Emerging Markets: Governance and Data Insights

Portfolio manager Monem Salam and special guest Kurt Lieberman of Magni Global Asset Management engage in lively discussion on selected investment topics covering sustainable investing, country and corporate governance, emerging markets, and global opportunities.

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Emerging Markets: Governance and Data Insights

Craig Churman: Welcome to the Saturna Sustainable Webinar Series. This discussion is going to be focused on emerging markets and governance by country and data, both of which are important to country governance. And we have two speakers today: Monem Salam with Saturna Capital—who’s Executive Vice President and a Portfolio Manager on the Amana Funds and private accounts. So, welcome Monem here. He’s been with the firm 17, 18 years and we’re glad to have him. He’s part of the investment team and business development. And Kurt Lieberman, who resides in Minneapolis, St. Paul Area. Twin Cities area, with Magni Global Asset Management. We welcome Kurt to the call. Kurt’s firm does a lot of work in terms of emerging markets country governance and we’ll get into that part of the presentation in detail as we go along. So, thank you for joining the webinar series. Just to recap, we started two weeks ago with a robust discussion on why strong balance sheets matter and as you know, Saturna Capital is an active manager. We’re very much into deep research on the securities we hold, and we tend to hold them for long cycles and long periods of time, both in the equity and the fixed-income markets. So, it’s very much at the core to our investment process and in the emerging markets side, we benefit greatly by having an office in Malaysia and Kuala Lumpur and for six years Monem Salam was president of that subsidiary and Monem is on the call now. For the last two years he’s been back in the states again. But he also is closely linked to that from a research standpoint and has firsthand knowledge of being in those markets. So, I wanted to welcome everybody to the webinar, and I’ll start by letting Monem talk about his background and a little bit about his experience in emerging market investing.

Monem Salam: Well, thank you, Craig. And Kurt, thanks for being on as well. And everyone for joining this presentation. Honored to be here. As Craig mentioned, you know, I’ve been with the firm Saturna Capital for roughly about 17 years. In 2012, after purchasing an asset manager in Malaysia, I moved out there to basically head up the operations. And, you know, at that time, you know, we’d been, at Saturna Capital, doing SRI, sustainable responsible investing, for a very long time, but it wasn’t until about 2015 that we actually implemented those guidelines into our investment management process, specifically you know by prospectus. And so, you know, while I was there for the 7 or so years, there was actually a transformation that happened within Malaysia. And I think that kinda speaks a little bit to what happens in other parts of the emerging markets as well. And that was when I first got there, if you mentioned something about SRI, socially responsible investing, that was purely akin to only Islamic investing. Right? Islamic investing basically, investing according to principles of Islam which prohibit a company from investing in sin stocks, according to Shariah guidelines. So that was basically SRI or ESG purely translated into the Islamic side. But we have to keep in mind that a log of regulators in emerging market countries, they have usually what’s called a dual mandate. The dual mandate is not only to regulate but also to be able to grow the capital markets. And throughout the presentation maybe I’ll get into a little bit later, but how they were able to, you know, and especially in Malaysia but also in other emerging markets, how they were able to translate the dual market into actually looking at ESG, environmental, social, governance standards, to be able to have companies that they were encouraging them to disclose them on the company side but also from the fund management side, how they were beginning to encourage people to look in, or to encourage fund managers to be able to look into this type of investing. So, I’ll stop there. I think there will be a lot of discussion parts so we can continue on, but I just wanted to kind of give a framework of, kind of, the transformation that not only Malaysia but other emerging markets have faced over the past seven years when it came to just conventional investing and then moving slowly towards ESG as well.

Craig Churman: Okay, and I’ll introduce Kurt Lieberman. We met Kurt a few years ago. His firm does a lot of work globally on data and governance on a country-by-country basis. Interestingly we had been invited to an event in Kuala Lumpur in March and I think we’ve all been homebound since then, but that doesn’t stop us from doing our roles of investment analysts and investment managers. So, I’ll let Kurt introduce himself and then we’ll get a little closer to the details on country governance.

Kurt Lieberman: That would be great. Thank you so much. Thank you, Craig. Thank you, Monem. Thank you, Saturna. It’s an honor to be here. It’s a pleasure to be on this. Over the years, as Craig and I and others at Saturna talked, we had very interesting discussions, so it made sense for us to have this webinar. Magni sees governance as very important investment information. We think things that are run better seem to perform better. I’ve been CEO of the company for about 8 years and we build portfolios based on the governance insights that we research, both at the country and the company level. Our governance research is a little bit different than perhaps some other organizations, particularly the data providers. You know, we believe that behavior is where you really see governance. The way people in an entity behave is a reflection of the underlying governance. And that opaqueness is a real problem because it tends to provide the cover for corruption and corruption is very corrosive to the performance of countries and companies. And part of our work is in the emerging markets. It’s a very interesting part of our work because as Monem talked about, there’s less data and when there’s less data it can be tougher for people to make decisions. We see that as opportunity in that where there is less data, it may well represent an intentional lack of data related to bad behavior. That’s not always the case, but it can often be the case and so I’m glad to be here and look forward to the discussion.

