A (4:06)

that the rest of the world is reacting to this US China race that is being reflected in stock market performance. Right. So can you walk us through maybe which regions are falling where and how? That's how that showed up in let's say 2025's performance.

C (4:25)

Oh yeah. So I think one thing people who, I think the whole world is focused on, you know, very fixated on tech stocks and AI trade in the US you know, over the last few years. And if you, especially if you're a US, US based investor, you may not have necessarily noticed that even since last year, US overall market has actually underperformed the rest of the world. If you compare us to EM index, which you know, I have shown in my writing that if you compare that to say yen total return is actually underperformed over the last year, last 12 months by something like 25%. But what is even more remarkable is that if you zoomed in onto the democracies, the countries that are sort of more, shall we say, democratically leaning, you can measure such things using data from the Freedom House or other reasonable data sources. That index, which we have from Bloomberg Index as well, called a B3 index, has actually outperformed the US by something like 65%, which is a whopping outperformance. And the reason that is is not because necessarily that market has always placed a premium or high value on democratic institutions rather this is something that has quietly started over the last few years, especially since the Ukraine war, gradually has been pricing in this idea of realignment of global supply chain. Which countries are more consistent with the idea that the US needs to take supply capacity, manufacturing capacity out of China and relocate them into countries that have such industrial capacity and whose political institutions and values are more aligned with the US that it could be actually trusted and that it fits in this sort of narrower supply corridor. If you look at the few countries that have done well, those actually are countries such as South Korea, obviously Taiwan, but also South Africa has actually popped up. Some of it has to do with things like commodities, Some of it has to do, in the case of Korea, very obviously has to do with the AI supply chain. Particular memory for the AI value chain. But then there's also beyond that, Latam, South Africa, not South Africa, South America. This idea that being very close to the US it is actually part of a crucial part of the U.S. i think, safe supply chain corridor. I mean, part of the reason why the US has actually gone so far as to spell out in the National Security Strategy document last year, right. This idea of Monroe or Dong Ro Doctrine. And it's very interesting if you look at a factor based attribution of outperformance of where outperformance actually come from, they align quite well with these geopolitical preferences of the United States.

A (7:26)

So countries like South Korea and Latam, let's say how much of it is a coincidence you think that these are democratic regions versus they just happen to be the right fit at the right time in the supply chain.

C (7:44)

Well, coincidence. History is full of coincidences. Depends on what we mean by coincidence. In particular, I think in this case there's a certain degree of, shall we say, deterministic element to it. Right. It is not necessarily because these countries are democracies as much as that they fit within the US trusted chain of preferences. So for example, if the US wants to bring back manufacturing capacity outside of China into other countries, practically speaking, the cost of labor and the availability, general availability of labor in the US at the moment and the lack of, I think fully truly autonomous robots makes it such that it is not really realistic to expect manufacturing to go up in the US in particular, if we see in the data manufacturing jobs have actually gone down in the U.S. now where can that go? Right. The capital flow will have to go towards countries that are closer to the US that trade more freely with the US with expectation of being able to trade, continue to trade freely with the US that will include countries such as Mexico, that will also include other countries in Latam that are closed. And that's part of the reason why I think the US has actually become more, shall we say, active in Latam in terms of even, I think, politically.

A (9:06)

So if you're thinking about this as an investor, is it as easy as saying, I'm just going to go international equities, but only equities that are in democratic countries?

C (9:20)

I think that's part of it. Right. So if you are an US investor versus if you are someone who is not US based, I think your calculus is a little bit different. If you are US based, you are very, I think, conscious of the fact that the world is changing in such a way that there's capability in the US and there is changes required on the world because of those changes in the US as we just discussed. Right. On the other hand, China is also very capable and is able to come up with its own independent capabilities. As a US based investor, you are mindful of of the risks that may be associated with owning Chinese assets. You know, any given moment, you know, things could actually happen such that you may not feel comfortable owning those assets anymore. Right. You know, there have been, I think, discussions of delisting of Chinese securities, for example. Right. That obviously changes if you are a country. If you're an investor based in a country that is neither China nor the U.S. in which case you actually have more flexibility in terms of selecting assets with loyalties, shall we say?

