Episode #513: J.P. Morgan’s Gabriela Santos Likes International Stocks for 2024

Episode #513: J.P. Morgan’s Gabriela Santos Likes International Stocks for 2024

Guest: Gabriela Santos is the Chief Market Strategist for the Americas on the Global Market Insights Strategy Team at J.P. Morgan Asset Management. Gabriela’s research focuses on emerging markets, especially China. She is responsible for the development of the Guide to the Markets, Guide to China and Guide to the Markets – Latin America, amongst other publications.

Recorded: 12/6/2023  |  Run-Time: 49:41

Summary:  In today’s episode, Gabi shares her view of the world after a year where the Magnificent 7 has dominated the headlines. She hammers home her excited about the opportunity set outside of the U.S. She explains why she likes the set up for Japan and India, why nearshoring is just one of the reasons why she’s bullish on Mexico, and why she thinks China has become more of a tactical trading market.

Comments or suggestions? Interested in sponsoring an episode? Email us Feedback@TheMebFaberShow.com

Links from the Episode:

  • 1:15 – Welcome Gabriela to the show
  • 1:54 – Reflecting on 2023
  • 4:01 – Forecasting the investment landscape for 2024
  • 8:16 – Inflation trends
  • 11:43 – Identifying areas of interest in current markets
  • 18:15 – Analyzing the dynamics of the Japanese market
  • 19:18 – Delving into various currencies
  • 23:24 – Deciphering the Chinese market: Guide to China
  • 32:46 – Investigating other compelling markets
  • 34:58 – Why nearshoring has Gabi excited about Mexico
  • 38:45 – Evaluating potential future risks
  • 41:54 – Gabi’s most memorable investment
  • Learn more about Gabriela: LinkedIn; J.P.Morgan; J.P. Morgan’s Guide to the Markets



Welcome Message:

Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.


Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.


What’s up everybody? We got a rocking show today. Our guest is Gabriela Santos, chief market strategist for the Americas at JP Morgan Asset Management. Today’s episode, Gabi shares her review of the world after a year where the Magnificent 7 has dominated the headlines.

She hammers home how excited she is about the opportunity set outside the US, and she explains why she likes the setup for Japan and India; why nearshoring is just one of the reasons why she’s bullish on Mexico, and why she thinks China has become more of a tactical trading market. Please enjoy this episode with Gabriela Santos.

Gabriela, welcome to the show.


Awesome, thank you so much, Meb. Thanks for having me.


Where do we find you today?


I am in a getting colder New York City at the JP Morgan office here.


Awesome. Love the city during the holidays, I’ll be there the first week of April, listeners. Maybe we’ll have to do a meetup or something. I’ve never seen a Yankees or a Mets game, so if they’re in town opening week, maybe we’ll do a meetup there.

We’re winding down the year. 2023, soon to be 2024. How’s this year play out to you? Two surprises? Totally, exactly as expected? What’s it been like for you as we start to wind down 2023?


Tis the season of year ahead outlooks, so we have been doing a little bit of a look back at this year and a look ahead, of course, most importantly, I think the number one thing I would say this year is we have been very pleasantly surprised from a macro standpoint, so that much hyped up talked about hard landing definitely never materialized. If anything, we got above trend growth this year, on track of something close to 2.5% growth.

We’ve also been pleasantly surprised, I would say, especially by the supply side of the economy. We’ve had improvements when it comes to the labor market, productivity, and as a result, we have had the expected fall in inflation, but for a good reason, which is supply side improvement, not demand side weakness like we had expected.

We’ve also had some surprises, I would say, when it comes to market performance, most especially on the negative side by fixed income. We had expected a much better year for yields to have already peaked in 2022 and for this to have been a high single digit return kind of year. Instead, we got a lot more volatility and, so far, low single digit positive returns.

On the equity side, as well. On paper, it’s been a strong year of recovery for equities like we expected, but very much concentrated on those Magnificent 7 stocks, and we had not expected that level of AI enthusiasm and that concentrated performance.


It was a pretty nasty 2022 for the traditional opportunity set. This year, I think people will be drinking a little more champagne than sparkling water or whatever it may be, NA beer from last year.

