Summary - Investment Podcast 14 – Emerging Markets

Professionalism and ethics form the bedrock of effective financial advising. When markets are volatile—particularly in emerging or frontier economies—clients look to advisors for steady guidance, scrupulous due diligence, and a steadfast commitment to their best interests. This article distills insights from a recent podcast discussion featuring Joseph Lai (Principal and Portfolio Manager of Ox Capital Management) and Bryce Anderson (Portfolio Manager at Morningstar), moderated by James Whelan (Managing Director at Barclay Pearce Capital’s Wealth Management Team). While the dialogue ranged from macroeconomic trends to valuation methods, it also highlighted the ethical imperatives that financial professionals face when recommending investments.

Given the potentially higher risks and less transparent frameworks in certain emerging markets, ethical considerations—such as duty of care, conflicts of interest, and adherence to regulatory guidelines—are of paramount importance. This piece aims to recap the original discussion with a strong emphasis on how professionalism and ethics inform the process of investing in emerging markets. All information herein is general in nature and should not be construed as personal financial advice. As always, advisors and investors should review relevant Product Disclosure Statements (PDS) and other official documents thoroughly before making any decisions, and they should consider seeking advice from licensed professionals.

The Importance of Disclaimers and Regulatory Compliance

Before delving into emerging market opportunities, the podcast began by reminding listeners that Ensemble does not hold an Australian Financial Services (AFS) license and does not provide specific financial advice. This underscores a crucial aspect of ethical financial practice: transparency regarding one’s regulatory status and limitations. Indeed, the conversation opened with disclaimers that Morningstar Investment Management Australia, Ox Capital Management, and their respective Australian Business Numbers (ABNs) and AFS licenses are duly registered entities, operating within the scope permitted by law.

From an ethical perspective, issuing proper disclaimers is not merely about ticking a compliance box; it is a demonstration of integrity. Clients and podcast listeners alike deserve clarity about whether the commentary they hear constitutes general or personal advice. In all professional settings, particularly in finance, ensuring that audiences understand the nature of the information being presented helps preserve trust. It also underscores an advisor’s duty to act in the client’s best interest by encouraging them to seek qualified, personalized advice where necessary.

Why Emerging Markets?

The conversation quickly turned to the potential benefits and challenges of investing in emerging markets. A central question was: What makes emerging markets attractive? Both Bryce Anderson and Joseph Lai agreed on several points:

1. Valuation Opportunities:
   Emerging markets often exhibit valuation multiples that can be far more attractive than those in developed markets. In some instances, stocks trade at single-digit price-to-earnings (P/E) ratios, while comparable companies listed on developed-market exchanges may trade at much higher multiples. From a purely economic standpoint, undervalued companies with strong fundamentals can present a compelling investment thesis.
2. Diversification:
   For Australian investors, emerging markets offer exposure to industries and firms not present in the local market. In Australia, financials and resource companies dominate, whereas investing in China, India, Taiwan, or South Korea grants access to sectors such as semiconductors, consumer manufacturing, alternative energy, and advanced technology. By broadening the sectoral scope of a portfolio, advisors can potentially mitigate systemic risks tied to one region or industry.
3. Growth Trajectory:
   Many emerging markets sustain mid to high single-digit (or greater) growth rates in Gross Domestic Product (GDP). Rapid urbanization, youthful populations, rising incomes, and pro-reform governments can fuel sustained expansion, creating an environment where both local and global enterprises can thrive.

Even so, higher growth potential often comes hand in hand with heightened volatility and unique risks, including political instability, regulatory unpredictability, and currency fluctuations. Here is where professional ethics matters greatly: advisors must ensure that their clients understand not only the potential returns but also the scope of risks. Honest disclosure of possible pitfalls is central to upholding fiduciary duty.

