Capital Ideas^TM

Intro to podcast interview

Will McKenna

This week on Capital Ideas, we’re sitting down with Capital Group portfolio manager Lisa Thompson, who has nearly 30 years’ experience investing in emerging markets equities.

In this wide-ranging interview, conducted by Investment Director David Polak, Lisa shares her views on the rapidly changing path of globalization, a brighter outlook for emerging markets, and why she enjoys investing in a technicolor world.

I'm your host Will McKenna. Let's get into it.

Interview transcript

David Polak

Lisa Thompson, welcome to the Capital Ideas Podcast.

Lisa Thompson

Thank you very much.

David Polak

Let me start with a question around a topic you and I were discussing just the other week, which is around the recent banking crisis, or my say, crises? How are you thinking about the health of the banking system? And do you see any differences between what's happening in the US and Europe and perhaps Asia?

Lisa Thompson

It's always really dangerous to say, this time is different. And so with that massive caveat, I am going to say I think this time is different. I do think that this is something that's important to watch in the U.S. But I actually think that we're in a very different environment in most banks outside of the U.S. And there's a few reasons for this. And I would say, particularly, maybe in southern Europe and in Asia, including Japan, in the U.S., we have this thing with the money market funds, it's completely liquid, in many ways, very easy to to move your money. And I think a lot of people, when they saw what happened at Signature Bank and Silicon Valley Bank, they said, yeah, I have some money sitting around, maybe I haven't gotten around, maybe I should move my money to to a money market fund. And I don't think, from what I understand and the work our analysts have done and talking to banks and other countries, you don't have that same dynamic. It's just not that easy to go and buy a short-term instrument in Italy, or I made it does, it takes more time it takes more. So I think that that's an issue an issue. And we've moved off NIRP, negative interest rates policy in Europe. And I think that that is a big deal. And finally, on the regulatory front, I think we've been through a lot of regulatory headwinds for a number of years in, in Europe, in the banking sector. And there's been a lot of capital rebuild. And so the capital levels are very high, the regulations are much more stringent. So when I put it all together, I do think it's different. But time will tell it doesn't mean that these countries won't be exposed if there's a deep recession, that we won't have a credit crisis. But I don't think that there is sort of the same issues that we saw to the 2011–2012 banking crisis in Europe.

David Polak

Thank you. It's a reminder that the market often looks for echoes of past crises when these things happen, and it immediately went to the global financial crisis, right? What you're pointing out is no, there are big regional differences. And you know, the world changes, the world evolves. And that leads into the next question, which is around deglobalization, which I think we would argue is wrongly titled. We perhaps would retitle it reglobalization or nearshoring. Right. We talked the other day about Mexico, and how there is more and more assembly moving to places like Mexico. Often India is the place that is cited in the media as seeing a big inflow of production assembly from China. But Mexico, tell me more about that.

Lisa Thompson

Well, it's interesting. And I do think that I'm gonna date myself here. But this is very redolent to the kind of growth impetus we saw in 1994. With NAFTA. And you kind of have to go back that far, you and I remember that maybe not a lot of people do. But this is a significant structural change, then benefit from Mexico and Mexico, came into this, you know, one of the benefiting from being obviously right next to the U.S. We've had a long history of companies doing business in the northern part of Mexico with success. And I think there's always been challenges, but I think this is just giving a bigger impetus, the cost benefits are huge. And I think that the desire to sort of change your supply chains and sort of, as you said, rework or I think it's reworking supply chains really benefits Mexico. Now, like everything in life implementation is key. And this is I'm sure going to be two steps forward, one step back. There's an incredible opportunity for Mexico. If they implement this right. And I think some of the things they're doing, I think will help, for example, they're trying to entice more investment, a little bit away from the border. And I think that's important. I think it's hard thing because the border is a well-honed area where companies know how to work, you can have workers comp, kind of go back and forth, people can live in the U.S. So that model has been in place for a long, long time. When you go to other parts of Mexico, you do have labor, but you don't have the skills. You don't have the infrastructure, you don't have the same ability to get things you do have railed on the stability. So I think it's sort of I understand why the government's doing it. I think it is kind of a long-term imperative, you don't want to have a two-tiered country, right, with all the activity only at the border. And a lot of the country being you know, very impoverished, which is a little bit the situation today. But it is going to take — it is not without its challenges. Mexico still has some big infrastructure weaknesses; it is not invested enough in the grid. But the government would like to have the national utility CFE sort of be the dominant provider there. It's had a mixed track record. So that's why its execution is key. But it's an opportunity for Mexico to seize. And that's nice to see.