This year is soon to be in the bag. Let’s take a look out to the horizon. Is this going to be another T bills and chill sort of year where people will have all of a sudden got all this yield they never had before and they’re just going to chill out? Or as we look around, let me start with the US, what are we thinking?


So we’re thinking if 12 months from now the strategy is still T bill and chill, then they’re going to wish they had done something different today, and that’s because we really think we’re at peak rates when it comes to fed funds rate and when it comes to just the whole yield curve, and what you normally see 12 months after these transition moments is that you have duration outperform and you have equities outperform, just pure cash.

This is one of our biggest challenges, is getting investors to appreciate reinvestment risk. It might look great to have cash at 5.5% today, but where will it be six months from now, 12 months from now? On an absolute sense and then also in a relative sense: the opportunity cost we could have by not having locked in the yields where they are in fixed income and taking advantage of some discounted valuations within pockets of equity markets.


We were talking about bonds, we said, and you can’t obviously put too much weight on this, but it’s pretty rare for a big asset class like US stocks, 10 year bonds, commodities, REITs to decline multiple years in a row, meaning three years in a row. It’s actually pretty rare and it looks like we’re on pace for the long bond to print three down years in a row if we’re looking at say the 30-year in, which really only happened once: the late ’70s, early ’80s.

Now, I don’t know how many people are saying, “All right, I’m going to put all my money in zero coupon bonds at the end of the year,” because they’re down 50% or something. It feels like a trade that would be a little squeamish for most of us, but bonds, certainly for the first time in many years, all of a sudden have this yield again, which is something that I think a lot of people welcome, but also is a little different than that very strange period of zero and negative yielding rates.


Absolutely, and I think what’s interesting is thankfully with the drop in yields in November, if you look at the US Aggregate, the Bloomberg Barclays US Aggregate as a measure of duration or core fixed income, it’s now mildly positive of 2.8%, so we hopefully only saw two negative years when it comes to core fixed income negative returns, but very, very unusual nonetheless.

And when we look forward, I do think there’s a strong argument for us not to go back to 0% rates. We’re not talking about huge double-digit returns kind of years for fixed income. There’s some normalization in rates, though, to a new steady state, which we would think would be yields around three, 4% along the yields curve, and that’s just a better environment for income.

The other pitch I’d make for bonds is the just in case risk of some kind of recession, some kind of crisis. That’s still there. It doesn’t mean everything is perfect and it’s all Alice and Wonderland at this point. It’s really still an environment where there’s downside risk to growth, and in that environment, bonds can work. It was in that peak inflationary fear environment that it really didn’t serve any kind of purpose in a portfolio.


For a long time current investor horizon, so quarters, months, even a couple years, inflation was a topic that came to the forefront that really hadn’t been a concern for arguably decades for Americans. Around the rest of the world, different story. But Americans really have had one environment for the majority of my lifetime, which is declining interest rates, disinflation, whatever you want to call it, and then all of a sudden, boom, we had this inflation again.

Are we thinking this is, I don’t want to jinx it, conquered? Is this something that’s back to our normal two, three, 4% sort of situation? Or is this something that’s… We say on this podcast a lot. I was like, “The only goal of the Fed is this PTSD from the ’70s where they don’t want to have this second ramp up and they’ll do anything to avoid that.” But how do we feel about inflation?


I think the Fed is an institution and has a long memory, so they have certain parallels to the ’70s, which clearly is very much on Chairman Powell’s mind. He’s mentioned Volker several times. But I do think even they fell victim to a certain amount of recency bias, to thinking that all of the inflation push was short-lived, or what they call transitory at the time, and there was no action needed, and that ended up being perhaps the wrong move and a big catch-up in rates needed.

I think going forward, usually we tend to talk in the investment world in absolutes. Either there’s inflation or there’s no inflation. I think putting some numbers helps. Do we think inflation will be structurally sticky at these elevated 3% levels? No. But do we think inflation will average below 2% like it did over the past decade going forward? Also no.

It’s an environment where a lot of the recent inflationary push we really think had a lot to do with supply chain issues or supply side issues, and they should continue getting unwound next year, and then we could end next year our forecasted inflation closer to 2%.

With that said, over the next decade, we think there’s a little bit more upside risk to inflation than downside risk, which was the reality over the past decade. What do we think inflation will average over the next 10, 15 years speaking of numbers? 2.5%, so it’s a little bit more inflationary pressure, but it’s not this elevated inflationary period, temporary period, we’ve lived through.