Ethical Duty: Balancing Risk and Reward

No investment is without risk, and emerging markets—whether in Africa, Asia, or Latin America—can be less transparent. Regulatory standards, corporate governance practices, and accounting norms sometimes lag those in developed economies. The ethical onus on advisors is therefore twofold:

1. Due Diligence:
   Advising a client to invest in an emerging-market equity or bond without rigorous analysis verges on negligence. Advisors must engage with reputable research, market data, and, when possible, on-the-ground assessments. Joseph Lai mentioned regularly visiting regions like Singapore, Jakarta, and parts of China to see “on-the-ground” realities. Such firsthand insights can be invaluable in verifying the sustainability of companies’ business models and their governance practices.
2. Suitability:
   Advisors hold an ethical obligation to recommend products that match a client’s risk tolerance, time horizon, and investment objectives. If the allure of a particular emerging market is overshadowed by a client’s more conservative profile, the advisor should act in accordance with the client’s best interest, even if it means foregoing potentially higher returns.

China: Navigating Complexity and Opportunity

China presents a prime case study of how ethical and professional responsibilities converge when considering emerging-market investments. China’s rapid growth and market size are well-known, but so are its regulatory fluidity and geopolitical tensions. The discussion revealed key points:

1. Selective Stock-Picking:
   Joseph Lai underscored the need to differentiate strong franchises from weaker ones. Even in a market as large as China, certain companies have robust earnings growth trajectories, global ambitions, and solid balance sheets. Conversely, others face more risk due to property-market corrections, fluctuating consumer sentiment, or policy headwinds.
2. Sovereignty and Geopolitical Risk:
   Ethical investing also demands acknowledging sovereignty risks. During times of political strain—such as heightened trade tensions—a company could face tariffs, restricted market access, or even delisting from certain exchanges. Advisors must weigh these uncertainties transparently when recommending Chinese equities to clients. As Bryce Anderson noted, “Some things you can’t predict,” but valuations can provide a margin of safety that cushions the impact.
3. Compliance and Transparency:
   Currency controls and regulatory oversight within China may limit how foreign investors withdraw funds or exercise shareholder rights. From an ethical standpoint, if an advisor sees a red flag about corporate governance or the repatriation of funds, they must communicate these risks candidly, offering clients a true picture of potential outcomes.

China underscores the intersection between global growth potential and complex regulatory environments. Advisors must perform deeper due diligence and maintain elevated transparency to act ethically when recommending Chinese-focused products.

India: High Growth Meets High Valuations

The podcast discussion highlighted India as another cornerstone of emerging-market investing. As the world’s largest democracy, India carries an aura of “friendliness,” especially for foreign corporations seeking to diversify supply chains. Prime Minister Narendra Modi’s government has introduced structural reforms, streamlined regulations, and shown a willingness to bolster domestic manufacturing, sometimes referred to as “Make in India.”

1. Why India Attracts Foreign Capital:
   • Economic Reforms: Improvements in banking sector regulation, taxation (Goods and Services Tax), and digitization have contributed to easier business operations.
   • Rising Middle Class: A young, tech-savvy population drives demand for consumer goods and services, including fintech solutions, entertainment, and automobiles.
2. Valuation Concerns:
   Joseph Lai cautioned that although India’s story is compelling, many Indian stocks are priced for perfection—some consumer-oriented companies trade at P/E multiples above 70 or 80. From an ethical standpoint, advisors must determine whether the potential growth and “story” genuinely justify such high valuations. As Bryce Anderson explained, in high-growth companies, valuation can remain elevated as long as earnings keep up with expectations. However, when even a single metric falls short, share prices can crater. Accordingly, a balanced, ethical approach would ensure clients are apprised of both the upside and the potential for sharp corrections.
3. Systematic Investment Plans (SIPs):
   Local Indian investors often deploy SIPs (akin to dollar-cost averaging), which can keep local markets buoyant. But for foreign investors, currency risk, changing global interest rates, and local policy shifts can alter outcomes. Advisors should be clear that while domestic flows may help stabilize valuations, external factors can still trigger volatility.