B (10:27)

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A (10:37)

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A (11:10)

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A (11:35)

I'm trying to wrap my head around this as, as we go because I, I've never really looked into this as a factor in investing like the, let's say the democracy angle and even the democracy angle as it's split across US and China. If you're not in the right camp, let's say, does it even matter what your macro or fundamentals are?

C (12:00)

Macro fundamentals obviously still matters, right? To the extent that you are within the camp that is consistent with US reconfigured supply chain, your ability to meet that demand is important. That is actually underwritten by your macro fundamentals. So if you have relatively more stable political institutions, if you have relatively young population that is actually that can be mobilized, if you have the infrastructure, all of those elements will actually put you further ahead if you have natural resources. For example, the US at the moment is very starved of energy. Energy consumes a lot of base materials, copper, lithium for batteries and various other rare earth minerals that are actually crucial. And we've heard about all those things in the news. It turns out all of those things actually fit quite nicely within this framework. So when I think about geopolitics and democracy as a factor, really I'm thinking about the where the demand is coming from and who can actually meet that demand. And typically when it comes to thematic equity investing, the opportunity lies in the fact that you suddenly have a new demand, source of demand and the supply is somewhat inelastic that is not quite able to adjust. So the price has to adjust. And that's the reason why we're seeing often these charts that have become more popular of things going vertical. We all remember from E Comm, if you have a very steep, very steep supply curve and you have a demand curve that's going up, the only variable that can adjust is the price. And that's the reason why, for example, you are seeing all the commodities and even memory, for example, as a commodity is going up as much.

A (14:02)

So when we look at the Bloomberg Emerging Markets Democracies Index, the ticker is bfre be free. When I was looking at the pieces in the index, it's heavily weighted to commodities mining, banking, how much of this is okay, those are the things that are going up right now across the board versus this is a democracies factor.

C (14:31)

Well, we do know that there is banking, mining and in lots of countries, democratic or not democratic. But if we screen this down, it is the case that the ones that are democratic are going by more. Right. So it is telling you that this is actually a prized factor. Going back to the idea that to the extent that there is this additional capital flow that is in search of these materials, it is actually looking for it in places that is more aligned with the US camp.

A (15:07)

Right.

C (15:07)

And there's a reason why it is these factors. For example, if you look at a factor exposure wise, there is mining obviously, but then there is also tech hardware. Tech hardware coming from whether it's Korea's memory chip sector or Taiwan's microchip or semiconductors industry overall, whether it's sort of other related sectors. But then the financial sector is also in those countries are seeing a boost. Part of reason is because if you have incoming capital flow, it has to be funneled through their domestic capital system. Right. So that is actually also a boost for them.

A (15:47)

If you're thinking about this, as far as how to arrange my portfolio for the year, I guess one, you could just invest in both sides, right? In the two camps. But if you had to pick, there's an opportunity cost to not investing. Let's say if you pick the US camp or US aligned countries, you're going to miss any rally in Chinese equities or China aligned camps. How are you thinking about this?

C (16:13)

So I did this analysis exactly because I was wondering how the sources of return and the price risk were reflecting this idea. And indeed if you look at the last four years, the first two years, if you look at the outperformance of democracy over ordinary em, it was more being you're being paid for avoiding China exposure. Because remember the first two years like 2022 and so on, China was not doing so hard coming out of its own COVID policies and its own economic slowdown. But then the subsequent two years, indeed you benefited from being long the democracies that are aligned with US supply chain. But you actually being penalized for being over underweight China or the China rebound trade. But the interesting is your exposure to the US aligned in democracies ems or more than paid for underweight in China. In other words, there is more operating leverage to this reconfiguration of global supply chain when you are actually exposed to the democratic factor. Does it make sense?