And there are things to generate a little bit more upside pressure to inflation, things like geopolitical tension and this push towards rethinking supply chains, where it’s not just about where we can produce something the cheapest, but it’s also about diversification, resilience, and slightly more expensive production of goods going forward. It’s also about the energy transition, renewable energy probably costing a bit more, leading to some spikes in the price of traditional energy given our underinvestment, so a little bit more upside pressure.

And I think in that environment it’s not just about stocks, bonds, protecting growth risk and that’s it. We’ll continue needing that extra toolkit just in case for the inflationary upside surprises along the way, and here’s where we’ve had a lot more conversation about real assets: things like infrastructure, real estate, and thankfully, more and more individual investors are having more access to those asset classes, in addition to the usual access institutions have had in the past.


That generally is an area, when we look at traditional portfolios, individuals, but also advisors in the US, it tends to be, A, very US focused, and B, often has very little in real assets, although I feel like the last few years has sort of reawakened an interest there.

Before we leave the US, I think this year market cap weight, or said differently, very specific large stocks really helped out this year. As we look forward, are there any areas, sectors, cap sizes, styles, anything that y’all think are more interesting, or said differently, something to avoid or are scary?


Speaking of the nuance, I think in terms of small caps, their discount to large cap is at the highest we’ve seen since the dotcom bubble, so in terms of having an allocation to small caps in portfolios with that idea of getting some kind of premium over large caps in the long run, we think this is a good opportunity to build some exposure.

With that said, if the discussion is more, “All right, I already have small caps. Tactically, should I start actually overweighting them versus large cap? There we would say not quite yet, and that’s because of a few things that we’ll still keep debating and discussing next year, which are more headwinds to small cap than large caps.

Things like higher rates: we do expect rates to come down, but they’re still more elevated, and small caps have a higher percentage of their financing that comes from banks that are floating rate, versus their large cap peers which have locked in very long duration or long maturity kind of liabilities, and that’s one of the reasons we think small caps have been underperforming in 2023.

The second thing related somewhat to rates is this idea that if T bills are not trash, meaning if there’s some cost to money, investors think a little bit more about business models, and nearly half of small caps are unprofitable companies, so there’s more of a hesitancy to finance that business model. That’s not really going away.

And then the third one is I think we’ll still have moments next year where some hard landing fears will percolate, or at least late cycle fears percolate, and small caps are a lot more cyclical. They especially have a lot of regional banks which are really not out of the woods quite yet, so a good moment to build a strategic allocation of small caps, but in our mind, not the moment to be overweighting them. Would still prefer their large cap brethren given their better quality.


All right. Well, one of the things you talk about a lot is XUS, which is one of my favorite topics. I think most of my American friends put almost all their money in US stocks. Meanwhile, pat yourself on the back this year, drink some more champagne because that’s been…


Yes and no. Yes and no.


I was saying it has been a great place for 10, 15 years, but I’ll hand you the mic. What does it look like going forward?


I am so finally really excited about the international story. We’ve had so many false dawns over the last 15 years. I completely understand the frustration with the thing altogether.

The one thing we always mention to investors here in the US is again going back to that idea of recency bias. It has been a great 15 years of outperformance of US versus international, a great 15 years of versus other currencies, but that’s not always the case. The seven years before that, you actually saw an international outperformance. You actually saw the dollar declining. It tends to alternate. We go through these long regimes or long cycles, and the question was really just when would we hand over the baton?

And I think, in a way, the pandemic was like a new race started. It allowed for a change in the environment that’s actually more beneficial to international than it is the US, and it’s the same discussions we’ve been having. Inflation. You finally have inflation in Europe and Japan. This is what they’ve been hoping for, praying for, working towards 15 years.

And to them, to an extent, it’s welcome. Think about it. Inflation means higher prices. It means companies are raising prices. It means better revenue growth, better earnings growth. That’s a key ingredient that wasn’t there. That’s now there.