Addressing the “Trump Factor” and Geopolitical Shifts

One of the more speculative areas in the conversation was the potential for a new U.S. administration, such as another Donald Trump presidency, and how it might affect emerging markets. Although politics can be unpredictable, an ethical, professional advisor considers multiple scenarios:

1. Tariffs and Trade Barriers:
   Tariffs, once again, may target sectors like automotive or semiconductors, potentially reshuffling global supply chains. Advisors need to track these developments in real-time and adjust recommendations swiftly and transparently. Clients must never be left in the dark about how political shifts affect market assumptions.
2. Reindustrialization:
   Potential policy changes encouraging U.S.-based manufacturing could raise production costs for multinational firms, some of which rely on cheap labor and established infrastructure in emerging markets. Ethical advisement requires that clients be informed of how these “reshoring” trends might influence both short- and long-term returns in portfolios.
3. Portfolio Diversification:
   Given geopolitical uncertainties, a diversified approach that mitigates single-country risk becomes even more ethically imperative. Spreading investments across multiple emerging (and developed) markets may reduce the impact of trade tensions or policy reversals focused on one specific region.

Inflation, Currency Fluctuations, and Interest Rates

Bryce Anderson and Joseph Lai also touched on interest rates and inflation—critical factors affecting emerging-market performance. When the U.S. Federal Reserve raises rates, for instance, the U.S. dollar tends to strengthen. This can put downward pressure on emerging-market currencies, potentially hampering debt repayment. However, not all emerging markets are identical: some, like Indonesia or India, may have more controlled inflation, while others struggle with higher price instability.

Ethical Implications of Macroeconomic Forces

• Disclosure: Advisors must clearly delineate how global rate changes might affect emerging-market bonds and equities. Communicating the possibility of currency depreciation or liquidity constraints ensures clients are prepared for potential volatility.
• Fiduciary Responsibility: Where currency risk could erode returns, an ethical approach might be to suggest hedged products or at least explain why the unhedged position presents a specific risk-return trade-off. A “one-size-fits-all” approach is rarely suitable, particularly in emerging markets.

Asset Classes in Emerging Markets: Equities vs. Fixed Income

While the podcast centered heavily on equities, advisors might also look to fixed income for diversification. Emerging-market bonds can be denominated in either local currency or so-called hard currency (often U.S. dollars). Each comes with distinct risk and reward profiles:

1. Local-Currency Bonds:
   Investors bear the volatility of the local currency. If the currency depreciates, the bond’s total return can be compromised even if the bond’s coupon remains steady. The ethical posture here requires straightforward disclosures about this currency risk.
2. Hard-Currency (USD) Bonds:
   Issuing debt in U.S. dollars often yields interest rates that reflect higher default risk. Here, the borrowing country must generate enough foreign-exchange reserves to service the debt. Advisors recommending these instruments have a duty to examine credit ratings, sovereign debt levels, and broader macro trends in each country. Misrepresenting or glossing over default risk in pursuit of high yields would be professionally and ethically problematic.

Professional Conduct: Education, Transparency, and Collaboration

Throughout the discussion, an undercurrent of professional ethics and best practice guided the conversation. How can advisors maintain this standard when navigating emerging markets?

1. Continual Education:
   • Regulatory Updates: Rules in emerging markets can shift rapidly, especially as these countries evolve. Keeping abreast of changes in investment quotas, taxes, or capital controls is essential.
   • Market Developments: Emerging technologies, shifts in local consumer behavior, and new export patterns can alter the risk-return profile of potential investments. Advisors who invest in education—whether through conferences, certifications, or direct travel—are better equipped to serve their clients ethically.
2. Due Diligence and Research:
   • Company Fundamentals: Advisors should analyze corporate governance practices, auditor reputations, and track records of dividend or interest payments.
   • Macroeconomic Factors: Understand how the region’s political environment or natural resource dependencies might affect local companies.
3. Clear Communication:
   • Set Realistic Expectations: Not every emerging-market stock will be the next global champion, and short-term volatility can be severe. Overpromising returns or understating risk undermines professional integrity.
   • Frequent Check-Ins: Clients benefit from regular portfolio reviews. If macro conditions shift—such as a change in U.S. trade policy, an election outcome in a major emerging economy, or unexpected rate hikes—advisors should proactively update clients, discussing whether portfolios need rebalancing.
4. Conflict of Interest Management:
   • Transparency on Fees: If an advisor stands to gain from a specific recommendation—whether via a sales load or ongoing commission—full disclosure is ethically mandatory.
   • Best-Interest Duty: Regardless of potential personal remuneration, the client’s welfare must remain paramount.