Craig Churman: So before we start talking about the data and the opaqueness why won’t we jump to the first slide that shows the performance of the emerging markets and to nobody’s surprise, you know, I’ll let Monem and Kurt really walk through this but the emerging markets have been choppy and bumpy at best over the years.

Kurt Lieberman: As you can see, for every time period on the chart, emerging markets has not only underperformed the, if you will, the developed markets, because EAFE is a pretty good surrogate of the developed markets. It excludes the US and Canada. It’s also unperformed the US. And as you can see, EAFE has underperformed the S&P 500. But as one of Craig and Monem’s colleagues, Scott, will tell you, a lot of the US excess performance was driven by the FAANG stocks, particularly if you make it a double A and add Amazon in. That high tech in the US has way outperformed for the last decade and even if you pull the US out, emerging markets have underperformed developed markets for an extended period of time. And one of the questions, perhaps, we should kick around is... in financial services, past performances is not a prediction of the future... that said, there is often a reversion to the mean trade. And that things will come back in line. And I think there is a reversion to the mean trade. It’s not clear when it will occur, and it doesn’t look as powerful as it might be. So, it’s not clear that emerging markets will outperform EAFE, but it’s not clear by how much, at some point in the future.

Monem Salam: That’s a good point, Kurt. And the other thing, you know, I mean we had, if you remember in the 2000’s there was a tremendous outperformance of emerging markets, even coming out of the crisis in 2008 and then we pretty much had, you know, kind of a lull period for the past twelve years pretty much, maybe ten years, from 2010. Part of it is the strong US dollar. Part of it is the idea that if you strip out the FAANG stocks, the technology sector, from the S&P, you’re gonna get pretty much in line returns from the MSCI EAFE as you do from the S&P 500 ex-FAANGS. But also, the one thing to keep in mind also is that in the emerging markets, you know, if you want to call it not all emerging markets are built the same. So there are not only region specific that have done better than others, but maybe drawing that even further, there are countries that have done better than others as well, take for example the Philippines, minus this year, has had close to 7 or above GDP growth rate for the past four or five years, 7%, which is one of the highest in the world. So, there’s countries, but specifically, looking down even further than that, you have company outperformance as well. So, really, especially more in the emerging markets and maybe in other places, you know, the active... being able to actively manage, look at the companies, know exactly what they do, know the country environment that they’re in, and the regional does actually quite well for you in terms of outperformance.

Kurt Lieberman: Very much so agree Monem. If I can point out a couple other countries along that line: Taiwan and Russia have performed fairly well over the period relative to EM and it’s not clear to what extent that will continue. I think there’s some risks there. In Taiwan, there’s the overshadow of China, and China kind of considering Taiwan part of China, and potential trouble there, as well as a potential reversion to the mean trade on Taiwan. Russia...

Monem Salam: I just wanted to echo on Taiwan.

Kurt Lieberman: Sure.

Monem Salam: Taiwan is classic example of, in looking at it from a countries perspective, there are macroeconomic tensions that are out there. However, Taiwan is a very, on the emerging markets side, a good barometer of what’s happening in the tech industry. Whether it be from the semiconductor side, or others. And Hong Kong, is another example. They do have some political turmoil going on, but you know, Hong Kong is also the place where Tencent is based and others in the technology area. So, again, it’s both. You have to look at the larger macroeconomic environment. But there are a lot of good gems that you can find in emerging markets.

Kurt Lieberman: Particularly at the company level, I agree, and on the flipside, a couple countries to perhaps talk about—one would be Mexico and the other is South Africa because they have some hidden strength in their infrastructure. At the same time, a lot of their performance relative to the EM has been driven by turmoil within those countries—the challenges with the drug cartels in Mexico and a lot of political and social unrest in South Africa. Should those countries be able to address the domestic disruptions, there could be some significant upside to those countries.

Craig Churman: Kurt, I don’t know if this is a good time to talk about it, but one of the topics we want to talk about is COVID and how the countries have dealt with it, specifically, so if you want to get to that point or you want to leave that for a later time. I mean, that’s front and center in terms of governance.