Number two, higher interest rates. We’re done with negative interest rates. That’s also a huge change. And did you know the SMP is up 20% this year? What else is up 20%? Japanese banks. This is a huge game changer for Japanese and European banks. Higher interest rates. It means they can earn interest on their excess reserves with central banks, which they haven’t for nearly a decade. It means they can charge higher spreads on the credit or the loans that they make. So huge, huge, huge game changers there from the nominal growth environment, the interest rate environment.

One last thing I would say is finally, after a decade, European companies, Japanese companies have started paying attention to shareholders. Again, I don’t know that everyone knows that Europe and the US have the same buyback yield. Europe has discovered the magic of returning capital to shareholders, not just via dividends but via buybacks. Japan, record high number of buybacks announcements, so there’s also just much more focus on realizing value for shareholders, which is a huge change.

And this is just in the international developed space, but one that’s been just left for dead for a long time, and we’re finally starting to see things turn around. Flows have started to turn around the past few months.


Yeah, we’ve certainly seen that in the data and talk about how some of these historical dividend yielding countries, companies, sectors, XUS, have really embraced this trend towards governance, and thinking about how to best use shareholder capital. Japan certainly sparked the attention of Uncle Warren Buffett and others.

It’s a fun story. We’ve seen Japan come full cycle. My goodness, what a strange 30 years it’s been there, and all of a sudden they’re cheap and nobody cares, including most of my friends in Japan. But that seems to have turned the corner in the last year or two, so we’ll see how the sentiment shifts if they start.


And amazing that, to your point, Japan, the reason I said almost is Japan is up 28% this year. Of course, it has had yen weakness, so in dollar terms, it’s slightly underperforming the US of 15%. But if indeed finally the Bank of Japan gets going next year and starts raising interest rates, for which there’s a lot of pressure in Japan for them to do because there’s a slight amount of panic from the Japanese that finally there is inflation and that the yen’s quite weak, then that suggests shrinking interest rate differentials with the US, stronger yen, and then you get a nice cherry on top from the currency for a US-based investor.


Talked about the dollar. How do you think about it? How should investors think about currencies in general as we’re thinking about these markets, as we’re thinking about fixed income, as dollars had, they look like this massive run and it looked like whatever it was, a year or two ago it kind of peaked, but then it kind of seems to have coming back. What are you guys thinking about here? I got some travel to plan, so what do you think is going to happen?


We have this awesome graph in our guide to the markets that I think is… You take the dollar real effective exchange, so one of the indices of the dollar versus the major trading partners adjusted for inflation. You take it all the way back to the ’70s, and it’s amazing. It goes a decade where the dollar gets stronger, followed by a decade where the dollar gets weaker and on and on and on we go. It’s amazing and it aligns with these changes, and the macro environment, capital flows, and just valuations.

We do believe that October of last year was one such turning point, where the dollar peaked and that we’re in the very early innings here of this ball game, other side of the dollar weakening. I think in the long run, when we model out currencies, it’s all about inflation differentials, GDP per capita, purchasing power parity, and that’s all fine and good, but you need a catalyst.

By those measures, the dollar is expensive. What was missing was a shorter term catalyst, and I do think we have that now. We find that things like interest rate differentials are super important, so this idea that the Fed can start cutting rates next year ahead, in our view of European central banks, the Bank of Japan has yet to get going, and by the way, we won’t see these countries take their rates back into negative territory, means shrinking interest rate differentials, lower dollar.

And there’s been volatility up and down this year, but it was amazing to see November when we did have this 70 basis point drop in the 10-year yield. The dollar weekend three and half percent in one month, so things can change very quickly related to interest rate differentials from an expensive starting point to us, means the dollar can be a really nice tailwind for currency returns.

And normally we think about unhedged in our international exposure on the equity side. Don’t think it’s worth it on the bond side, it just adds volatility and that’s not really the point. But for equities, we do tend to think of it unhedged, and that would help overall returns.


You guys have one of my favorite… Everyone loves the guide to the markets, but one of my favorite charts in the guides to the markets, and we’ll put this in the show note links, listeners, it’s like an Alps mountain range where it’s the US versus foreign stock performance for the last 100 years. And then you see the Mount Everest of returns being this last cycle in US stocks, and then JP Morgan has decided, I’m agreeing with them, that cycle’s over, and you have a tiny little sand dune of foreign performance. We’ll see if that reverses again. We’ll see how long that lasts.