The Margin of Safety Approach

A recurring theme in the podcast was the concept of a “margin of safety.” Valuation-driven asset selection can serve as a protective moat against uncertainties—political, economic, or otherwise. When investing in emerging markets, acquiring shares at lower multiples can cushion against underperformance if a geopolitical event or economic slowdown occurs. That said, the margin of safety is not a guarantee. It merely improves the likelihood that a portfolio can withstand a range of future conditions without permanent capital destruction.

Professionally and ethically, this approach encourages prudent risk management. Rather than chasing speculative gains on hype, professionals who adopt margin-of-safety criteria demonstrate a commitment to measured, evidence-based decision-making. This not only aligns with compliance standards but also fosters long-term client trust.

Building a Resilient, Ethical Portfolio Strategy

Putting all these considerations together, how might an advisor construct an emerging-market allocation that reflects both professionalism and ethics?

1. Start with the Client’s Profile
   • Determine risk tolerance, time horizon, and financial goals. If a client has a low appetite for risk or short-term liquidity needs, it might be ethically irresponsible to recommend a volatile market like frontier equities or highly speculative bonds.
2. Diversify Across Regions and Sectors
   • Rather than concentrating holdings solely in one country—no matter how promising—spreading exposure across Asia, Latin America, Eastern Europe, or Africa can help mitigate country-specific shocks. A diversified emerging-market equity or bond fund is one pathway; a blend of carefully chosen single-country funds or individual securities, managed by specialists, is another.
3. Partner with Credible Managers
   • Teams like Ox Capital Management or Morningstar’s multi-asset specialists have on-the-ground research capabilities and expertise in valuation. Working with managers known for their robust due diligence and transparent communication can safeguard both the advisor’s and the client’s interests.
4. Ongoing Monitoring
   • The conversation among Joseph Lai, Bryce Anderson, and James Whelan repeatedly emphasized the importance of monitoring global macroeconomic changes, currency trends, and corporate fundamentals. In a dynamic environment, an ethical advisor remains vigilant, ensuring portfolios adapt to evolving realities.

Conclusion

Emerging markets intrigue investors and advisors with the promise of higher returns, diversified sector exposure, and robust long-term growth. Yet, they also carry complexities and risks that demand a professional and ethical approach. From conducting thorough due diligence and providing transparent risk disclosures to respecting regulatory boundaries and disclaimers, advisors must tread with care.

Professionalism in emerging markets means staying informed of local regulations, macroeconomic changes, and corporate governance standards. Ethics calls for an unwavering commitment to putting clients’ interests first—recommending only those investments aligned with a client’s risk profile, time horizon, and financial objectives. It also involves candidly explaining the nuances of currency risk, geopolitical factors, and potential market downturns.

By integrating these principles into every step of the advising process—research, communication, portfolio construction, and ongoing management—financial professionals not only uphold their fiduciary duties but also forge a relationship of trust that endures over the long term. The ultimate takeaway from the podcast conversation is that emerging markets can be navigated successfully and responsibly when professionals anchor their practice in integrity, transparency, and a dedication to serving the best interests of their clients.

Accreditation Points Allocation:

0.10 Technical Competence

0.10 Client Care and Practice

0.10 Professionalism and Ethics

0.30 Total CPD Points