Animal Spirits Podcast - Talk Your Book: The Case for Emerging Markets

Episode Date: March 19, 2021

On today's Talk Your Book we spoke with Nick Niziolek from Calamos Investments about the potential for emerging markets in the coming years.   Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought you by Calamos. Go to calamos.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management. This podcast is for informational purposes only. and should not be relied upon for investment decisions. Clients of Ritthold's wealth management may maintain positions in the securities discussed in this podcast. Ben, I remember this is probably

2016, 2017, maybe. I went to a Morning Star Conference in Chicago. And this is like right around the time where the talk about is active management dead. And I remember seeing like five dozen companies with exhibit booths that I hadn't heard of. And I went up to one. And it was like, oh, talking about them. What do you do? What do you do? How much money do you manage? $7 billion. The next one, $15 billion. So Calamos, I think, is a good example of why that argument is completely bunk. Active management is not dying. It's quite the opposite. But Calamos manages north of $30 billion. And they're probably not exactly a household name. Right. I had heard of them from the institutional world before, but that's not something that

people talk about all the time. The stuff that people talk about on the daily basis are the stuff that's in the news. It's GameStop. It's Robin Hood. It's the stuff that you and I talk about. But yeah, there's still these huge asset management firms where even if active management is not seeing huge inflows in a lot of ways, the markets are still growing. So these firms are growing, right, based on their assets. So the past 10 years or 10 plus years has seen a bull market. So even if there's been outflows from active management, that has been more than dwarfed by their increase in assets just from market growth. So we spoke about emerging markets on the show specifically, their emerging market strategy was up 55% last year. I think the benchmark was up

like 19 or so. And we spoke about this on the show also that oftentimes, and we spoke about this with Perth. When you think about emerging markets, you think like energy, industrials, financials, and Nick and his team are focused on the future, more growth-oriented names. This does seem like the space that everyone is underinvested in. We're talking about growth versus value, you were large cap versus small cap or even microcap and individual names, and we're stocking exclusively with the U.S. because the U.S. makes up 55% of the market. Emerging markets are so much smaller and they could go on a run like they had in the 2000s where they just dominate everything.

That could happen and you see the flows just completely trying to play catch up in this space. I could totally see that happen. And the narrative. Let's say that we get a quarter to a massive flows, which we're already saying, can't you see like featured articles in Barron's and the journal and times about emerging markets are back? And then the chase is on. And then you see your performance numbers. And already, it's finally starting to outperform the S&P.

Oh, yeah. By the way, so we were speaking about this. I think people would be shocked to learn that over the last year, the S&P 500 is underperforming emerging market stocks. The numbers are, that's close. But still, 52% for EM, 49% for the US. Now, don't zoom out. It doesn't look as pretty.

But maybe that's the point is that there is so much catching up to do. And who's to say that the gap is going to close? but over the last 10 years, the S&P's up 270, EM is up 43. 270 versus 43. These are one of those cycles. I've written about this and Calamos did too in some of their pieces. The cycles are crazy how you can have five to seven years cycles where the U.S. will outperform by one, 200 percent over EM, and then it switches.

And a lot of that has to do with the economic environment or the movement of the dollar. And that's the kind of thing where if the dollar was weak or just didn't do much for a while in emerging markets, it's a lot. It's almost like you have the U.S. on one hand in emerging markets, and then, I don't know, foreign developed markets are kind of stuck in the middle. We talked about this on the show with Nick. There's so much that is going on innovation-wise in emerging markets that a lot of people just don't see.

And these could end up being some of these huge fintech companies and technology. And it's not like what you think. It's not your grandfather's emerging markets and what they're doing. And so I think this is a space that could have some cachet to it, like you talk about and have not only the performance, but the narrative that goes with it. So I just Googled Ben Carlson Emerging Markets. You've written a lot about this. And this one did an age so well, but that's okay.