David Polak

And while we're on the topic of emerging markets, if we could just broaden out the lens of emerging markets have had pretty mixed start to the year you have China, Taiwan, Korea, setting the pace. But meanwhile, Brazil and India lagging, how do you think about emerging markets A) as an opportunity and B) as an asset class?

Lisa Thompson

It was, you know, I've had a long, long history in emerging markets as well. I mean, starting with Mexico, but I've been involved in, in emerging markets for almost 30, over 30 years, but broadly in emerging markets for probably, you know, over 25 years. And I think that that, you know, I'm not, first of all, when you invest in emerging markets, you have to have a longer term time horizon, right? We know these are more volatile markets. So you know, when we talk about short term, I don't know. I mean, you tell me, I don't ever think that I'm really going to be great at short term. But on a longer time horizon or medium-term horizon, I think this is a really interesting time for emerging markets. For reasons I'm bullish. On a high level, you know, emerging markets didn't engage in this excessively loose fiscal and monetary policy that we saw the developed markets. They didn't have, I mean, some did, like maybe China's the exception, but in general, they didn't. And they didn't have the ability, nobody was gonna let Mexico go and start printing pesos, you know, with wild abandon during the current pandemic. So they really took a lot of pain in the pandemic, in particular, and they don't have the same excesses. So that's why funnily enough, you're seeing inflation levels in emerging markets that are more similar to the developed markets. Its inflation levels, haven't, you know, they're a little bit higher in emerging markets. But what's really changed is what's happened in the developed markets. And I think that's super interesting. And I think it's pretty positive for the currencies in emerging markets. Secondly, I think that decarbonization and lack of sufficient invest in the mining sector. And the commodity sector, in general means that commodity price prices are likely to stay in a higher trading range. And that is generally beneficial to emerging markets, as they are more commodity intensive economies. And then finally, I think that the geopolitical issues that we are having with China mean that not only will China be looking for other places to invest, and I think one of those places is going to naturally be the emerging markets, but also, as you mentioned, we're going to be doing more nearshoring and other investments in emerging markets. And I think this is really important for two reasons. One, you're increasing the number of countries that are looking to invest more aggressively in emerging markets, and you're moving from reliance on portfolio flows to FDI. Which is much stickier, and I think that that's a big deal. And then fourth, you know, and I like to end with valuation, not start with valuation. Starting with valuation can kind of get you into trouble. But before that, I think the valuations are attractive. And so I think we've been through a tough time in emerging markets really, since, you know, the bust of the commodity cycle, you know, 2009 It's been a tough road for emerging markets. Yeah, you had China was doing really well that it you know, it kind of collapsed. And India has been, you know, a great market, but a lot of the other markets, it's been tough. And I think people are still a little nervous, they look at things, you know, both pro and cons, which I think is good. So yeah, I feel better about it. Certainly spending a lot more time. I think a lot of things are changing. And the geopolitics, I think, actually are beneficial to emerging markets.

David Polak

One of the things we're often asked is, that sounds great, Lisa, but where's the catalyst, and one thing you mentioned was currency. And if you look back over the last decade or more, the dollar has essentially risen relentlessly against pretty much all currencies. And there's a possibility that people out there have forgotten what it's like to see the dollar weaken, again, broadening the lens even further now away from emerging market currencies, but to all currency crosses. How do you think about the dollar at this point?