Kurt Lieberman: Happy to do that. We did some recent work looking at country-level response of the countries of the world, on the pandemic, and taking a look then at their equity markets and we used data from Malaysia. Monem and I both know the folks involved. It was an international collaboration led by Malaysia. The Malaysians are very proud of the collaborating effort and they ranked 184 countries on a variety of objective healthcare measures to measure pandemic response. We then correlated that with investable countries and took a look at the ETFs, where there’s countrywide ETFs, and we sorted the countries into those that perform better and those that perform worse on COVID. Through the end of May, the performance of the countries that performed better in responding to COVID, those countries outperformed the bottom performing countries on COVID by over 700 bps, 726 bips. It’s a huge amount of money. There’s an article published in Baron’s where I’m quoted on that research. Countries that did a better job responding to the pandemic had less damage to their equity markets. In a meaningful way.

Craig Churman: Interesting.

Monem Salam: It makes good sense if you think about it. There is some short-term pain that a lot of the emerging markets will face because of any lockdowns and those type of things but I think in the long run, to have had that type of protection of the citizens in mind... Malaysia was a leading example of that. They actually were very early on implementing what’s called the MCO—the movement restriction order, shutting down international flights. And they’re still kinda slowly coming out of it. They’re taking their time. But the other thing that was interesting that I found, and I haven’t looked at your research more in-depth, but you know, there is a cultural view of the people versus their government, so I think that has a lot to do with it as well. For Malaysia, for the most part, are very obedient, if you want to call it... if the government says something, they’re gonna end up doing it. There’s not all that turmoil. Take it and contrast it to maybe something like in India. It’s a democracy, and so’s Malaysia, but in India, the government says something, and you choose whether you do it or not. And so, I think that helps to kind of also frame around how the countries were able to react. And that trickles down into the countries reacting and also the individual businesses that were available. Just one thing on the COVID part, I just want to mention, on the ideas part. You know, again, looking at it from a regional... and I don’t wanna harp on Malaysia just because Malaysia in this industry happens to be doing very well... but you really have to look at... even in terms of prices there are opportunities. So, for example in Malaysia, the glove manufacturers have done really well because of the global pandemic. And they probably will continue to do well. I mean, the valuations have gotten a little ahead of themselves, but I think, you know, there are areas in the emerging markets where you find a lot of attraction because of the pandemic. And that’s where looking at these companies and countries more specifically is very important.

Kurt Lieberman: I agree. Well said. If I can, I’d put Brazil in that same category as India. Sorry, Craig. We did some work and said okay... how much did good governance matter in the relative performance of the countries of the emerging markets? So, Magni scores countries on a 0 to 100-point scale. We took the countries of the emerging markets and broke them into four quartiles based on the quality of their governance. Highest scoring, second highest, third highest scoring, and fourth highest scoring. If you built a simple basket of country-level ETFs, equal weighted for each of the four quartiles and ran it without rebalancing for ten years, you’ll see that countries with better governance outperform the other quartiles and you see a perfect correlation with the fourth quartile with relatively worse scoring countries having the relatively lowest performance. So, governance is a way of assessing quality in countries. It’s not to the exclusion of what Monem said. There are other considerations, you know, like the tech industry in Taiwan and so on. One macro piece to look at is governance.

Monem Salam: Just to be able to expound upon that. I do find sometimes, when you’re in emerging markets, there is a difference between country governance and company governance. I find a lot of times that the governance of companies is actually a lot better than the governance of the country itself. You know, you’d think the opposite way, but really a lot of that depends on money flows. When you have a lot of money from foreign investors, particularly in the US or Europe, that are pushing money into the emerging markets, there’s a lot more weight that those investors can pull to be able to make companies do a better job. And so, you know, you find that many times, governance, with its nuances. There are some, we can get into that. But in general, there’s a lot of countries where the company governance is a lot better than the country governance.

Kurt Lieberman: Very much so. Foreign flows help drive greater transparency for the company at a minimum, sometimes better governance. But sometimes it’s simply a matter of the company is more forthcoming about information about what’s going on, and that in itself is a self-correcting mechanism.

Craig Churman: And Kurt, one of the things we talked about was countries that have moved... actually been promoted or demoted among the Emerging Markets sector. Can you give some examples there of countries that you follow?