I've got a few ones that didn't age so well. In 2014, on Ben Carlson's Tumblr, do you remember that? On 2014, you said why emerging markets have more room to run. That's your best call. Okay. I played the long game, though. No, well, the point was, I remember that. The point was, I think what I wrote about is the fact that some of these individual companies in the U.S.

are bigger than whole countries in the emerging markets, right? wasn't that the idea? You have a great memory. That literally was the idea. So it shows the values of countries listed firms. We'll link to this in the show notes. So the room to run is it's almost like emerging markets are themselves small cap. So room to run in terms of they have a lot of potentially growth ahead of them. So we were talking about the nature of how long these moves can last from 1999. And these are cherry-pick numbers. But so what? They tell a story well. From 94 to 98, the S&P did 1004% of merchant markets that fell 40. But then from 99 to 07, while the U.S. gained only 38% emerged markets gained 420%.

And that's the thing you can see. The mirror version for these ones is on steroids. The swings between the S&P and EM are wilder than S&P and developed markets. Yes. And you see way more bare markets in the emerging markets as well. Their drawdowns. Man, there's a trip down memory lane. In 2014, you wrote, to put the size of these country stock markets into perspective,

Apple currently carries roughly $165 billion in cash in their balance sheet. That's equivalent to the size of the stock markets in Egypt, Colombia, Morocco, Chile, and Poland combined. Bigger than that now, too, right, with the Apple's cash? Yeah. Anyway, so Calamos wanted to come on and talk about emerging markets and what the potential opportunity is. It's an interesting idea, and I think the numbers are crazy. We talk about EMs making up half of the global economy and like a fifth of the markets. I've seen it smaller numbers there, because depending on how you count it, and then just 6% of investor allocations and portfolios.

We didn't get into this specifically, but how does that number close? How do we close the gap between population and listed companies, IPOs? How else does that happen? Their financial markets are a lot less mature, too. And some would say there's a reason that U.S. has a valuation premium over emerging markets because of the freedom that we have and some of those countries don't have. So some of that maybe is warranted. A lot of it probably not as bad as it looks.

So they wanted to come on. So we talked to Nick Nisleck, the COCIO of Kalamo, and he had their global investments. And again, they managed north of $30 billion. This was an interesting one because he's looking at emerging markets from an active perspective, too. But he gives some great stats as to how things are changing in emerging markets. And a lot of this, too, is just in the last few years has kind of come on my radar up. Okay, this is way different than was in the past.

You're not betting on commodities markets anymore to outperform. And then it's going to pull emerging markets, which is what happened in the 2000s. It's totally different now. So here's our interview with Nick. All right, we're joined today by Nick Nisoleck. Nick is the co-CIO of Calamos. He heads up there, global international investments. Calamos might not be a household name for everybody, but it is a large asset manager. They currently manage north of $30 billion. Nick, thank you so much for coming on today. Thank you. All right. Today we are going to talk about, given that you are on the international

side, we're going to talk about emerging market stocks. It's been a rough decade. Maybe that's just the best place to lead off. What happened? Where are we? And what do we think about going forward? It was a rough decade that 2010s have not been for the emerging markets, at least relative to other asset classes like the U.S. equities. And really, you go back to what we were heading into into the GFC. The 2000s were a very strong period for emerging markets, commodity-driven super cycle, a lot of growth potential opportunities in emerging markets. And as a result, we kind of exited that decade with EM equities and EM exchange rates, currencies, more fully valued, even overvalued, relative to other currencies on markets on many metrics.

And then if you think about the GFC period and kind of what happened and what transpired, China really let us out of that. Significant reflationary impulse with a large monetary policy, large fiscal stimulus program to kind of restart growth and become the engine of the growth for the global economy. But that resulted in a significant pull forward of demand. So coming off of a period of significant outperformance and significant investments in infrastructure and then following that up with a response where you were pooling forward that demand led to an environment for most of the next decade that resulted in lower growth, lower

interest rate environment, and that really benefited more defensive growth. Companies with large moats and big platforms that ultimately could drive through this lower growth environment and managed through at a time when China and other economies rebuilding from the crisis that unfolded in the GFC. So it wasn't really much of a surprise when you think back on it, hindsight 2020, that the U.S. equity market was the place to be. It was a safe haven area. Many of the large companies in these benchmarks are more platform companies, companies that have strong moats and that defensive growth profile. But as we look ahead, I think the environment is changing once again. I mean, we're obviously coming off a period where

