese and European banks. Increased 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 sport changers there from the nominal progress atmosphere, the rate of interest atmosphere.

One very last thing 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, file excessive variety of buybacks bulletins, so there’s additionally simply far more concentrate on realizing worth for shareholders, which is a big change.

And that is simply within the worldwide developed house, however one which’s been simply left for useless 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 nations, firms, sectors, XUS, have actually embraced this development in the direction of governance, and desirous about the best 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 rapidly they’re low cost and no person cares, together with most of my mates 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 explanation I mentioned virtually is Japan is up 28% this yr. After all, it has had yen weak spot, 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 quite a lot of stress 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 means shrinking rate of interest differentials with the US, stronger yen, and then you definitely get a pleasant cherry on prime from the foreign money for a US-based investor.


Talked in regards to the greenback. How do you consider it? How ought to traders take into consideration currencies on the whole as we’re desirous about these markets, as we’re desirous about mounted revenue, as {dollars} had, they seem like this huge run and it appeared 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 desirous about right here? I acquired some journey to plan, so what do you suppose goes to occur?


We now have this superior graph in our information to the markets that I believe is… You are taking the greenback actual efficient change, so one of many indices of the greenback versus the main buying and selling companions adjusted for inflation. You are 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 modifications, and the macro atmosphere, 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 sport, different facet of the greenback weakening. I believe in the long term, after we mannequin out currencies, it’s all about inflation differentials, GDP per capita, buying energy parity, and that’s all high quality and good, however you want a catalyst.

By these measures, the greenback is dear. What was lacking was a shorter time period catalyst, and I do suppose we’ve that now. We discover that issues like rate of interest differentials are tremendous vital, so this concept that the Fed can begin reducing 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 gained’t see these nations take their charges again into adverse territory, means shrinking rate of interest differentials, decrease greenback.

And there’s been volatility up and down this yr, nevertheless it was wonderful to see November after 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 foreign money 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 consider it unhedged, and that might assist total returns.


You guys have one in every of my favourite… Everybody loves the information to the markets, however one in every of my favourite charts within the guides to the markets, and we’ll put this within the present observe hyperlinks, listeners, it’s like an Alps mountain vary the place it’s the US versus international inventory efficiency for the final 100 years. And then you definitely 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 international efficiency. We’ll see if that reverses once more. We’ll see how lengthy that lasts.


We’re hopeful, we’re. And it’s attention-grabbing, Meb, I don’t know if everybody is aware of, however we take 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 international massive mix, so I believe 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 nicely.


Nicely, that looks like a very good segue into one of many matters you discuss quite a bit about. It varies over time on folks’s curiosity with China. Typically persons are euphoric and China is that this juggernaut that’s going to make Japan within the ’80s seem like a small alternative set in nation; after which different occasions, like most likely 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 traders take into consideration China? It’s been a little bit of a basket case for the previous 10 years. What are you guys desirous about?


Yeah, and it’s been an particularly robust three years actually for the reason that peak of the market in February of 2021. The attention-grabbing 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 by way of coverage and route 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 section of their financial system’s growth. And this time round specifically, it affected a really massive piece of the fairness universe in China, which was the web firms. What you additionally see is finally traders get the purpose, they readjust the funding and also you get a rebound in Chinese language markets.

What I believe is going on is there’s a shift in mentality in the direction of investing in China from, “All proper, I’m prepared to tolerate this volatility that you simply’re speaking about, however I’m going to have a strategic massive allocation to China and I’ll simply surf it out.” I believe 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’re seeing these large swings within the pendulum of quite a lot of optimism and quite a lot of pessimism, and relying on the place you’re by way of that pendulum and valuations, then traders really feel extra snug dialing it up a bit after which dialing it again down a bit. I believe that’s sort of the place we’re. It’s simply much more unpredictable going ahead, geopolitical tensions in addition to quite a lot of competing priorities Chinese language policymakers have now, and it’s not nearly progress for them anymore.

The place we are actually going for subsequent yr is, I believe, on that pessimism finish of the pendulum. You take a look at Chinese language valuations. They’re at 9.8 occasions. That’s 15% under long-term common. It’s the identical valuation we have been at October of final yr, which was adopted by China rebounding 60% from the lows, so quite a lot of conversations we’ve been having about traders 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 most likely on the cusp of issues turning round, particularly now that there’s a much bigger concentrate on placing a ground on progress for subsequent yr; in the meanwhile, dialing down some geopolitical tensions; and clearly there’s simply quite a lot of pessimism and underneath 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 often round 12% of the overall, of which China is a 3rd or half. 4% place of the equities, that doesn’t appear to be a lot for most individuals, though I wager if I have been to ballot what the common allocation of China is, it’s most likely going to spherical to zero for many People.

