Podcast Summary: The Long View - Sudarshan Murthy: ‘These Countries Are in Much Better Shape Than They Were 10 Years Back’

Introduction

In the March 25, 2025 episode of The Long View hosted by Dan Lefkovitz of Morningstar, Sudarshan Murthy, co-portfolio manager at GQG Partners, joins the discussion to provide insights into the evolving landscape of emerging markets (EM). With a robust background in global, US, and emerging markets equities, Sudarshan delves into the dynamics shaping today's investment opportunities and challenges in EM.

Guest Introduction and Investment Approach

Dan Lefkovitz introduces Sudarshan Murthy, highlighting his extensive experience and educational background from the National Institute of Technology in India, the Indian Institute of Management, and the Wharton School at the University of Pennsylvania. Sudarshan is responsible for managing GQG’s global, US, and emerging markets strategies alongside Rajeev Jain.

Broad Investment Remit vs. Specialization (01:38 - 04:29)

Sudarshan discusses the advantages of managing a broad investment portfolio across various geographies and sectors. He emphasizes the value of cross-pollination and shared learnings within the team, which enhance their ability to identify high-conviction investment opportunities. Sudarshan states:

“There's so much of cross pollination, so much of learning that happens... the learning curve probably is somewhat steeper. But once you get that going as a team, it can be incredibly powerful.”
[01:38]

Emerging Markets Underperformance and Historical Cycles (04:29 - 10:21)

Addressing the prolonged underperformance of EM equities compared to the US, Sudarshan attributes this to cyclical market behaviors—bull and bear cycles influenced by regulatory changes and economic reforms. He explains:

“Good times produce bad decisions and that creates bad outcomes and tough times create good behavior that leads to good outcomes.”
[05:03]

Key factors include post-Asian financial crisis regulatory strengthening and significant economic reforms in countries like India and Brazil since 2010. Sudarshan highlights India's introduction of the bankruptcy law and real estate reform in 2016 as pivotal steps enhancing the stability and attractiveness of its markets.

Impact of US Interest Rates on Emerging Markets (10:21 - 12:37)

Sudarshan challenges the traditional view that EM performance is tightly coupled with US interest rates. He posits that EM companies are adept at navigating higher interest rates, which are prevalent in their economies. He notes:

“Any company in emerging markets that has gone through cycles learns how to adapt to higher interest rates... they are used to dealing with complex situations.”
[10:21]

US Trade Policy and Tariffs (12:37 - 14:32)

Discussing US trade policies, Sudarshan explains that many EM companies have a strong domestic focus, reducing their vulnerability to international trade tensions. However, he cautions investors to be wary of Chinese companies heavily exposed to Western technology.

Currency Strength and Investment Returns (14:32 - 16:34)

The strong US dollar has historically diminished returns for investors holding foreign equities. Sudarshan acknowledges this but suggests that currency cycles may lead to mean reversion, potentially reversing the current trend.

Catalysts Turning the Tides in Emerging Markets (16:34 - 20:28)

Sudarshan identifies several catalysts that are enhancing the attractiveness of EM:

• Economic Reforms: Ongoing liberalization and regulatory improvements.
• Market Growth: Large market caps, particularly India’s nearly $5 trillion market.
• Diversification Potential: EM investments offer true diversification compared to US-centric portfolios.

He emphasizes India’s substantial earnings growth and the role of the private sector in delivering public goods, enhancing investment prospects.

Focus on Specific Markets: India, Indonesia, Brazil, and China

1. India (18:04 - 21:43)

   • Earnings Growth: Comparable to the US in the long term.
   • Sector Opportunities: Banking, utilities, and infrastructure, bolstered by government initiatives.
   • Regulatory Improvements: Reduction in red tape, fostering entrepreneurship and private sector participation.
   • Notable Quote:

     “Red tape to red carpet... competition among states to attract private sector investments.”
     [20:37]

2. Indonesia (21:43 - 23:57)

   • Banking Sector: Highly consolidated with top banks showing attractive valuations and robust returns on equity.
   • Regulatory Strength: Lessons from the Asian financial crisis have led to a stronger banking system.

3. Brazil (23:57 - 26:17)

   • Resilient Companies: Well-run banks and strong commodity sectors.
   • Government Reforms: Enhanced institutional checks and balances, increasing investor confidence.
   • Market Sentiment: Despite recent underperformance, long-term fundamentals remain strong.

4. China (14:32 - 16:34, 26:17 - 18:04)

   • Economic Growth: Remarkable GDP growth and poverty reduction, yet EM investment in China has lagged due to unsustainable earnings growth.
   • Performance Metrics: Since 1993, MSCI China Index has underperformed with less than 2% annualized returns.
   • Investment Stance: GQG Partners remains underweight in China, focusing instead on high-conviction opportunities globally.

Investor Sentiment and Market Perceptions (26:17 - 27:13)

Sudarshan addresses the current negative sentiment towards EM, likening it to past market sentiments during the US financial crisis and the pandemic energy sector downturn. He argues that broad negative generalizations overlook the nuanced improvements and reforms in EM, presenting investment opportunities.

Developed Markets and Emerging Market Attributes (27:13 - 29:32)

Highlighting the blurring lines between developed and emerging markets, Sudarshan points out that some developed markets exhibit characteristics traditionally associated with EM, such as hype and volatility cycles—exemplified by the current generative AI boom. He anticipates that while generative AI will eventually revolutionize industries, short-term skepticism may create temporary market air pockets.

Conclusion and Final Thoughts

Sudarshan reiterates GQG’s strategy of identifying the best 50 companies globally to build a high-conviction portfolio, remaining flexible and responsive to new opportunities. He emphasizes the resilience and growth potential of EM markets, bolstered by ongoing reforms and strong economic fundamentals.

“We are trying to see which are the best 50 companies that we can own that's going to deliver high, single digit, low double digit analyzed over the next five years.”
[16:50]

Notable Quotes with Timestamps

• Cross-Pollination and Learning:

  “There's so much of cross pollination, so much of learning that happens...”
  [01:38]

• Regulatory Reforms in India:

  “The bankruptcy law kind of changes that. Now banks know that they can take management to court in a span of a few months.”
  [08:48]

• Red Tape to Red Carpet:

  “Red tape... to red carpet... competition among states to attract private sector investments.”
  [20:37]

• Dividend on EM Investment Strategy:

  “We want to make it diversified by high conviction.”
  [16:50]

Key Takeaways

• Emerging Markets Evolution: Significant improvements in regulatory frameworks and economic reforms have enhanced the investment landscape in EM countries like India, Indonesia, and Brazil.

• Investment Strategy: A focus on earnings growth and high-conviction portfolios allows for selective investment in the best-performing companies across diverse geographies.

• Market Sentiment: Negative sentiment towards EM is often superficial, failing to account for underlying improvements and long-term growth potential.

• Diversification Benefits: EM investments provide essential diversification away from US-centric portfolios, tapping into large and growing domestic markets.

Final Thoughts

Sudarshan Murthy’s insights highlight a cautiously optimistic outlook on emerging markets, underscored by robust economic reforms and evolving market dynamics. Investors are encouraged to look beyond prevailing sentiments and recognize the substantial growth opportunities that EM markets offer in the long term.