a lot of those types of companies in the U.S. equity market is more fully valued and definitely has had very strong performance, whereas EM is coming in from a much more attractive standpoint in our view as far as valuations and currencies. And then if we think of the policy response that we just went through, ultimately the U.S. this time has really led the way. Massive fiscal stimulus, significant monetary response. Ultimately, the engine of growth is probably going to lead us out in the early stages. But I think the question is how much of that is pull forward. And ultimately, if you think about what China's response was, which was much is much, much more targeted as well as many other emerging markets, where will the more sustainable growth

profile be over the next coming years? So that's kind of the explanation for why the underperformance. I think it was the environment we're in. And I think to think forward, the environment looks a lot different. I remember back in 2010, 2011, a lot of people said, well, we got this new normal in the U.S. and lower growth. So I'm going to get my growth in emerging markets. And that's where a lot of institutions were looking to allocate to. And that didn't happen. And I think one of the reasons is because the dollar is stronger following the great financial crisis than most people. would have figured. At that time, people were predicting the destruction of the dollar to fall on this money printing and stuff, and obviously it didn't happen. Do emerging markets need

the dollar to fall to outperform? Is that a prerequisite? I wouldn't say it's required, but it definitely is very helpful. We've done a lot of work in the area kind of looking at how different factors influence EM returns. And what we've seen is that, first off, the dollar tends to operating kind of longer term seven to 10 year cycles, as many markets do. And when you enter a stronger dollar regime, that tends to be a tough place for overall overseas risk assets and emerging markets in general. Part of that's the translation impact, although I think that's a small piece of it. Obviously, if the dollar's strengthening the returns, the overseas markets are not as strong versus vice versa if they are weakening. But the bigger issue is the impact a stronger dollar has on these emerging markets.

In some cases, there's a need for U.S. dollar funding. And as those liabilities are appreciating with the stronger dollar, that becomes kind of a fiscal issue for these countries. as well as the inflationary pressure that a stronger dollar has on these economies. And as a result, that really puts the handcuffs on these central banks and emerging markets' ability to loosen their monetary policy and promote growth and enable reforms in these markets. So a strong dollar environment does tend to make it more difficult for you and outperform. But on the contrary, if we do enter a weaker dollar regime where we are in a multi-year period of dollar weakness, ultimately that really enables these central banks around the world to loosen policy.

and implement their forms that are needed to really unlock the growth potential of these emerging markets. What do you think is the case for a weaker dollar right now? I guess it's a softball question. Before you answer, be careful. I hope you're not rooting against America. Definitely not rooting against America, but as I said, these are longer term cycles. So I mean, over the course of seven to 10 years, you tend to see certain markets, certain asset classes, currencies begin to outperform and underperform. And while valuation itself is never a catalyst, I think it does help understand the degree to potential outperformance and other performance. And given the strength that we've seen in the dollar over the last decade, on many different metrics, the dollar does look

more fully valued. Purchasing power parity, a Big Mac index, different ways you're thinking about the relative value of currencies, the dollar is more expensive, but it could stay expensive. So you need some sort of catalyst or other factors to kind of influence that change in regime. We think we have a few here. First off, I would say that Fed monetary policy has been ultra accommodative. And I think the Jackson Hole speech last year by Chairman Powell solidified the fact that we are changing our monetary policy to more of an inflation averaging regime versus inflation targeting. As you recall, last decade, every time inflation pressures started to build in the U.S., we were immediately tightening monetary policy and kind of taken away the punch bowl, if you will. And as that supply of dollars is not growing, that obviously puts pressure on other currencies and strengthens the dollar. So I think that's a significant change in something that can't be underestimated.

The other point I'd make is the overall debt levels. When you look at how much debt has been added in the U.S. over this cycle of this crisis, it's very significant relative to other economies. I mean, obviously there's fiscal stimulus going on everywhere, but the degree to which the U.S. has added debt on a per capita basis is nearly three times other major economies. And if you look at recent testimony by Treasury Secretary Yellen to Congress, the view is to continue to spend to promote growth, which is much different than we saw during the last cycle, where there's talk of austerity and worried about the Tea Party movement and things like that.