A (17:22)

I think so.

C (17:23)

Yeah. Yeah, sorry, you continue so exactly as you say, right. If you are a sufficiently nimble investor who is in the third country, who is not afraid of the decoupling risk, you might find yourself, you know, sort of wanting to long both sides because there is AI trade in the us there is AI trade in China, but then there is sort of the attendance, supply chain and so on and so forth. But if you're someone who doesn't really want to take the risk of managing that decoupling risk, someone who sits in the U.S. what I'm saying is that what we are seeing within this factor is that you are more than compensated from being long the, you know, sort of the beneficiaries of this supply chain reconfiguration. And that will pay for your underexposure to China.

A (18:12)

Right, that makes sense. When we think about Latin America in this context, Latin America will probably become more and more influenced by the US and China will be pushed out if we follow this line of regime, at

C (18:29)

least the hope of the U.S. sure, sure.

A (18:32)

And we've seen Latin America go up like crazy in the last few months. Is it fair to think or project that the more the US influences a nation, potentially the stronger its equity markets will go?

C (18:48)

So I talk about this in my outlook as kind of potentially being a virtuous cycle that for now the first leg of what's happening in Latam is this sort of capital inflow. If you are a resource rich country in Latam, whether it's Chile, whether it's Brazil and so on, you're going to benefit from just sort of this first order demand effect. But subsequently, if the US was to try to influence Latam more and try to make Latam more aligned with the US institutionally, that will create more economic stability in these countries which historically have always suffered from issues with high inflation, political instability and currency weakness. And every so often Argentina will have a bond sort of default and so on and so forth. But if they manage to moderate and bring about institutional stability with the support, the financial support and political support of the US you can potentially see a virtuous cycle where inflation gradually comes down, cost of credit comes down. I see a strengthened middle class within those countries which will then have a positive spillover onto more domestic facing sectors such as consumer, discretionary, financial and even technology. So I can see this as being a pretty secular trend now. This is sort of conditional, this trade working out right. You know, accidents could happen. Maybe the preference of the US doesn't necessarily materialize. But to the extent that one believes that this is actually a core interest of the us, not just of this administration, but more generally, which I believe to be the case, that this is actually part of the trend, the secular trend the US is actually pushing for, to have a more regional, stable supply chain, then I think some of these things could actually happen.

A (20:54)

When I think back to the Biden administration. I would argue that, but they were not as aggressive and also interested in having this type of influence over other regions. Which makes me think, okay, if the Trump administration wraps up its four years and another president comes in, they may not be as aggressive either as President Trump has been as far as influencing Latin America, let's say. Does that put a stop to this trade idea?

C (21:29)

I think some things are more secular, some things are more cyclical to the extent that. Let me give you an example. The biggest signature policy of the first Trump administration was this idea of tariff on China. And tariff on China were imposed but never removed by the Biden administration. If anything, they were actually modestly raised and strengthened in various ways. Once I think there's a momentum behind certain policies just because on the surface level there is a certain idea of political disagreement. I think the underlying economy logic sometimes would overwhelm what happens on the ground.

A (22:20)

Okay, how does the AI boom and let's say the aggressive Capex plans for all these hyperscalers, how does that fit into this macro framework?

C (22:31)

I think actually what's interesting about the AI trade is how he maps almost very nicely, almost perfectly onto this geopolitical framework. If you look at who is actually participating in the ramp up of AI supply chain for the US at the moment, the hottest country right now is Korea. I think it's somewhat accidental in that Korea already was a big supplier of memory. But also I think it would not be conceivable for the US to depend and strengthen another source of dependency on a country that you could not necessarily trust. Right from a geopolitical point of view. So we are seeing, I think, a strengthening of that type of relationship. And same thing with Japan, by the way, where you are finding some of that industrial capabilities, supply chain capability coming on from countries that the US has historically trusted.