We’re hopeful, we are. And it’s interesting, Meb, I don’t know if everyone knows, but we look at the Morningstar categories for flows and it was never international. It was all kinds of other things leading the pack. This year, the fifth category, that’s how the most inflows, is foreign large blend, so I think that’s a sign that mentality shifting, flows are shifting. We talked about international develop, but there’s a very strong argument for the emerging market side, as well.


Well, that seems like a good segue into one of the topics you talk a lot about. It varies over the years on people’s interest with China. Sometimes people are euphoric and China is this juggernaut that is going to make Japan in the ’80s look like a small opportunity set in country; and then other times, like probably now or the last year, where China seems like it’s universally hated and the sentiment is low and PE ratios are scraping the bottom, how should investors think about China? It’s been a bit of a basket case for the past 10 years. What are you guys thinking about?


Yeah, and it’s been an especially tough three years really since the peak of the market in February of 2021. The interesting thing is it’s a market of very high [inaudible 00:23:36]. We talk about in the US, a correction is a 10% drawdown. A bear market is 20%. For China, a correction is a 20% drawdown. A bear market is a 40% drawdown, so it’s doubled the ball of the US.

And actually, these moments where the market falls 40, 50%, they’re very aligned with turning points in terms of policy and direction or the five-year plans. And this was what happened in early 2021. It’s China re-pivoting where they want capital to go for the next phase of their economy’s development. And this time around in particular, it affected a very large piece of the equity universe in China, which was the internet companies. What you also see is eventually investors get the point, they readjust the investment and you get a rebound in Chinese markets.

What I think is happening is there’s a shift in mentality towards investing in China from, “All right, I’m willing to tolerate this volatility that you’re talking about, but I’m going to have a strategic large allocation to China and I’ll just surf it out.” I think it is becoming thought of as more of a tactical trading market that goes beyond just the turning points around reform and policy.

And what I mean by that is you are seeing these big swings in the pendulum of a lot of optimism and a lot of pessimism, and depending on where you are in terms of that pendulum and valuations, then investors feel more comfortable dialing it up a bit and then dialing it back down a bit. I think that’s kind of where we are. It’s just a lot more unpredictable going forward, geopolitical tensions as well as a lot of competing priorities Chinese policymakers have now, and it’s not just about growth for them anymore.

Where we are now going for next year is, I think, on that pessimism end of the pendulum. You look at Chinese valuations. They’re at 9.8 times. That’s 15% below long-term average. It’s the same valuation we were at October of last year, which was followed by China rebounding 60% from the lows, so a lot of conversations we’ve been having about investors is lack of conviction to be strategically overweight China anymore.

But also, a conviction that it’s dangerous at this point to be too underweight, because we’re probably on the cusp of things turning around, especially now that there’s a bigger focus on putting a floor on growth for next year; at the moment, dialing down some geopolitical tensions; and obviously there’s just a lot of pessimism and under allocation.


Let me try to get these in perspective. Even from the JP Morgan guide to the markets weight, that’s roughly 60% US just stocks. Emerging is probably… I don’t know, it’s usually around 12% of the total, of which China is a third or half. 4% position of the equities, that doesn’t seem like much for most people, although I bet if I were to poll what the average allocation of China is, it’s probably going to round to zero for most Americans.

Although the clips that I use from y’all’s booklet more than anything are the various home country bias around the world, not just the Americans putting 60% in, particularly in Asia, but also geography within the US, where the people in the northeast put most of their money in financials. Out here in Cali, it’s tech. In Texas, it’s energy.

You guys do now all sorts of thematic ones. You’re doing an entire China… Is it China or Asia guide to the markets? It’s like a whole section or is it a standalone?


Guide to China, yeah, so a way for foreigners to understand what’s going on there. This is interesting, Meb, because I think when we first launched that publication three years ago, I think the direction of travel we were going with institutional clients, big pension funds, endowments, was they were starting to think maybe a third of EM for China’s not enough.

If we actually looked at the size of China’s markets, they have the second-largest markets in the world. The real weight for China should be half of all of emerging markets, and maybe it doesn’t even make sense to put it in that bucket. That was kind of the thinking at the time.