Two last points I would make on this. I think there's a change in view in Europe. I think investors may underestimate the impact Brexit is having on that economy. And ultimately, Germany, who is very pro-austerity and pro-week euro because that helped their export German economy, is now realizing if they continue that approach, they maybe face other countries ultimately leaving the Eurozone. So the last few years, we've actually seen fiscal spending picking up in Europe under this guise of green infrastructure, green investing. You haven't seen as much concern over the strength in the euro out of that region as you had during prior cycles, where every time the euro started to strengthen the ECB president, which kind of talked down that strength as much as possible. It's still there, but not to the same degree. And the last, I would say, is just China. China definitely understands the importance of their currency, needing it to be stable and even appreciating to be a destination.

for capital. You see a lot of the policies coming out of China, even their response to this COVID crisis and kind of the more targeted accommodation that they provided, really all coming together to kind of support that stable to strengthening Chinese Juan, which they view will be a destination of capital for many markets around the world. You have this great chart where you show that emerging markets are like half of a global economy, but less than a fifth of global stock markets and just one-twentieth of U.S. investor portfolios. So how does that ever get more in balance? Does that ever make sense that the numbers are so skewed like that? Our view is that there will be some reversion in the mean, if you will. I mean, do I think

investors are going to ultimately have 50% of their portfolios in emerging markets? Likely not, but do I think there's scope for significant increase to kind of close that gap? Absolutely. There's a couple factors at play here. I mean, if you just look at relative valuations, Emerging markets look more attractive on a valuation basis, and as a result, some of those markets and opportunities are kind of discounted to a degree that there could be scope for an increase just there. I'd also say that the decoupling that we're seeing globally started kind of with U.S.-China trade, and I think we're going to start seeing this more broadly as supply chains reorient. You're seeing more and more emerging market countries as they developed, developed these

homegrown brands. And ultimately, as there's more EM companies participating in the EM growth story, as opposed to these global multinationals, that also increases the scope for the allocation of emerging markets to increase. And the last thing I would say is I think the indices are pretty inefficient when it comes to identifying what is emerging markets and what's to be included in the benchmark. They're very backward looking. And ultimately, there's a lot of new, great innovative emerging market companies that haven't found their way to these benchmarks yet. And these companies are becoming quite large, you know, $100 billion plus companies that ultimately will likely get included in these benchmarks and therefore will increase their weight and their exposure of the overall market. But as active managers, we're allowed to get involved in some of those first.

So some examples, C-limited, Mercado Libre, Yandex just recently got added to the benchmark but wasn't in there for many years. The entire China A share market has only been a recent development in the emerging market indices. So with so much of actually listed companies not yet showing up in the emerging market, benchmark, it's not surprising that the indices are kind of underrepresenting the opportunity in our opinion. When you talk about relative valuation, are you talking about EM relative to EFA or the U.S.? Or are you talking about it relative to its own history? I think you have to look at it multiple ways. As we said earlier, when we were talking about just overall currencies, valuation itself is not a catalyst. And I would say the same about the equity market. But I'd also say

evaluation isn't precise. Anyone that thinks or can tell you exactly what something is worth, I would question. So ultimately, you're right. We're looking at historical evaluations. How are these assets priced today relative to how they've been priced historically? And what does that say? It says that they're attractive. Significant discounts to be had in emerging markets given where these asset classes had traded historically. I'd also say on a relative basis, given the outperformance we see in the U.S. markets, relative emerging markets, there's a discount and a gap to be closed there as well. And then when we look bottom up and we're just kind of going around the world and And obviously, looking at these great businesses and comparing what we'd have to pay for

similar businesses and some of the developed areas, we see a valuation argument to be had there as well. So our view is that there is a gap there and that ultimately, as capital flows return, which is what we've seen over the last few months here, some of that evaluation will be on one. Do you look at picking countries in emerging markets in terms of an active strategy just as important as picking stocks? I mean, emerging markets is a broad bucket here because some of these countries could have, I don't know, two or three stocks that make up a majority of their index, basically, if you're going