Kurt Lieberman: Yeah, Morocco was dropped several years ago from the Emerging Markets. They went down to Frontier. They didn’t begin with a very good country score, so we weren’t surprised by that. By the way, when I say demoted or promoted, we follow the MSCI rankings of countries and groupings because it’s more widely used around the world and it’s very strong here in the US. And so these are all MSCI changes in classification and Magni does not do these classifications. Greece was demoted from developed down to emerging several years ago. It’s interesting, we view Greece as kind of a corrupt Caribbean nation—sorry if any of you are from a Caribbean nation—but they’re somewhat of a corrupt Caribbean nation bootstrapped to Europe and get some beneficial impact from the European Union. And so, they’re kind of neither fish nor fowl. The EUS specs make them look like a developed country. Outside of that, they do look like an emerging market in many ways. One of the most interesting, for us, was the promotion of Saudi Arabia. It’s a relatively large equity market that had been excluded from the Emerging Markets, it was not in the Frontier. MSCI had them in Special Situations because of limitations in the ability to invest there as the Saudis reduced those limitations and in exchange, MCSI promoted them. Its governance is very interesting. On one hand, they’re world class in some things, like financial statements. If you take the financial statement of a Saudi company. It’s pretty reliable. It’s ahead of most anyone in the emerging markets and rivals parts of the developed world. At the same time, they’re very opaque. Understanding where the family ends, the government begins, and the government ends and RANCO begins are pretty fuzzy. They have a lock of corporate governance law, and so if you’re considering an investment there and there’s a risk that that investment wouldn’t go well, there’s no law to handle how that situation would be dealt with. It goes to the royal family. The royal family consults with Sharia scholars and the Shariah scholars give a recommendation and the royal family gives a ruling. Those that are Muslims and those that are familiar with Islam understand that’s an orderly process. To a lot of people who don’t understand Islam, like a lot of Western business leaders, that can sound very random. It can sound very scary.

Craig Churman: Monem, one of the questions I have for you is in terms of your client accounts, are you getting both clients interested in emerging markets in terms of an allocation, have you found something that’s attractive for your clients?

Monem Salam: I think definitely, the interest is there. Looking at it from a perspective of the ESG in the emerging markets. I wanna harken back to something I said earlier, which is that a lot of the regulators of emerging market countries have a dual mandate. The first mandate is to be able to regulate but the second mandate is to be able to grow the capital markets and they’re constantly looking for opportunities to be able to bring more foreign moneys, more foreign flows into the country. And so, again, if you’re looking at it from that perspective, if you already tapped out your conventional side, and in the case of a lot of the Muslim countries, you’ve already begun to kind of look at the Islamic investing angle and where the money comes from, the next logical step for you to take is to be able to do some of the work on the environmental, social, and governance area. I’ll give the example of Malaysia again. You know, Malaysia has done a lot of work, not only to encourage the companies to disclose more regarding their governance and regarding environmentals and those type of things. But also, what they have done is given tax incentives to fund managers to look into ESG. And that’s a very unique angle that Malaysia took. That is, if you were managing money according to ESG standards then they would actually give you a tax write-off or no taxes on the income from that. So that kind of encourages people, encourages companies, fund managers, to be able to do that. As far as the clients are concerned, are they really looking for emerging markets? I think the performance says it all. I think many people right now look at the returns and turned away from emerging markets. But that’s really the exact opposite of what a good asset allocation would want you to... and that’s really the important part here, which is that I think that in any portfolio, anywhere between 10% to 15% should be dedicated to this because I strongly feel that when the emerging markets will do better, they will do better by significant amount than maybe others. And that’s been the case in the past, as well. You know. And so, I think, making sure that advisors that are catering to our clients, that we always have a certain percentage to emerging markets, I think is very important.

Craig Churman: One of the things that we saved for the next webinar was China. And I don’t know if we want to give a little preview now where we’re gonna look at China. And when we were talking about this series, we actually weren’t sure if we’d do China and its effect on both the other markets and the supply chain. Or whether we’d do emerging markets first. We opted to do the emerging markets first. And so, Scott Klimo is gonna host our seminar, our webinar, in two weeks and it’ll be strictly on China and the supply chains. So, we look forward to having Scott’s insight there.

Scott Klimo: Do you want me to say something about it, Craig?

Craig Churman: Sure, sure if you wanna give us a preview, Scott.

Scott Klimo: Sure, so obviously it’s been a topic, I think, of tremendous concern given the friction that’s occurred between the United States and China on trade. And even prior to the stance that’s been taken by the current administration, a lot of companies were recognizing that China was losing some of the benefits that it has had in the past. The country’s workforce is actually declining at this point, shrinking, and it’s getting more expensive. And so certainly at lower ends we have seen lower-end activities. We’ve already seen a significant migration offshore. Vietnam particularly is one country that has benefitted from that. But we’ll be going into that in greater detail and I’ll be speaking with Edward Alden, who is the Ross Distinguished Professor at the Western Washington University Business School and an expert in trade policy and supply chains. I just finished reading one of his books—Failure to Adjust: How Americans Got Left Behind in the Global Economy—which is a really interesting study of American policy and how it hasn’t always served American workers very well, really dating across... regardless of party and administration, dating back to the Nixon Administration. Yeah, so that’s a little preview.