A (23:31)

What do you think is the, let's say, the biggest risk to this framework breaking down?

C (23:37)

Well, obviously, if the US and China suddenly found themselves fully resolved and not being in some kind of contention anymore, then yeah, sure, we will reverse everything and just go back to manufacture everything in China and have this perfect symbiotic relationship where the US come up with ideas and China comes up with the supply capacity, I suspect that's not really going to happen. Part of what we, I think what we're witnessing is a, I think managed, shall we say decoupling or managed separation, where the US clearly sees that it's not going to be able to, I think, get rid of China as a competitor, you know, completely has to live with the reality the Chinese ascendant. But he also doesn't want to cede that, you know, sort of superiority. And in particular it does also wants to make sure he has actually a secure supply chain from China. So during this period, to the extent that two countries still have a lot of stronger hold of each other in terms of critical supply of elements, technology or rare earth and what have you, they're going to manage this relationship while making preparation and creating alternatives and redundancies on the side. So I don't see this unwinding and disappearing as much as it goes through cycles. Right. So just like last year during Liberation Day and China tariffs went up to 140% or whatever. one moment everyone was freaking out and then those were removed and put on a pause and then there was negotiation. China suddenly was making threats about cutting off supply of rare earth. The US was sort of ramping up its control of critical technology of more advanced chips. And now we're seeing those things being softened. I think it is kind of a dance. You know, the general direction is not changing, but any given moment the pressure can actually go up and down, if that makes sense.

B (25:43)

Real quick, we'll get right back to the interview. Just wanted to pop in and say if you like this content, I read a newsletter every single morning called Opening Bell Daily. I cover macro, the stock market, asset prices, why things are going up, why they're going down. And if you want to get that for free, you can sign up at the link in the description.

A (26:02)

Let's get back to the interview. How does the currency's currency factor? Because we saw Latin America do very well, Korea did very well, but a lot of that was because dollar weakening, I think. Can you explain whether that fits into how you're thinking about this?

C (26:21)

Yeah. So currency first of all, I think the biggest thing no one can miss over the last year has been weakening of the US dollar. Right. If you look at the dollar index essentially weakened substantially since Liberation Day in April last year. Part of this has to do with I think this perception of the weakening of the US global standing and whatever. People can project all sorts of narrative onto it, but generally speaking, there is a sense in which there is capital flow going outside of the U.S. right. And if you do an analysis of just the outperformance of EM democracies of the US or even just US itself, let's just say yen democracies and see where the returns are coming from using let's say the Bloomberg factor model, which allows you to differentiate Sort of sources of return coming from currency strengthening versus actual stock selection within the country. You will see that the few prominent countries that have outperformed South Korea, South America, Latam and then let's say China. So South Korea, interestingly, even though it has done well overall, it is not because of one itself. It's because the semiconductors industry memory stocks in those countries have done so well. The Korean won actually weakened modestly in South Africa. Both there's an equity selection effect because there is a lot of miners in particular gold and gold miners. And also financials are just because the country in general doing well, equities have done well as a factor. But then its currency has also strengthened because of capital flows. Mexico is an interesting one on that it actually kind of was awash. And the reason was awash is because on the one hand the Mexican peso actually strengthened. You actually derive some positive return from capital inflow because of all the unshoring demand. On the other hand, Mexican equities themselves were actually a detractor. Part of it has to do with policy uncertainty whether or not USMCA and all these disagreements with the US over tariffs and so on and so forth. There is quite a bit of uncertainty. But you don't see the same thing for example in Latam, the rest of Latam. So I think when you watch and decompose currency from the underlying equity return, you get some pretty interesting story as to what's actually driving, right. What is actually driving the returns and what's actually happening. How much of has to do with the geopolitical capital flow realignment of supply chain and how much of has to do with some other mega factor that may also align it itself with this. Right. So you know, so the AI is obviously part of it, right? The reconfiguration of global defense is obviously another part of it. And you will see sort of defense stocks in certain countries or heavy industry in certain countries do well in Korea, for example, heavy industry has done very well in Japan as well as in Europe. But those things are not necessarily perfectly aligned with an overall capital flow story. It's more just sector specific. Now, just because at the very moment those two things are not aligned, it doesn't mean that as we go forward, it could very well be the case that investors go from being very bullish on particular sectors within Korea to being bullish in general about Korea as a destination of investment because they recognize just the broadening of the importance of Korea as a country to this reconfiguration of global supply chain. And the fact that those countries themselves are becoming aware of, of the need for them to be more shareholder friendly and promote the idea of capital flow going into their country. So Korea, for example, has actually changed policies in such a way to encourage Korean investors to actually divert capital flow from going betting on the Max 7 in the US which Korean investors are really very passionate about, to actually betting on and investing in their domestic companies and making it easier for US investors to invest in Korea. And the same thing is happening in Japan, for example, as you see more and more of their national leaders recognizing this idea that us over the last 20 years has done well in its equity market in particular because of this critical awareness of the idea of sharing value or returning value to shareholders and being friendly to shareholders. And as you see those things change, you can actually see a cascade of momentum where instead of just being sector specific, you actually see this broad revaluation.

