Animal Spirits Podcast Episode Summary

Episode: "Talk Your Book: Emerging Markets Are Back"

Date: November 3, 2025

Main Theme & Purpose

In this episode, hosts Michael Batnick and Ben Carlson explore the sudden resurgence of emerging markets (EM), which have surprisingly matched the US stock market on a total return basis over the past two years. They are joined by Raoul Sharma, portfolio manager at Schaeffer Cullen Capital Management, who brings a "boots on the ground" approach to EM investing. The discussion centers on why EMs have roared back, the role of a weakening dollar, improvements in governance, the growing importance of technology and dividends, and Schaeffer Cullen’s specific strategy for EM investing.

Key Discussion Points and Insights

Emerging Markets' Resurgence & the US Comparison

• Returns Analysis:

  • EM stocks are up over 32% this year (as of October 20). (00:58)
  • Since January 2024, EM and US stock returns are “even-steven,” despite headlines dominated by US mega-cap tech. (01:14)
    • Michael Batnick: “Emerging market stocks and US stocks are even. Steven, that's kind of hard to believe.” (01:34)

• Historical Context & Dollar Dynamics:

  • While US stocks have outperformed for many years prior, the sharp decline of the US dollar is noted as a key reason for EM's outperformance in 2025.
  • Michael Batnick: "A weak dollar...makes a lot of sense. Yeah, I definitely wouldn't have said it. Yeah, sure, emerging markets is going to be the outperformer this year, but I guess that's how this thing works." (02:16)

China & Innovation: Beyond Imitation

• Engineering Culture vs. US Legalism:

  • Referencing Dan Wang’s "Breakneck," China is portrayed as a society led by engineers, in contrast to the US’s lawyer-driven approach.
    • Ben Carlson: “…China is run and built by engineers and the United States is built and run by lawyers. And so the way that things get done, the way that things are built, very different incentives, very different structures.” (03:58)
  • Raoul describes China’s efficiency, noting that leading AI models are only 5-6% behind ChatGPT but cost 90% less to create. (04:57)

• Tech Advancement & Misconceptions:

  • The “US innovates, China imitates” adage is now outdated. China leads in electric vehicles, robotics, and battery storage, with their domestic companies setting global trends.
    • Raoul Sharma: “If you just look at some of the new EVs they're producing, these are just really beautiful cars…a US industry insider pointing to the same thing.” (07:59)

Schaeffer Cullen's EM Investing Philosophy

• Active, Value-Based Strategy:

  • Classic Benjamin Graham value discipline: avoid overpaying, long-term focus, and strict adherence to process.
    • Raoul Sharma: “We're active... we use a Benjamin Graham style value investment discipline… We're very long term investors and we don't stray from our discipline.” (09:11)
  • Strong emphasis on deep country research, recognizing that country-level risks are amplified in EMs.

• Value/Growth Dynamics:

  • In EM, the line between growth and value is blurred. Many former growth stocks (e.g., Chinese tech) have corrected, turning into value plays.
    • “Some of the growth stocks essentially became value stocks…we pounced on them.” (10:14)

Weak Dollar as an EM Catalyst

• Raoul cites a powerful historic correlation: when the dollar declines by over 10%, EM stocks rally on average 45% (with a 90% “hit rate”). (11:47)
• Currency moves relieve debt burdens and spur fund flows into EMs.

Return Drivers & Governance Reforms

• Corporate Governance Reforms:

  • Major waves of reforms in Japan, South Korea, and now China are boosting valuations and encouraging share buybacks and dividend hikes.
    • “China has probably been the global leader in terms of the percentage of share buybacks and dividend increases…companies to have better corporate governance.” (04:57)

• Earnings as Key Drivers:

  • Long-term, it’s still about earnings growth, but EMs are starting to see some multiple expansion as reforms take hold. (20:32)
  • EMs currently offer better average annual earnings growth forecasts versus the S&P 500, at roughly 40% lower valuations. (20:32)

Country and Company-Level Value Decisions

• Risk Management:
  • EM investing is more than cheap PE ratios—country quality and corporate governance matter to avoid perennial value traps (e.g., Russia). (15:28)
  • China’s discount has lessened as headwinds around regulatory crackdowns and governance have eased (though Taiwan risk and transparency concerns remain).