Lisa Thompson

Well, if it's difficult to talk about emerging markets, on a short-term basis, it's even more difficult to make any forecasts about currencies near term. So whatever I say, I'm sure will be terribly wrong in the near term. But again, I don't think that my focus should be on the near term, because that's a very hard way to make money part of The Capital System. You know, it's not only getting to know companies and managements well, and really doing the work on things like macro and really understand the big variables, but also not trying to compete with everybody on what's happening the next three months. So, with the dollar, you know, I think it's true that it's whether it's $1, or gold, these are currencies or things where lots of different factors can impact currencies. So that what I mean to say is, you know, sometimes it's real rates, sometimes its purchasing power, sometimes its inflation. And so the trick is kind of figuring out what is driving that right now, on a near-term basis. And there's a lot less focus on, you know, what is typically a longer term issue, but purchasing power parity. And I think that on a purchasing power parity basis, which again, is not a not a near term, but a longer term thing, the dollar looks expensive. I think the other thing is that we have seen, you know, due to the success we've had in the technology sector and the success we've had in with private equity, and I would say, you know, the U.S. being just in its primacy in terms of capital markets, I mean, we, you know, we do capital markets really well, we are, you know, we're a country that's geared to financial activity. And with low interest rates, we saw a lot of asset price inflation. And American companies just did that better than anybody else, right, buying back stock, optimizing their balance sheets, private equity, raising a lot of money for private credit, private, you know, private debt, private equity. So we've done that very, very well. We've had enormous success. We've also benefited, I would say from, you know, all the incredible innovations on the technology front and all the ecosystems that we're all well aware of in Silicon Valley. So it's not just financial wizardry, it's there's a lot of things that came together, we had an incredible run, we've had an incredible run for a number of years, some of it, and a lot of it well deserved, right. And I think that's led to significant portfolio inflows into the U.S. So not only did we have the reserve currency status, but we also had people wanting to invest in this market. This was the best-performing stock market, right, over a long, long period of time. We've seen a lot of countries, you know, both invest in our Treasury market, but also importantly, invest in our stock market or in private equity and a lot of vehicles like that. And I think there's a risk that is starting to change. And part of it is I think, as I said, countries are starting to invest a little bit more in their own backyard. We talked about China, and then China investing in emerging markets. And actually we're at, you know, the like we're investing in Mexico. I think, with the European Recovery Fund, you might be able to say that Northern Europe is investing again in southern Europe. That Italy's the biggest recipient of the subsidized lending that's coming from the Europe, the grants that are coming from the European Recovery Fund. So we haven't seen that since you know, back in the day with the, you know, to the early 2000s. When we saw a lot of money coming from Northern Europe to Southern Europe, it's coming in a different form, right, but it's not portfolio flows, it's actually grants, it's more stable capital. So I think, I just think that not that all this capital that's come into the U.S. is going to leave the U.S., but at the margin, less will come in. And, you know, often markets are set at the March, in the Middle East, they're doing a lot of privatizations, and IPOs. At they're going to be investing more, and there's gonna be more investment vehicles for Saudis to invest in their own country, for example. I think the Chinese, I don't know what they're going to do but if I were them, I think they're going to invest in a lot of domestic capacity, you know, and things they're going to try to, you know, improve their own semiconductor capacity, we know that we don't know how or when we know they're gonna invest a lot of money, right. They're investing a lot in EVs, a lot of things are investing in. But I also think, you know, that another place that capital could go to is the equity markets and the capital markets in China. So I look at all this and I say, you know, maybe we won't have the same portfolio inflows into the U.S. And that's been a big kind of underpinning of the dollar, more than I think people realize. And we've had this incredible run of money coming in to take advantage of what I would say, asset price inflation in the U.S. in the global markets, but particularly in the U.S., which we've done it very well. And, you know, now I think that's changing. And I think, you know, I could go on about this for a long time, but that I'll stop there.

David Polak

Well, thank you. I think, you know, the last decade or so the odds were very heavily stacked in the U.S. favor, and those odds are evening out now.

Lisa Thompson

Look, I mean, I still think we have a lot going for us as a country. I'm not saying that. Like, I mean, there's a lot of innovation, we've got a very flexible labor market, there's a lot of things that that go well, but we've I think we've under invested a bit as well, you know, a little bit too much financialization and a little bit too little investing in productive capacity. And I think that's changing. So I, you know, it's not that I'm bearish on the U.S. long term, I think that we've just maybe benefited a little bit more than the rest of the world. And we're probably going to get a little bit of that back relatively.

David Polak

Yeah, geographical balance is the phrase that springs to mind. And with, with balance, we could easily see the dollar over the long term weaken. And that would be a tailwind both for emerging markets and international investing. Exactly.

Lisa Thompson

It for emerging markets. It's like manna from heaven. And that's, that's a very good point. And so it's another reason to be long-term bullish on emerging markets.

David Polak

And when you were chatting about the long term, one of the comments you made was about the importance of understanding management. And Capital Group, I think last year, we met with a — we had 25,000 company meetings, mainly led by our analysts. And we, we tend to look at the world through the lens of bottom-up lens of all of these companies. We have 25,000 points of light. And that gives us a rich mosaic from which to understand the world rather than just relying on top down, how important for your investment process is management's and what's maybe what's a really strong management team that led you to invest and maybe stay longer than you might have done. And what's a bad management team? And what did you learn from that?