country to country. So is that just important as stocks themselves? Or do you guys just not even worry about that and just go for the certain sectors or stocks themselves? It's complicated. There's a lot to unpack there. I'd say that there are times where the country factor can really overwhelm. And those are inflections. So with emerging markets, a lot to do with capital flows and capital moving into these markets. And ultimately, if we think about economic freedoms or we think about the inflection and fundamentals, it's very common in emerging markets. You might get an election, you might get a new policy reform, and you can see significant capital flowing into those markets as a result. Most recently or currently, I would say the fiscal stimulus package

we got out of India, the new budget that was released, showed some significant reforms across multiple sectors that we think have the potential to provide some outsized returns for that market over the next few years. But that being said, your point is well taken that there are certain countries where with very small representation, limited opportunity set, that it's just as important to understand what you own. So we never invest in a country purely on that kind of top-down view. Ultimately, it is the bottom up. It's the fundamentals of the businesses we're investing. And quite honestly, I would say that the most significant factor in emerging market investing is more secular tailwinds, these shifts that you're seeing, disruption, innovation,

those are the longer-term themes that override some of these shorter-term cyclical phenomenon. So we spend probably more of our time, probably two, three times more of our time talking about secular shifts and being on the right side of disruption and innovation across these markets than we do individual countries and the inflections that are occurring there. So let's talk about how you capitalize on that. As I was getting ready for this, I saw that in 2020, your EM fund did something like 55% and the benchmark did, what was it, 20% around, something like that? Yep, yep. Explain yourself. How did you guys?

accomplish this? First and foremost, I point to a very flexible process. So we talk about top-down cyclical themes, and that's kind of your country exposure and our thoughts on the dollar and reflation. That has an impact on the portfolio. We can obviously shape our sector, our country exposure to kind of benefit from those things. And then top-down secular is probably more important, as I just mentioned. And that was a real key driver. I would say about half of the value ad that we had in 2020 was being exposed to the right side of disruption, the right side innovation. Exposure to e-commerce, digital payments, the healthcare telemedicine industry is just as strong in the emerging markets as it was in the developed markets.

And so having exposure to these companies that were innovating, disrupting even before COVID hit, but then we're able to adapt and adjust their business models to benefit from the disruption had significant gains. And this goes back to the benchmark inefficiency. The interesting thing is many of these companies aren't actually in the emerging market benchmark. And that goes to kind of the third part of our process that I'd highlight is that we use a lot of quantitative tools to screen a very large universe. So there might be 1,800 companies in the emerging market benchmark.

We've got over 7,000 built in our systems. And we're using quantitative tools to kind of screen and identify the companies that are inflecting where we're seeing a fundamental inflection, where we're seeing some sort of change. to then narrow down and have our research team focus their time on reviewing those stories and identifying the fundamental conviction and thesis to build our exposure to those types of names. That's how we found companies like Mercado Libre or C-limited, taking advantage of this disruption innovation that was happening pre-COVID, but then when COVID hit, ultimately saw a significant change in their business models. And then as we kind of move forward, making sure we're involved

in the companies that are just going to grow and expand beyond that, as opposed to the companies just saw a pull forward to demand. It was a very volatile year, and I mean, there really was multiple stages to the outperformance. We were able to hold up a little bit better during the downturn. We were able to kind of focus and reorientate our portfolio primarily towards those secular winners. And then towards the last part of 2020, it really became more of a reflationary cyclical tilt to the portfolio. Starting late summer, we started adding more to what I would call COVID recovery plays, reopening plays, and some of those cyclical companies that are benefiting from greater prospects ahead.

You spoke of the technology and the disruption. I think that's probably the biggest surprise to a lot of people that changing nature of the last, call it 10 years or so, where emerging markets used to be just these materials and industrials and finance and all these stuff. And now you're seeing a huge groundswell of technology companies come up. And I think a lot of people kind of miss that because they assume that's the only reason the U.S. is outperformed because tech has done so well. It's almost like emerging markets have left the other developed part of the world behind

in terms of technology. So how did they do this where these emerging market countries seem to have out innovated even places like Europe that seems like they should have been ahead of the game and they weren't? I think it's in part started with a clean slate. When we look at many of these emerging markets, they're almost skipping phase that we were just in, whether we're talking about the banking sector and digital payments and the rise of online marketplaces. There isn't that establishment or that old way of executing commerce and purchasing things that exists in a lot of these developed markets. So they're just skipping that step a little bit or at least accelerating through that

