Podcast Summary: The Sustainability Story – Episode with Dan Boston: Volatility, Valuation, and the International Opportunity Set

Introduction

In this insightful episode of The Sustainability Story, hosted by the CFA Institute, Mike Wahlberg engages in a comprehensive discussion with Dan Boston, the head of Polar Capital's global small company team and the lead manager of their International Small Company Fund. Released on April 15, 2025, the episode delves into the intricate interplay between market volatility, valuation, and international opportunities, especially in the context of recent geopolitical tensions and economic shifts.

Market Volatility and Recent Developments

The conversation kicks off with Mike addressing the significant market downturn following President Trump's imposition of sweeping tariffs on April 2nd. As of April 9th, global markets had plummeted by 9 to 11%, US treasuries rose by approximately 40 basis points to around 4.4%, and the US dollar weakened against major currencies. Even Bitcoin saw a decline, with only energy companies benefiting as oil prices hit a four-year low. The announcement of a 90-day tariff reprieve later that afternoon reversed some of these trends, intensifying market movements.

Dan Boston responds by acknowledging the turbulence but emphasizes the resilience of his team and firm. He states, “the headlines coming out seemingly every minute, every hour have a lot of heads spinning at the moment” ([00:56]). Despite the chaos, Dan underscores Polar Capital’s focus on wealth creation through alpha-generating compounders, highlighting their strategy to seek out undervalued companies amid the sell-off.

Leveraging Market Sell-offs for Investment Opportunities

Mike draws a parallel to in-shop sales during market downturns, noting, “If you've been doing the work for a long time, are you finding that there's good opportunities of companies that you like that just weren't trading at right prices” ([02:52]). Dan concurs, explaining that Polar Capital has already added a new company to their portfolio this quarter—a rare move given their selective annual additions. He elaborates, “as companies have traded down, the discount to their intrinsic value has also gone up pretty dramatically” ([03:16]). This strategy positions Polar Capital to benefit as undervalued stocks regain their footing.

China's Economic Challenges and the Great Global Reset

A significant portion of the discussion centers on China's economic predicament. Dan outlines three critical factors from Polar Capital's 2025 outlook:

1. Shift in US-Led Globalization: “We feel like we are truly at the cusp of what we would call a great global reset” ([05:53]).
2. Capital Allocation Issues in China: Highlighting the real estate troubles and debt management.
3. Commercial Real Estate Repricing: Anticipating future adjustments in property valuations.

Dan remarks, “China is in a tough and precarious situation” due to a bursting real estate bubble and mounting debt ([06:21]). He explains that prolonged US-China tensions could trigger a recession in both nations, dampening global economic momentum.

Demographic Decline and Its Implications

Mike references Peter Zion’s analysis of China's demographic cliff, pointing out the long-term sustainability challenges posed by the one-child policy. Dan expands on this, noting that China’s median age of 53 presents significant consumption hurdles: “there is a demographic cliff that can be described as China having around half the people being 53 or older” ([09:44]). He compares China’s situation to other aging economies like Japan and Germany, emphasizing that an older population reduces consumption of goods and services traditionally driven by younger demographics.

Shifting Trade Relationships and Global Security

The conversation shifts to the potential realignment of global trade partnerships. Dan emphasizes the historical role of the US in providing global security and maintaining open trade routes: “for the last 75 years, the US has essentially provided global security in terms of its navy” ([13:37]). He expresses skepticism about the feasibility of other regions, such as the European Union or Southeast Asian countries, stepping in to fill this role. The uncertainty surrounding the Trump administration’s policy durability further complicates the landscape, with Dan noting, “there is a lot of uncertainty” ([18:16]).

Currency Dynamics and Equity Performance

A pivotal topic is the relationship between the US dollar's strength and the performance of US versus international equities. Dan references Robert Shiller’s economic theories, observing, “when the dollar is strong, the US markets generally outperform” ([19:15]). He highlights that the US dollar has been trading around two standard deviations above its mean, contributing to a 13-year period where US equities have outperformed international counterparts. However, Polar Capital anticipates a potential reversal, suggesting that a weakening dollar could level the playing field for international stocks.

China’s Real Estate Crisis: Evergrande and Beyond

Dan delves deeper into China’s real estate woes, using the Evergrande crisis as a case study. He explains how over-leveraged real estate development has led to a misallocation of capital, exacerbated by government policies that favor local municipalities’ revenue growth through land sales. Dan states, “something like 70% of financial wealth of household wealth is tied up in real estate” ([25:01]). This heavy reliance on real estate destabilizes China’s economy, as affordability issues and non-performing loans loom large. The ghost cities phenomenon serves as a tangible manifestation of this crisis, illustrating the extent of overbuilding and speculative investments gone awry.

Mike corroborates with personal anecdotes, recounting his experience witnessing abandoned skyscrapers in central China: “entire cities that were basically 30 towers that were 40 stories tall that were kind of just stopped” ([28:36]). This visual evidence underscores the severity and rapid onset of China’s real estate troubles.

Strategic Insights and Career Advice

In the latter part of the episode, Mike steers the conversation towards personal development and career growth. He asks Dan what advice he would offer his younger self as a new analyst. Dan’s response is both practical and inspirational: “Find a mentor quickly... Find the best person in your industry and make them your mentor” ([29:38]). He emphasizes the value of learning from seasoned professionals who can provide nuanced insights beyond academic knowledge. Dan shares his experience with Robert Shiller, praising his ability to make complex economic concepts accessible and applicable to real-world scenarios: “Bob always focused his work on things that were useful for the average person” ([30:47]).

Conclusion

The episode culminates with Mike and Dan reflecting on the profound shifts in global economics and the investment landscape. Dan reiterates the importance of adaptability and informed decision-making in turbulent times, while Mike thanks him for the valuable insights. The discussion leaves listeners with a nuanced understanding of the current market volatility, the precarious state of China's economy, and the evolving dynamics of global trade and currency influences.

Notable Quotes

• Mike Wahlberg ([00:56]): "Most people outside of our industry, they think, oh, it must be all pulling your hair out and jumping out of windows when the markets are falling like this."

• Dan Boston ([03:16]): "As companies have traded down, the discount to their intrinsic value has also gone up pretty dramatically."

• Dan Boston ([05:53]): "We feel like we are truly at the cusp of what we would call a great global reset."

• Dan Boston ([06:21]): "China is in a tough and precarious situation on the back of a real estate bubble bursting, on the back of a lot of debt that's not properly been accounted for."

• Dan Boston ([09:44]): "There is a demographic cliff that can be described as China having around half the people being 53 or older."

• Dan Boston ([13:37]): "For the last 75 years, the US has essentially provided global security in terms of its navy."

• Dan Boston ([19:15]): "When the dollar is strong, the US markets generally outperform."

• Dan Boston ([25:01]): "Something like 70% of financial wealth of household wealth is tied up in real estate."

• Dan Boston ([29:38]): "Find a mentor quickly, whether this is your boss or not."

• Dan Boston ([30:47]): "Bob always focused his work on things that were useful for the average person."

This episode of The Sustainability Story offers a profound exploration of the complexities surrounding global markets, economic stability, and investment strategies in an era marked by geopolitical tensions and rapid economic transformations. Through Dan Boston's expert analysis and personal anecdotes, listeners gain valuable perspectives on navigating the uncertainties of international investing and the broader implications for financial sustainability.