Lisa Thompson

Well, I always think it's better to be long-term greedy. And I mean, long term, like really thinking about, like, where do you want to be in the next 1020 years? I mean, because I think when you're short-term greedy, you run the risk of blow ups. And that's in life, that's in you know, anything. So I was, you know, I know, greed is not a good word, but I like being long-term greedy. You know, for example, what does that mean? That means a company, like maybe a mining company that's investing, if you're short-term greedy, you've cut corners, you know, you might, you know, not invest upfront in real exploration and development kit, don't really worry about the water nearby. You don't worry about community relations. You know, you're just trying to make some money because it's a hard business and it's capital intensive. And you might look great for a while. But if you're long-term greedy and you realize that you're going to be putting what now is like, five, $10 billion into a country and once you've put that money in, yeah, get it back. Because it's, you know, it's some capital and they can just with a stroke of a pen, take it away. You realize, well, why I really got to invest up front and to the exploration and debate almonds, spend that money up front even before I've, you know, okayed the project. And then I've really got to make sure that the guy, I'm aligned with the government that we're on the same page, because it's going to make it less likely that they come back and say, yeah, you know, what, we don't feel we've got fair economics, we don't feel like this is a good deal for us. And I need to make sure that the people in the community are benefiting, that they've got jobs, that the water, we're not ruining their water supply, you know, that they're, that they feel like, they're proud to have this company there. Because also, if they like it, then the government is less likely, because it's not going to just be going against some company that's based in London, or Toronto, it's going to be going against a community that there's maybe not a lot of other opportunities for, and who wants that? Right. So, you know, I think of that, and I will say, like, I mean, the good mining companies, the well-run mining companies, they do this. And, you know, I think you just don't, of course, there's always issues, it's a tough business, but you reduce the risk. And I think that's really important. So it probably as I've gotten older, I've come to realize, I've always thought you had good managements, but how do you it's really like, they've got to be thinking about the whole social cost of the full cost. So it doesn't come back and bite them, you know, that they have to be not just running the benefit the business for the benefit of their three- or four-year tenure where they're going to make a lot of money and get out. And so I do like to hear about companies that are not that focused on the future, but doing what I think is, like just make sense, like sensible, like, if you were owning that asset. And I think of us when our longer term holding period, we're kind of we're not the owners that they are, we might not, we may not hold that security for 20 or 30 years, we have held some, but we're going to hold it for a longer time. I want someone who's really tending to that asset, you know, and not just trying to play a game. And, you know, I've seen that with some managements that are really thinking about the all the constituencies, you know, if you're a bank, are you thinking about what the regulators want, and not just trying to fight with them, but trying to talk, sit down and talk to them and understand what their issues are, you know, your employees, again, you don't want to have your employees out striking all the time. So that's what I look for, you know, and, you know, sometimes I think there's this idea that, oh, family run businesses is not good. And I would say, I think that there are well run family run businesses and poorly run family ones. But the ones that are well run are the ones that are really like, like, I bought, like, we're invested in this for 100 years. And we're gonna run the business like that. And I tend to gravitate to that.

David Polak

It's a really good point. And you've been doing this at Capital now investing capital for nearly three decades. You, thank you, if you look back on those three decades, or what's your favorite part of being an investor at Capital?

Lisa Thompson

Gosh, there's so many things. First, we are so advantaged by the amount of information that we have. And we have all these super smart people who share information. And one of my, one of our former colleagues I was talking to who retired. And they said, you know, it's like, you're living in a world, a Technicolor world, when you're at Capital, there's so much information. And it's so exciting. And then when you retire, you're sort of relegated to read The New York Times, or The Wall Street Journal, and the world goes almost black and white. Right? It's that you just know, there's so much more you're missing. And so that's super exciting to see. And when you see the whole process really working, when we're getting together and we're leveraging off each other. We're working together, we're bringing in different expect lived experiences, different viewpoints, you know, trying to solve these questions. That's when I get super excited. It's like the best.

David Polak

Lisa, thank you so much for your time today. It's been a fascinating tour of the world. Fascinating tour of investments and some real insights there.

Lisa Thompson

Thank you very much. It's been great to be here.

Episode outro

As disrupted supply chains, deglobalization, conflict, and an economic slowdown take their toll on global trade, investors might expect multinationals to be in the firing line. In this episode, we take a close look at the case for seeking sustained returns from global champions. I'm Matt Reynolds, Investment Director, and this is Capital Ideas Podcast Australia.

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