Craig Churman: Thank you. Monem, any countries that will benefit from turmoil in China that you’re aware of in Asia?

Monem Salam: Well there’s quite a few. When you look at supply chains... a few countries come to mind, particularly Vietnam is probably the one that kinda sticks out. As international companies that have manufacturing in China look to move abroad or look to diversify, I should say, away from a shrinking population, governance, those type of things. I think Vietnam kinda stands out, but also depending on what time of manufacturing it is, other countries like even Malaysia, Indonesia, also do stand out. For example, Malaysia is also fairly strong in the low-end manufacturing and packaging of computer parts. Contract manufacturing, those type of things. So, they stand to benefit. Indonesia, you know, has a 300 million population. Although they’re scattered, there’s a lot of opportunity there. The other one that I do wanna highlight because they’re kinda like a self-contained entity because they’re so large is India. India has a lot of opportunities as well but again, in the words of a lot of astute investors, you have to invest in India not because of the government, in most emerging markets that’s the case, but you do it despite the government. Because they usually have a democracy and they’re usually putting barriers to growth rather than anything else. But India is a large one. The other thing in emerging markets that happens and that’s unfortunately the case with India, too, is there’s restriction in how much foreigners can buy and sell and those type of things. So, sometimes that will restrict companies or funds or assets to be able to deploy but I think there’s a large opportunity there as well.

Craig Churman: Okay we’re coming up toward the end so Monem, I’ll ask you a question I didn’t prepare you for. But I know on your list is to visit 100 countries or something to that effect. How many have you been to?

Monem Salam: Quite surprisingly, 72 out of 100 that I’ve actually been to so far. That’s my goal in life. I was supposed to go to 2 or 3 more this year but I don’t think that’s gonna happen so yeah, I do enjoy going to countries and really... it’s kind of a dual mandate for me. Whenever I go, I try to enjoy the scenery and stuff but I also, I do talk to people about the country is doing, companies are doing, what’s working, what’s not working, so it’s really fascinating to be able to go and experience all of these cultures.

Craig Churman: Well and I think you and Kurt and Scott Klimo have said the same thing. You really have to have country context and you can’t beat being there and I know you’ve made a lot of on-the-ground trips both from an investment standpoint just to get the culture and we have clients spread all over. Many of our clients are native of countries all over, so we have quite the network. So, really appreciate it.

Monem Salam: I wanna give one example of country nuances and those things if I can, when it comes to governance, and this is something you come across a lot. I mean, if I was basically screening out for diversity of the board when it comes to gender diversity. You know, there are a lot of companies in Asia and other parts that will actually score very well on that. However, when you look a little bit deeper, which is non-index related, not passive, but more active—looking from an analyst perspective, what you realize is that the diversity is coming because it’s the daughters or the family members of the owners that are actually sitting on the board. And so, those are the types of things that maybe not visiting a country or not knowing the cultural context of a country can lead you astray. And so, it’s really, really important to be able to know those type of things so thanks for bringing that up, Craig.

Craig Churman: Kurt, any closing remarks before we wrap up here?

Kurt Lieberman: I just wanted to echo Monem’s point, it was an excellent point, both a cultural context and the specific example about the diversity point. And I strongly concur.

Craig Churman: Thank you for your time, Kurt. Thank you for your time, Monem. Looking forward for the next webinar scheduled for the 8th of July. Thank you very much.



Investing involves risk, including possible loss of principal. 

Sustainable investing strategies generally limit the securities they purchase to those consistent with sustainable principles, which limits opportunities and may affect performance.

The MSCI Emerging Markets Index, produced by Morgan Stanley Capital International, measures equity market performance in over 20 emerging market countries. The MSCI ACWI Ex-US Index is a broad measure of equity market performance throughout the world that excludes US-based companies. Investors cannot invest directly in the Indices. 

The MSCI EAFE Index is an international index focused on Europe, Australasia, and the Far East. The MSCI ACWI Ex-US Index is a broad measure of equity market performance throughout the world that excludes US-based companies. The MSCI Indices are produced by Morgan Stanley Capital International (MSCI). Investors cannot invest directly in the indices. 

The S&P 500 is an index comprised of 500 widely held common stocks considered to be representative of the US stock market in general. Investors cannot invest directly in the Index.