step with a little less disruption and they're already on to where we're headed. The other thing I would say is that EM technology, specifically semiconductors and all the innovation that's happening there, that's something that's kind of underestimated as far as it's importance, I think, and I think we're starting to see it now with some of the supply chain disruptions. But if you think of what EM was 20 years ago, 15 years ago, energy, oil, really supplied what was needed for the industrial complex globally. Today it's chips, it's semiconductors. And so while the Middle East was very important for the last decade or two decades ago. Now it's going to be Taiwan and Korea and parts of China and Malaysia that are really producing all this material, these chips that are needed

to fuel everything that we're working on. While this was viewed historically as a low-cost commoditized type industry and therefore a lot of production was moved to Asia to benefit from lower-cost labor, as technology is advanced, as new equipment and efficiencies have been invested in, many of these companies are kind of at the forefront now and really positioned to capitalize on these emerging trends. So we find that as an incredible opportunity. And if you want to be invested in technology and innovation, you really need to have exposure to some of the technology companies in the EM area. You did a post recently on how carbon emissions are crashing. Who is leading the charge here? And what are some of the investments opportunities in the space? It's really globally. I would say

Europe was initially leading the charge. A lot of the emission standards were coming from Europe, really at the forefront there. But China has really taken the torch, if you will. Almost every day, we're seeing new announcements and different decrees as far as how they're managing down their admissions and trying to beautify China, if you will. It's coming here. I mean, obviously, we're seeing more and more green infrastructure discussions and initiatives there as well. So it's a global phenomenon, but I think what's interesting is that the way we're going to get there is going to be very dirty. Copper is actually a very dirty material. It's dirty to get out the ground, but it's essential to these EV vehicles and a lot of the advancements that we're

going to end up making in this zero emission world. And then you flip forward to power plants, the hydro plants, the solar plants that need to be built globally, ultimately a lot of cement, a lot of steel, a lot of aluminum. What we've been talking about and writing about in our team is in the 2000s, we wrote a lot about this commodity super cycle and all this demand that was coming from China and infrastructure and all the supply that was being built and thinking about that as a theme. And I put all that away and never thought I'd really have to touch it again because ultimately with the pull forward of infrastructure demand that we saw post-GFC, I didn't think we were going to get back there. But the environment we're in today where we've

got this combination of really no supply coming on the line for the last decade, coupled with kind of reopening recovery globally that will be somewhat synchronized. And if you add on top of that, the amount of infrastructure, green infrastructure that it will likely put in place So over the next decade, we think there's an incredible opportunity in the material sector. And that's an area that we've been adding to cross copper, aluminum on the cement. For much of the last years, we think it's a great way to play the reopening. So even without a commodity super cycle, these things are still going to be in pretty high demand because everything is so backed up.

Exactly. The combination of the reopening and then the lack of supply that's been built. And the fact that the supply takes many years to be added. I mean, these are three to five-year greenfield projects that need to be implemented. So ultimately, we think we're in a multi-year period here where we're going to see increased demand for commodities, which results in better pricing and kind of the re-rating of a lot of these companies that have really been left for that for most of the last decade. How much do emerging market economies, I'm using that as a catch-all, I know they're individual

countries, how much of their returns is driven by the individual macro story of their particular country versus, let's say that all the spending that we're doing does kick off a global GDP boom where the globe is growing at 5% plus. How do you parse it out? Do those countries follow the United States or not necessarily? As far as how much of the return should we expect from the emerging markets to come from the global recovery as opposed to kind of their own idiosurgetic events? I would say that ultimately the global outlook and the global recovery will be a significant driver for overall emerging markets, but we do have idiosrogatic stories within the emerging markets that will be very important and significant to pay attention to. India is