Though the clips that I take advantage of from y’all’s booklet greater than something are the assorted dwelling nation bias all over the world, not simply the People placing 60% in, significantly in Asia, but in addition geography throughout the US, the place the folks within the northeast put most of their cash in financials. Out right here in Cali, it’s tech. In Texas, it’s vitality.

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 an entire part or is it a standalone?


Information to China, yeah, so a manner for foreigners to know what’s happening there. That is attention-grabbing, Meb, as a result of I believe after we first launched that publication three years in the past, I believe the route of journey we have been going with institutional purchasers, large pension funds, endowments, was they have been beginning to suppose perhaps a 3rd of EM for China’s not sufficient.

If we truly appeared on the measurement of China’s markets, they’ve the second-largest markets on the earth. The actual weight for China ought 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 considering on the time.

I believe the considering 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 taking a look at different elements of rising markets.

I believe 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 all the things. 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 taking place there that assist to diversify a few of that China publicity, if there may be any, or simply the final publicity one has, even with multinational firms, to China. Quite a lot of pleasure. We talked about Japan. One other one in Asia is India. On the EM facet, it’s about to grow to be doubtlessly the second-largest market in EM fairness universe. It’s about to go Hong Kong.


Oh, wow. Okay. Yeah, you’re proper. I used to be taking a look at this China, X China, how a lot of this do you suppose is said to… And it could possibly be zero reply could possibly be zero, it could possibly be quite a bit, it could possibly be none, since you discuss most likely to quite a lot of establishments. Russia, so far as a share 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 appeared on the Russia scenario and mentioned, “Hmm, this offers me pause. The China Taiwan dialogue that’s been happening ceaselessly, my Russian belongings getting frozen or shares getting marked to zero, that’s one factor. If that occurred to China in my portfolio, that might be an enormous, not solely portfolio punishment, however behavioral profession threat the place purchasers, significantly 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 simply suppose is entrance of thoughts, it’s not a lot an institutional world? Or how are folks desirous about it?


I do suppose it’s. I believe there’s a want to not less than mannequin out what would occur if certainly one thing just like Russia occurred and the worth of these belongings 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 quite a lot of conversations about modeling the non-zero likelihood of that taking place.

I do suppose the invasion of Ukraine was vital 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 completely different priorities that aren’t nearly boosting progress. Confidence is low, and it’s taking longer to get better. I believe that is also feeding into that.

The one factor I might simply say after we do have these conversations about geopolitical threat is we might nonetheless put the likelihood of that occurring as very low, and I believe that is from China’s personal curiosity. President Xi Jinping does very completely different calculations, I might say, than President Putin. There’s nonetheless an enormous concentrate on some financial stability, political stability.

There’s quite a lot of dependency on Taiwan for semiconductors. Taiwanese firms are one of many largest employers in China. There are quite a lot of interdependencies there, and within the occasion that that occurs, it’s very robust to mannequin out due to the dependence on Taiwan for superior semiconductors. All these chips that we’d like 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 in regards to the largest and second-largest financial system on the earth, so it’s robust to mannequin out, however I do suppose it provides into the chance of the allocation.


As we glance XUS, are there another areas that we haven’t actually talked about which might be significantly attention-grabbing 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 massively benefited from AI and all the enthusiasm and funding there may be Taiwan, which is up 23% this yr. EM can be about tech innovation and likewise a strategy to put money into the AI theme.

India can 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 high quality of precise company talent 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 considering of China plus one going ahead: producing in China but in addition elsewhere. India’s one. Investing in China, but in addition in one other large EM like India.

After which the very last thing I might say, Meb, is Latin America. That’s my dwelling area. It’s confronted quite a lot of points over the past 10 years or so, put up bursting of the commodity tremendous cycle, however I believe it’s acquired extra tailwinds going ahead. It’s acquired 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 important minerals that [inaudible 00:34:24] has quite a lot of which might be utilized in semiconductors, in addition to in electrical automobiles and batteries. There’s quite a lot of good things I believe taking place 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 carried out phrase Gabi bingo at the start or phrase cloud, nearshoring would’ve been manner before 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 might 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 Hold attempting to consider the brand new title for NAFTA. USMCA is a part of the free commerce settlement with the US. It’s very deeply built-in into US provide chains in terms of electronics, autos, definitely it’s acquired low cost manufacturing wages, which China, by the way in which, not ha,. So it’s extra aggressive from that standpoint as nicely. So many 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 vitality transition, to semiconductors, throughout provide chains.