Investor Behavior & Domestic Changes

• Increased Retail Participation:

  • India and China see growing retail investor interest and financialization. India, in particular, is highlighted for its modernization, with new infrastructure and high digital adoption. (22:33)

• Balance Sheet Conservatism:

  • Compared to the US, EM companies are generally more averse to debt, partially due to limited access and currency risks. (23:58)

Technology's Ascent in EM Index

• Technology is now EM’s largest sector—contrary to old stereotypes of EMs being dominated by financials and industrials.
• The fund now tilts somewhat closer to the index, given how many “Internet darlings” corrected to attractive value levels. (25:04)
• Dividends—and increasingly share buybacks—are a core part of the investing strategy; companies that pay dividends tend to have better governance and are less volatile in downturns. (25:52)
  • Raoul Sharma: “We've gone down less in 83% of down markets since our inception... dividends go a long way to doing that.” (26:44)

Persistent Risks & Geopolitics

• The threat of a China-Taiwan conflict imposes a lasting discount on Chinese equities. The fund avoids small/mid caps in China to remain nimble if a crisis emerges. (21:33)

Flows and Investor Sentiment

• 2025 has seen strong inflows into EM funds, but mainstream media awareness and retail investor enthusiasm are still lagging. (27:53)
• Uncertainty around US-China trade/tariffs continues, but any clarity could ignite a relief rally in EMs. (28:25)

Dollar Cyclicality

• Hosts caution against dollar doomsaying, noting its historically cyclical (not catastrophic) behavior.
  • Michael Batnick: “You're diversifying against the cycles as much as you are against a collapse of the dollar.” (29:34)
• Raoul expects the dollar may trend lower, supporting non-US and especially EM equities for the next several years. (30:04)

Notable Quotes & Memorable Moments

• On China’s Innovation:

  • Raoul Sharma (04:57): “They're just very creative of how to build things in a less costly way and in a more constrained way. So if they can't get Nvidia's best chips, that's not really holding them back as much as maybe the US thought it would…”

• On Value Traps in EM:

  • Raoul Sharma (15:28): “If I just looked at low PE and high dividend yield… I would have probably had a third of my portfolio in Russia. But because Russia has a lot of other problems… we always had a lot less.”

• On the New Face of EMs:

  • Raoul Sharma (25:52): “The biggest difference in emerging markets is just how diverse the opportunity set is… We're getting about six times the number of companies in emerging markets [as in the US screens].”

• On Cyclical Dollar Risks:

  • Michael Batnick (29:34): “You're diversifying against the cycles as much as you are against a collapse of the dollar.”

• On the Case for Continued Gains:

  • Raoul Sharma (30:04): “Hopefully it'll just be orderly. Maybe we get a 4 to 7% decline in the dollar every year for the next three to five years… I think it would be really good for non US equities and especially emerging market equities.”

Timestamps for Key Segments

| Timestamp | Topic | |-----------|----------------------------------------------------------------------------------------------------| | 00:58 | EM and US stock returns even since Jan 2024—contrary to expectations | | 03:58 | Dan Wang "Breakneck" discussion—Engineers in China vs. lawyers in US | | 04:57 | Raoul on China’s tech progress, cost advantage, and governance reforms | | 07:59 | Misconceptions about China’s tech capabilities dispelled | | 09:11 | Schaeffer Cullen’s EM investing philosophy—active, value-based, country selection focus | | 10:14 | Growth vs. value in EM, and opportunities in AI supply chain | | 11:47 | The impact of a weak dollar—historic context for EM rallies | | 15:28 | The importance of country risk—why cheap isn’t always good (Russia example) | | 17:43 | Governance shifting in Asia, investor culture changes | | 20:32 | Returns driven by earnings growth—EM offers better growth at lower valuations | | 21:33 | China-Taiwan conflict’s effect on risk and investment strategy | | 22:33 | India’s transformation and growing retail investor base | | 23:58 | EM companies’ balance sheet conservatism vs. US peers | | 25:04 | Tech is now EM’s largest sector; portfolio alignment | | 25:52 | Dividends as a core strategy; defensive element of EM dividends | | 27:53 | Investor flows, sentiment, and prospect for continued rally with clarity on trade/tariffs | | 29:34 | Dollar cycles and diversification logic | | 30:04 | Outlook for dollar depreciation and positive impact on EM equities |

Conclusion

Emerging markets are seeing a major, perhaps underappreciated, comeback, driven by a combination of dollar weakness, substantial governance reforms, renewed attractiveness of value (especially in technology), and increased local investor participation. While geopolitical risks and perceptions linger, especially regarding China, fundamental improvements and cheap valuations create compelling opportunities. Schaeffer Cullen’s value-anchored, actively managed approach emphasizes selecting both countries and companies with strong governance and earnings potential, capturing the upside while minimizing the unique risks of EM investing.

To learn more about Schaeffer Cullen's Emerging Markets High Dividend Fund, visit Cullenfunds.com.