A (31:15)

Do you think the winners of last year will continue to be the winners of this year? My guess is yes, because of the framework you've laid out here. But is that what you're anticipating?

C (31:28)

Personally? Yeah, I can't make any sort of actual predictions, but personally I would expect things fundamentals to have momentum. One of the things I like to do research on is this idea of fundamental momentum. Once you have a certain trend, whether it's on a company level or the country level, and things start sort of going in that direction, they tend to go in that direction a bit more in particular, if you are looking for inflection points where things are just getting started with a certain trend. So I think this thesis, to the extent that is not really broadly well known yet or well articulated just yet, it's just now, I think being recognized, people are seeing patterns here and there. I can see this actually continuing for substantially longer. I remember a little bit unrelated, someone was telling me about European defense sector and defense stocks. This was back in 2023 even, and the Ukraine war had already, you, you know, happened for over a year. And they were like, oh, look at this European defense, you know, companies and their stocks. I was like, there's no way I'm going to touch these things. They've already quadrupled or whatever, right? But then come, come a year later, they doubled and tripled again, right? And then I thought, surely this thing is over, right? There's no way I'm going to touch it. Come November, you know, the new administration is sworn in and suddenly there's a global recognition. Oh, wow. This idea of decoupling of global defense Pact. This idea of Pax Americana and that US will underwrite global security is actually quite permanent. And the idea that Europe has to cough up and pay for its own defense and therefore divert more capital towards its own defense industry is actually going to happen for real. So that trade went on even more violently until of course, now I think it seems to be taking a bit of a pause because I think there's some broad expectation of the Ukraine war pressure being won down or maybe there's sources of peace, settlements and so whatever. But the general direction, again going back to some point we made earlier, I think this is kind of a nice analogy, is that the general direction I think is unchanged. But. But just like nothing ever happens in a straight line, certainly not an exponential straight line, you can take pauses and make people think that, oh, this is maybe over. But I think sometimes these things just take a while to play out.

A (34:07)

At the start of last year, almost nobody was talking about international stocks. Everyone thought with second Trump administration, it was going to be like a super cycle for US stocks. You had all these easing regulations, all these very bullish tailwinds coming in, and The S&P 500 underperformed almost every other major country this year. I'm starting to hear a lot more people pay attention to, okay, Latin America, Korea doing really well, even some people talking about Europe, Australia picking up. So I do think we're at this inflection point, as you say, and it's coming after a huge run. So a lot of people also think they miss Korea, they miss Latam. But personally I think there's a lot of upside still with these international markets. And now that I'm laying this framework out with you, it actually makes me more bullish based on the two camps, let's say, and thinking through it in this term.