I think the thinking now is, “No, actually. That’s enough.” And maybe we even think about strategies that help diversify that China risk or that China movement, and we start looking at other parts of emerging markets.

I think one of the really incredible things this year has been the decoupling of the rest of EM to China. We used to think EM is all China because it’s big and because it moves everything. That’s starting to change. China, as we mentioned, is down nearly 15% this year. EMX China is up 12%.

There’s just other stories happening there that help to diversify some of that China exposure, if there is any, or just the general exposure one has, even with multinational companies, to China. A lot of excitement. We mentioned Japan. Another one in Asia is India. On the EM side, it’s about to become potentially the second-largest market in EM equity universe. It’s about to pass Hong Kong.


Oh, wow. Okay. Yeah, you’re right. I was looking at this China, X China, how much of this do you think is related to… And it could be zero answer could be zero, it could be a lot, it could be none, because you talk probably to a lot of institutions. Russia, as far as a percentage of stock market cap in EM or the world is tiny. China’s not. China, you mentioned a third of EM.

How many people do you think kind of looked at the Russia situation and said, “Hmm, this gives me pause. The China Taiwan discussion that’s been going on forever, my Russian assets getting frozen or stocks getting marked to zero, that’s one thing. If that happened to China in my portfolio, that would be a huge, not only portfolio punishment, but behavioral career risk where clients, particularly for advisors, be like, ‘Oh my God, you kidding me? We own this much China now it’s zero?'”

Is that something that you think is front of mind, it’s not so much an institutional world? Or how are people thinking about it?


I do think it is. I think there’s a desire to at least model out what would happen if indeed something similar to Russia happened and the value of those assets went to zero, or if there was, related to that, an actual conflict that emerged between China, Taiwan, the US. I don’t think it’s anyone’s base case or high probability event, but we’ve had a lot of conversations about modeling the non-zero probability of that happening.

I do think the invasion of Ukraine was important for that risk side, but I also do think that what occurred in China had itself unrelatedly also led to that and this idea that policy makers in China have different priorities that are not just about boosting growth. Confidence is low, and it’s taking longer to recover. I think that also is feeding into that.

The one thing I would just say when we do have those conversations about geopolitical risk is we would still put the probability of that occurring as very low, and I think this is from China’s own interest. President Xi Jinping does very different calculations, I would say, than President Putin. There’s still a big focus on some economic stability, political stability.

There’s a lot of dependency on Taiwan for semiconductors. Taiwanese companies are one of the largest employers in China. There are a lot of interdependencies there, and in the event that that happens, it’s very tough to model out because of the dependence on Taiwan for advanced semiconductors. All those chips that we need for AI and quantum computing are made there. The strain of Taiwan’s also a huge zone for global trade, and we’d be talking about the largest and second-largest economy in the world, so it’s tough to model out, but I do think it adds into the risk of the allocation.


As we look XUS, are there any other areas that we haven’t really talked about that are particularly interesting or fraught with risk and you’re going to get coal in your stocking this year if you invest in them?


Interesting story, we mentioned Taiwan and semiconductors. Another place that’s hugely benefited from AI and all of the enthusiasm and investment there is Taiwan, which is up 23% this year. EM is also about tech innovation and also a way to invest in the AI theme.

India is also another story we’re alluding to here. India is up 17% this year. Indian companies also have the same return on equity as US companies do. It’s not just an EM economic promise kind of story, it’s also a quality of actual corporate skill and corporate execution story, and India has delivered the returns over the last 15 years, unlike other emerging markets, so that’s another really exciting story for us. And it very much benefits from a thinking of China plus one going forward: producing in China but also elsewhere. India’s one. Investing in China, but also in another big EM like India.

And then the last thing I would say, Meb, is Latin America. That’s my home region. It’s faced a lot of issues over the last 10 years or so, post bursting of the commodity super cycle, but I think it’s got more tailwinds going forward. It’s got some of that China plus one benefit. Mexico seeing huge investment as something close to the US to set up production.

We might also be in a new commodity supercycle related to critical minerals that [inaudible 00:34:24] has a lot of that are used in semiconductors, as well as in electric vehicles and batteries. There’s a lot of good stuff I think happening in EM beyond just the China story


As you look in [inaudible 00:34:38] any favorites?