However a method firms can sort of decrease the price and nonetheless adjust to the spirit of that’s to have a few of that manufacturing in Mexico, the place not less than it’s a part of the commerce settlement, nevertheless it doesn’t improve your price to a prohibitive stage like producing all the things within the US would.

There’s many, many tailwinds from Mexico, and once I go to Mexico, I am going there quite a bit, 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 organising manufacturing there. It’s not simply an concept of nearshoring, it’s very a lot taking place in apply.

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


There’s quite a bit happening. We’ve seen quite a lot of pleasure on the startup scene in [inaudible 00:37:44], but in addition rising markets over the previous few years the place we’ve seen quite a lot of firms actually graduate into what folks would name the unicorns, however bigger personal firms and hopefully will circulation by way of to public markets, as nicely.


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


This has been a whirlwind tour of all the things to date. As we glance out to 2024, what else is in your mind that we didn’t discuss? Is there something you’re significantly excited or anxious about as we glance out to the horizon?


We all the time do take into consideration dangers. I believe we’ve laid out a base case of a comfortable touchdown, fee cuts finally starting. This will probably be supportive for mounted revenue, for broader equities, that there are constructive tales taking place all over the world. 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 quite a bit about is credit score threat. I believe even in an atmosphere the place a comfortable touchdown may 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’ll begin actually seeing the quantity of refinancing for firms choose up, particularly excessive yield, which tends to have shorter maturities, but in addition funding grade. And it’s a bit important for us to begin seeing rate of interest cuts as that refinancing wall is selecting up. That’s how you find yourself with a comfortable 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 a very powerful 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 folks have been calling, I believe Neil Deta of Renaissance [inaudible 00:40:13] Smooth Touchdown Nirvana. We’re on this atmosphere of progress is cooling however not an excessive amount of. What if companies rapidly simply get very cautious, cease hiring, and even begin laying folks off? That’s an atmosphere 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 all the time 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 date is wrong and we truly begin seeing precise vitality 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 believe, fairly than issues about inflation, even the vitality one.

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


As we discuss winding this down, we acquired a pair questions that I’d prefer to spark a little bit bit of dialogue. One is, what’s one thing that Gabi believes, that while you sit down with your pals 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 an announcement, 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 quite a lot of the dialog we’ve had to date, this entire worldwide dialogue, is one thing that almost all of persons are nonetheless not satisfied by, and I believe it’s that recency bias, but in addition the truth that it’s been in the proper place and we’ve 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, really, really consider that there’s quite a 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 actually 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 sport.


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 traders throughout this previous cycle,” as a result of for, I don’t know, the opposite 40 ish nations on the earth, when you have been a world investor, that means you diversified globally, of which the biggest market cap is US, it was by far the very best choice.

The pattern measurement 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 excited about my worldwide dialogue.


One other instance, Meb, that I all the time level out can 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 an attention-grabbing slide in our information to the markets that reveals, “Let’s evaluate it to the very best performing factor the previous decade, US progress.”

Really, you do have pockets of worldwide which have both saved tempo or outperformed. European luxurious, Asia tech, Europe biotech, and Europe renewable vitality. It’s simply been very, very concentrated within the growthy bits, that are barely decrease elements of the index, however at a broader idea, I believe 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, unhealthy in between? Something come to thoughts?


China’s definitely been a wild experience, I might say. I do proceed believing quite a bit 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 traders to speculate 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 attention-grabbing tales there: software program, automation, home consumption, particularly these sort of quick style low cost retailers you may have in China, renewable vitality.

I believe China, for me, by far is essentially the most memorable, however I proceed having conviction in choose elements of the A share story. We now have such an important crew there, and I used to be only in the near past in Shanghai visiting them, and I believe we’ve a notion within the US that China’s a catastrophe, however you understand what? Streets are busy, planes are busy, persons 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 must…


Shanghai would blow your thoughts.


On the to-do listing. I acquired quite a lot of nations on my world Jim Rogers journey capitalist, funding biker schedule that I must go go to, and China’s on prime of the listing. I’ll hit you up for some suggestions once I make the journey.


Please do, please do.


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


Gabi’s LinkedIn has quite a lot of it. Additionally,


Good. We’ll added to the present notes.


I seek advice from myself within the third particular person, however yeah.


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


Thanks, Meb. I actually admire it. I’ll hold listening.

Closing Message:

Podcast listeners, we’ll put up present notes to at this time’s dialog at In the event you love the present, when you hate it, shoot us suggestions at We like to learn the critiques. Please overview us on iTunes and subscribe to the present anyplace good podcasts are discovered. Thanks for listening, mates, and good investing.



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