the market that we're probably most favorable on right now. Ultimately, that will be an economy that has its own growth story and it will benefit from the global recovery, but it will also benefit from reformers there within. More recently, last few months here on EM, you've really started to see the commodity and the energy export type market starting to outperform. And that obviously makes sense because as the outlook for global growth picks up and that outlook improves, those markets are going to follow as well. So I think both are important. Ultimately, a stronger growth profile. People will be more comfortable moving on the risk spectrum. There's a lot of opportunity to have an EM, and we'd expect EM not just to follow it, but to lead in that environment,

honestly. Are there any countries that are total stayaways for you? Are you comfortable investing in a country like Russia or some of these other places that might have a little more risk that are outside of the actual companies themselves? I wouldn't say we wouldn't invest in those markets, but I would say that we definitely think about when allocating our client's capital, we're thinking about the risks that we're taking on and making sure we're being idically compensated for that. And where we can, we try to use structure to improve it even better. So Calamos has its roots and convertible bonds, and that is an area that we have a long history on. And while our emerging market product, for example, is an equity product. And we're trying to be an equity benchmark,

we have the flexibility to use some of those convertible structures for a small part of the portfolio. So those markets like Russia, where you mentioned, where you do have more risk of government interference and potential sanctions, the way we'll add exposure to those types of markets because there is an attractness to the valuation and there is a lot of upside potential in those markets is we'll do it in a convertible structure where we have limited downside risk. We have a bomb floor that limits that downside, but we have upside optionality. And if we do get a re-rating in those markets or if economic freedoms do improve and there is some sort of inflection, we'll be there to capitalize on that.

So I wouldn't say that we'd rule out investing in any specific market, but I would say that we are always cognizant of downside preservation. And as a result, we might use different structures in some of those markets to prevent capital loss if possible. So you also did a post on electric vehicles. All that we hear about really is Tesla and I guess maybe Neo. I saw a post in the journal today where they showed companies that came public through SPACs that are projecting to get to $10 billion in revenue. And keep in mind, it took Google, which was the fastest US startup ever to do it, it took Google 10 years. So you've got these companies. These are strangers to me, but they might be familiar to you. Arrival, Saturday Future, Fisker, re-automotive, and Archer. All five of them are

projecting zero to $10 billion of revenue in six years or under. What's going on in the global EV boom? I mean, I think it's same as the green infrastructure we're talking about. I mean, there's such a focus on green and zero car remissions that this is a tailwind that's not going away. The way we like to play it, I'm familiar with those companies. We looked at those companies. There's a lot of uncertainty. This is very early days in this industry. We really focus on the supply chain. And I think one of the unique things about the emerging markets is this is actually where most of the batteries are manufactured. The materials that are going into the batteries are manufactured for these green vehicles. For example, we have exposure to companies like LGCOM, Samsung SDI, which are all

companies that are making the batteries that actually go in or the battery technology that goes into these electric vehicle. So it matters a little less who wins. I mean, obviously they're all partnered with different players, but they all have multiple partners. That allows us to participate in the growth of electric vehicles, but not necessarily have to identify which one of these SPACs is going to be the next great electric vehicle company. I'd also say that the semi-connecting industry is a great way to play electric vehicles. As vehicles are electrified, there's a lot more demand for semiconductors, and ultimately that's an area where we know very well and ultimately have significant to companies in that industry that can benefit from that.

The CAP-X, electric vehicles, it's a very automated manufacturing process. So we're looking at automation companies that are kind of feeding into that supply chain as these new facilities are built. Whether 10 companies end up being successful or two, ultimately they're building 10 factories in a lot of cases, and therefore a lot of equipment and CAP-X is going towards the development. So if we could be on the right side of that with the automation and the industrial complex that needs to support that, that could be very beneficial for us as well. well. We're optimistic in electric vehicles, but I would say that we feel the better risk

reward right now, or at least the area that we're more comfortable investing in, is really looking at that supply chain and trying to be positioned for the companies that are really enabling this growth and development that we're seeing. Yeah, I don't think a lot of people would know, but emerging markets have outperformed the S&P over the last year, not by a huge amount, but probably the first time this happened in a while. It seems like our flow is something that could impact this performance too, where these countries and markets are so much smaller that we get some capital flows, is that just something that could feed on itself and maybe even more so in emerging markets since it's a smaller piece of the pie? That's a great point. That's