Mexico. Okay, let’s hear it. There’s a word by the way, if we had done word Gabi bingo at the beginning or word cloud, nearshoring would’ve been way sooner than 50 minutes in, so is this a nearshoring opportunity? And explain to listeners what that even means.


Nearshoring is the Scrabble word in Latin America right now. It’s all anybody talks about. This idea with first it was a trade war, then the pandemic, then geopolitical tensions with China, companies are just rethinking supply chains, and nearshoring refers to bringing production closer to the end consumer, wherever it may be, and Mexico is just the natural destination for production where the consumers in the US.

Mexico’s a part of the USMCA. I Keep trying to think of the new name for NAFTA. USMCA is part of the free trade agreement with the US. It’s very deeply integrated into US supply chains when it comes to electronics, autos, certainly it’s got cheap manufacturing wages, which China, by the way, no longer ha,. So it’s more competitive from that standpoint as well. So many reasons why Mexico is kind of the go-to place for a lot of production.

The other thing, if we think about one of the big trends in the US related to these change in supply chains is there’s much more of a push to make things domestically related to the energy transition, to semiconductors, across supply chains.

But one way companies can kind of lower the cost and still comply with the spirit of that is to have some of that manufacturing in Mexico, where at least it’s part of the trade agreement, but it doesn’t increase your cost to a prohibitive level like producing everything in the US would.

There’s many, many tailwinds from Mexico, and when I go to Mexico, I go there a lot, clients tell me the north of the country, Monterrey, which is the manufacturing hub, is booming, booming, booming with US companies, European companies, Chinese companies setting up production there. It’s not just an idea of nearshoring, it’s very much happening in practice.

Now how do invest in that In Mexico, the first big winners this year have been construction companies, so all the material needed to build all these manufacturing plants, but I think there’s a bigger story there. More Mexicans will be employed. Eventually, their wages will slowly drift higher. That’s a big boost to the consumption and consumer companies, even financial companies would benefit from that. So to me that’s actually a really exciting trend for the region, especially Mexico.


There’s a lot going on. We’ve seen a lot of excitement on the startup scene in [inaudible 00:37:44], but also emerging markets over the past few years where we’ve seen a lot of companies really graduate into what people would call the unicorns, but larger private companies and hopefully will flow through to public markets, as well.


Yeah, related to e-commerce, related to digital banking, I think [inaudible 00:38:04] very advanced in this idea of digital banking, kind of skipping over the traditional banking method, and just having apps where you do everything, including banking, financial advice. We think we’ve got the lead here in the US. I think they’re even more advanced actually in some emerging markets, because they can skip the traditional banking method and leapfrog it in some ways.


This has been a whirlwind tour of everything so far. As we look out to 2024, what else is on your brain that we didn’t talk about? Is there anything you’re particularly excited or worried about as we look out to the horizon?


We always do think about risks. I think we’ve laid out a base case of a soft landing, rate cuts eventually beginning. This will be supportive for fixed income, for broader equities, that there are positive stories happening around the world. But of course, that’s kind of the base case.

One of the risks we talked about was reinvestment risk, but another one that we think a lot about is credit risk. I think even in an environment where a soft landing might be the base case, we’re still here in the beginning of a credit cycle and that’s just because of how elevated interest rates are.

By the middle of next year, we will start really seeing the volume of refinancing for companies pick up, especially high yield, which tends to have shorter maturities, but also investment grade. And it’s a bit critical for us to start seeing interest rate cuts as that refinancing wall is picking up. That’s how you end up with a soft landing, is companies don’t have to refinance at these levels. High yield company at 9.5, they can hopefully refinance at slightly lower and lower interest rates. That’s why interest rates are still the most important variable next year related to this idea of credit risk.

Related to that, another risk is just business caution. Right now, we’re in this, what some people have been calling, I think Neil Deta of Renaissance [inaudible 00:40:13] Soft Landing Nirvana. We’re in this environment of growth is cooling but not too much. What if businesses all of a sudden just get very cautious, stop hiring, or even start laying people off? That’s an environment then where you get a traditional recession, the unemployment rate goes up and then consumption contracts, so we’ll be watching business confidence carefully.