C (35:11)

So the way I think about this is not necessarily when I buy these international stocks, I'm betting against the US on the country. I'm using this as an expression of being bullish on the US sort of transformation. So that's why I keep going back to this idea of US camp or US aligned. If you believe whatever AI transformation in the US is going to happen, if US manufacturing on shoring is going to happen and all these things, then you got to think about the attendant changes. They're not just only happening in the US they are going to have because of, of this idea. We mentioned at the start of the interview that the US simply doesn't have enough supply capacity to effect all of these changes. So it's going to manifest themselves in some of these other countries as a result of the supply chain reconfiguration and because these countries are pretty cheaply priced and they are under owned. When people wise up to this, change the operating leverage to the theme, so to speak, right. It's going to be a lot bigger. So if the thesis manifests like for example, if AI really becomes super powerful, super intelligent at this very moment, the hyperscalers are already so highly owned, if not over owned, by not just US investors, but also international investors, who everyone's attention is paid to these things, that this thesis playing out doesn't bring about as much upside as you might expect. The sort of the beneficiaries or side beneficiaries of this thesis playing out, if that makes sense.

A (36:54)

It does. It's very hard to expect a $2 trillion company to double versus a 50 billion or $100 billion company. This question I don't know if there really is a clear answer to. I'm curious your thoughts. AI and China in this, I mean US and China in this AI arms race right now, what do you think has to happen for someone to be crowned a winner?

C (37:24)

I think it's going to take us a while to come to a realization that this question is actually ill phrased in that there is not going to be a moment when someone just is crowned a victor or gets a gold medal on the Olympic stage. Right. Instead this is going to be a marathon, a long race and each country is playing to its strength while trying to make up for its shortcoming. In the US at the moment, it's clearly very big on the brains of AI. It has the leading model, depending on how you measure it, by a few months, maybe a couple of iterations in terms of capabilities. On the other hand, China has managed to catch up on the AI models while showing very distinctly that it has this robotics or manufacturing capability being able to manufacture the brains or the muscles of AI. So whether it's autonomous cars, whether it's actual robot humanoid robotics, that video has been become viral on the X of China showing these robots during their spring festival gala on the national tv or from unitary, I think these things are showing us that there is that persistent gap. The US is going to have trouble for quite some time being able to scale up on the physical manifestation of some of these intelligence, which is actually what is sorely needing because labor costs are so high. And the last time we were here we spoke about this idea of bomber disease, of shortage of labor and ideally you would want us to have an ample supply of cheap robots. That's intelligence. Able to do a lot of the work in various settings. But if you're not able to scale. So that's part of the reason why I think, you know, I think this is kind of a long race. The scaling is going to have to continue for quite some time yet.

A (39:35)

I mean, the way I think about it is that the US is doing, you know, the chips or not the chips, the brains, as you say, but then China is just dominating the hardware. So software, hardware maybe is. Is the way to think about the race.

C (39:50)

Yeah. And. And to the extent that if you are trying to solve everyday problems of just picking up a piece of hardware in a factory setting and moving it somewhere else, tighten a screw or whatever, it is not perhaps the type of intelligence that requires the most cutting edge model that is able to cure cancer or discover the next new law in physics. So it depends on where we see the most, I think, value in terms of, of broad commercial applicability. And that is, I think, still quite unclear.

A (40:26)

Absolutely. Steve, where can people find your work online?

C (40:31)

So obviously they can find me on X Twitter. Steve Ho is my handle. They can also find my research@bloombergindhesis.com and we publish periodically articles and actually even on the terminal I will publish articles periodically me.

A (40:47)

Amazing. I really appreciate you joining. This was mind blowing for me in many ways and I tried to keep up with you. Thank you for your time.

C (40:54)

Thank you so much for having me.