something we've been talking about for most of the past years, just that this could be one of the greater pain traits for a lot of investors. I mean, we mentioned earlier that the average advisor probably has about 6% of their portfolio in emerging market equities right now. And if you think about global benchmarks being closer to 18, if you're moving up towards that target, there's significant room for increased flows. I think I saw a stat this morning that we're on the 24 straight week of positive flows in the EM asset class, which sounds significant, and maybe that sounds a little topy in some respects, but the reality, this has been an asset class that's been underfunded and hasn't really received flows for most of the last decade. So when you look at

the longer term charts, that really just looks like a very small tick from the bottom as opposed to any kind of significant change. So I would agree absolutely that ultimately, as flows move into this region, then ultimately it could end up being a self-fulfilling prophecy and that you end up getting war flows chasing the dynamics of needing to rebalance and kind of reallocate towards this asset class. One macro thing that I forgot to ask earlier was what was the response around the globe on a fiscal perspective from these countries compared with ours? Obviously, they don't have the financial flexibility and the infrastructure that we do, but how did they respond to the crisis? Much more targeted, especially in Asia, which was an economy that given cultural differences

and just their response to past pandemics had a very difficult time early on, but a much quicker recovery, at least thus far from this crisis. So countries like Asia, Taiwan, Korea, we saw very targeted stimulus and monetary policy. Much of their fiscal programs were more about providing coupons or rebates to individuals and businesses to kind of focus demand on areas that they thought needed specific recovery, restaurants or different service sectors as the economies are starting to reopen. And then ultimately, those economies right now are benefiting from a significant pickup in exports. We would have not anticipated given U.S.-China relations two years ago that exports from China to the U.S. would actually be at all-time highs again. While that may not be sustainable over the longer term, I think it does persist for the next few years because inventory levels are at ultra-low levels globally.

If you look at where the U.S. and European inventory situation is today, significant drawdowns. And then if you go over to Asia and you see the imports that have been coming out of China, exports have been coming out of China and Korea and Taiwan, ultimately they've drawn down their inventories quite significantly as well. So as we kind of think about how this recovery unfolds, I would say that for many emerging markets, the stimulus has been more targeted. And as a result, there's more flexibility to do more as the economy begins to reopen. But I'd also say that many emerging markets have benefited from increased exports during this crisis,

but that we have a significant inventory restocking cycle on the horizon. as well. Tell me about it. I'm doing my bedroom. Nothing fancy, normal stuff, nightstands, a dresser. I'm backed up. I'm not getting myself to June. Those supply chain issues are going to end up actually creating some reorientation of supply chains over time as well. So I think that's another opportunity for investors as businesses kind of look at their supply chain and start thinking about should they move some production to different areas or duplicate production. That's going to create opportunities as well feeding into those cap-ex cycles that I think are on the horizon. In closing, are these economies relative to us in terms of reopening? It varies. I mean, I think one of the key things

with the emerging markets is, as much as we try to paint it in one broad asset class, they're very differentiated. You see economies like China and Korea and Taiwan that are very far along and have been reopened and are really seeing minimal to no cases. And then you have economies like Brazil right now that are getting hit by another resurgence and much further behind. And then the vaccine situation is much different. I mean, obviously, these are our countries where sometimes logistics and transportation are going to be an issue. So ultimately, their ability to implement vaccines and roll those out, maybe a little bit more prolonged. So I think over the next year or two, you're going to kind of see some divergence in growth profiles as these economies reopen.

But ultimately, you know, as we get to the other side of this, there's significant opportunity as these economies benefit from the reopening trade as well. Nick, you and your team have a bunch of great research. Where can we send people to go check it out? Calamost.com. If you go to our main website, you can see some links there to get to the global international team. And we put out a quarterly outlook. We probably write thought pieces once or twice a month. So there's plenty of information out there to take a look at. All right. Thank you. Nick, thank you, Kalmos. We appreciate it. We will have links to all this stuff on our show notes. You've got a bunch of great charts in here. So thanks, Guy, Nick. Thank you. Thank you, Nick. Thank you to Kalimos.

Animal Spiritspod at gmail.com. And we will see you next time. You know,