Of course, there’s always a salient risk of geopolitical tensions, here specifically looking at the evolution of the tensions in the Middle East, whether the market reading thus far is incorrect and we actually start seeing actual energy production be impacted and you get some kind of spike in specifically oil prices. All of these are more downside risks to growth, I think, rather than concerns about inflation, even the energy one.

And in that scenario, I think it brings us back to just having a little bit of core fixed income for those downside risks to growth.


As we talk about winding this down, we got a couple questions that I’d like to spark a little bit of discussion. One is, what’s something that Gabi believes, that when you sit down with your friends in New York over a coffee or some food, come out here to Cali and you’re doing an ideas dinner, and you say this, it could be a concept, it could be a statement, it could be a position, that three quarters of the table is going to disagree, shake their head, not agree with.

What do you believe, and this is professional peers, that the majority of professional peers on something they wouldn’t agree with you with?


I do think a lot of the conversation we’ve had so far, this whole international discussion, is something that the majority of people are still not convinced by, and I think it’s that recency bias, but also the fact that it’s been in the right position and we have had many false dawns where Gabi has come to Southern Cali to do a presentation and talked about international and then it fizzled out, so I do think that that’s still a non-accepted or non-consensus view, necessarily.

But I truly, truly, truly believe that there’s a lot of value, alpha to be had by having that international exposure. But especially that there has been a real shakeup here, that we’ve been waiting to truly feel like we’re in a new regime, and I do believe that started in October of last year and that we’re in the early innings here of this new ball game.


This has been a Twitter battle that I don’t know why I continue to engage in, but international investing, we had a tweet the other day because someone heard someone say, “International investing hasn’t worked.” And I said, “Okay, hold on a second. What you mean by this is international investing hasn’t worked for American investors during this past cycle,” because for, I don’t know, the other 40 ish countries in the world, if you were an international investor, meaning you diversified globally, of which the largest market cap is US, it was by far the best decision.

The sample size of 44 out of 45, it is just one country where international investing didn’t work, but we love to give some of these examples. Falls on deaf ears, of course, but no one’s interested in my international discussion.


Another example, Meb, that I always point out is also, at an index level, international has not worked for a US investor, but that doesn’t mean that certain pockets of it haven’t worked, and we have an interesting slide in our guide to the markets that shows, “Let’s compare it to the best performing thing the past decade, US growth.”

Actually, you do have pockets of international that have either kept pace or outperformed. European luxury, Asia tech, Europe biotech, and Europe renewable energy. It’s just been very, very concentrated in the growthy bits, which are slightly lower parts of the index, but at a broader concept, I think now there’s more of an argument actually, not just for the growthy bits, the value bits, and hence for broader outperformance.


What’s been Gabi’s most memorable investment? Good, bad in between? Anything come to mind?


China’s certainly been a wild ride, I would say. I do continue believing a lot in especially A shares. I do think from China’s interest, that’s the market they want to develop for their own Chinese investors to invest their pool of wealth. That’s where they’re going to encourage the new priority kind of companies to go public, and that there’s still interesting stories there: software, automation, domestic consumption, especially these kind of fast fashion discount retailers you have in China, renewable energy.

I think China, for me, by far is the most memorable, but I continue having conviction in select parts of the A share story. We have such a great team there, and I was just recently in Shanghai visiting them, and I think we have a perception in the US that China’s a disaster, but you know what? Streets are busy, planes are busy, people are going about their business. There’s still opportunity in certain pockets of it.


That needs to be on my 2024 travel schedule. I’ve never spent real time in China, only Hong Kong, so I need to…


Shanghai would blow your mind.


On the to-do list. I got a lot of countries on my global Jim Rogers adventure capitalist, investment biker schedule that I need to go visit, and China’s on top of the list. I’ll hit you up for some recommendations when I make the trip.


Please do, please do.


Gabi, we’re going to add a lot of the things we talked about today to the show notes, all the various guides, which I’m actually going to go redownload and then flip through after our chat today. Where’s the best place to find you, your writings, your various TV appearances? People want to find Gabi, where do they go?


Gabi’s LinkedIn has a lot of it. Also, jpmorganfunds.com.


Perfect. We’ll added to the show notes.


I refer to myself in the third person, but yeah.


Gabi, thanks so much for joining us today.


Thank you, Meb. I really appreciate it. I’ll keep listening.

Closing Message:

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