Hi, everyone. Dan Cassidy here. Welcome back to the Talking Markets podcast series here on the UBS Market Moves podcast channel. Today's conversation will focus on the landscape for emerging market investing, including thoughts around recent performance, themes, and trends within the asset class, along with considerations when it comes to positioning. Joining me here today at the 1285 Podcast Studio in New York, glad to welcome back from Barron Capital, Michael Kass. Michael is a managing director and portfolio manager with Barron Capital, a firm he joined in 2007. Michael has 39 years of research experience. With that, Michael, very timely that you're joining us. It's been a couple of years, I think, so long overdue. Great to have you back here at the studio, Michael. Welcome back. Great to be back. Thank you, Dan. So a lot to cover, Michael, given what's been going on geopolitically speaking, and that ties into the nature of our conversation today, that being on emerging markets. Now, despite recent market volatility, this as a result of geopolitical tensions along with higher oil prices, UBS CIO views EM equities as attractive with a constructive outlook from here. What's your investment case for EM equities at the moment? Sure. You know, it's interesting because I recall being back here in late 24. I was optimistic on EM at the time and felt that we were at or near the bottom, certainly on a relative basis. And kind of, wow, here we are in early 2026. A lot of what we talked about, the catalysts that we laid out are now coming into view. I would say we're very much in sync with your CIO strategist on the outlook for EM. We completely agree. I would say that the key catalyst for us would be that moving into this more geopolitically driven world, We talk about deglobalization a lot. Deglobalization requires this massive global capital investment cycle to fund energy security, food, agriculture security, commodity security, strategic commodities, rare earth, etc. And now we're obviously defense, military spending. And it broadens to a lot of different companies and sectors, but I think the important thing is that there is just a lot more of that economic activity in the EM universe than in the U.S. There is a lot more of the industrial and real asset complexion in an EM index than there is in the S&P. So this is one of the reasons, as the kind of emphasis and the capital allocation is shifting to those industries that were really orphaned during the age of globalization, We're not coming full circle on that, and we're seeing EM come back in into a leadership position. We think that's sustainable. That's maybe the most important counts. There are a number of others, though. First, we talk a lot about AI, obviously, and we talked last time. I remember it was 18 months ago or so about emerging markets increasing visibility in the AI ecosystem. Obviously, Taiwan, Korea, we've got the big semiconductor names, but there are lots of other smaller companies that have critical enabling technologies that are allowing the ongoing development of advanced computing, advanced semiconductor design, manufacturing, packaging, bonding, hybrid bonding, all of these plays where there are companies that we've been able to identify that participate. But I think definitely in the last year or so, the EM components are beginning to outperform the hyperscalers, the US MAG-7. And so I think you're starting to see more focus from global investors or U.S. investors on EM as a way to participate in the evolving AI opportunity. So that's the second catalyst. The third, I would say, is India. India, which is lagged, is still the highest real growth economy in the world, has incredible drivers there, digitization, localization, formalization of their economy and leadership businesses and rising market share, you know concentrated in the best leading companies entrepreneurs etc But also you know a series of economic enhancing productivity you know reforms that are creating a what I would say escape velocity for lots of leading companies that are benefiting from those reforms. So India itself, while it has lagged, the valuation has gone from, you know, on kind of one standard deviation above the mean to one standard deviation below the mean. If there's any kind of a pause in enthusiasm for, you know, global AI CapEx, we're going to see a rotation back to India. So that's kind of a – will be a positive for EM on a relative basis in that scenario. And then last is China. China pivot – their answer to deglobalization is a pivot to value-added industries to all things, technology, AI, semiconductor, localization and self-sufficiency, robo-taxi, automated driving, battery technology. I mean they are leaders of humanoid robotics. I mean, if you think about everything that Tesla is doing, there are companies in China that are doing something similar. In some cases, you know, we'll have greater global market share just because of the size of the China market. So, you know, we see lots of opportunity in the forward-looking, you know, AI tech-driven industries, robotics, automation, you know, across the – that's what's interesting, I would say, in China. So, you know, while we're still underweight China overall, we're concentrated in those areas where we see significant value creation potential. Those are the earnings catalysts. We talked about most of those when I was here back in 2024. They're now coming into view. They're actually driving, you know, earnings acceleration. So what's happening now is you've got, you know, improving relative earnings growth potential across pockets of EM, most of EM. Still, you know, relative valuation, you know, 20-year lows. You know, yes, EM outperformed in 2025 and into this year, but most of that was earnings revisions, particularly in that kind of AI semiconductor complex, massive positive earnings revisions. The relative value is still at a 20-year loan. So we are just at the bottom. We think we're just still at the inflection point. We think there's lots more opportunity for relative performance on EM. And I'd say we're in sync with your CIO, but I think we've got kind of earnings catalysts that we, you know, as bottom-up fundamental investors that we're really focused on. Now, as the market environment has evolved a great deal since your last visit, Michael, acknowledging positioning for a few moments an increasingly geopolitically fragmented world, is global diversification in an equity portfolio becoming more essential? and for investors who are heavily concentrated in U.S. equities today, what may be some steps that should be considered to build a more globally resilient portfolio? I mean, I think the first thing I would say is, as I kind of mentioned up front, you have to look at investing now looking forward through that geopolitical lens because geopolitics has really, you know, post-Russia-Ukraine invasion, that's really flipped the entire kind of investment kind of mindset for us. Obviously, what I mean by that is that it is a geopolitics first. It is a global security, national security first environment. And so those industries that have been out of favor during the age of globalization are all of a sudden the leading earnings growth opportunities and are beginning to lead the market. We would say that the moment that Russia invaded Ukraine was the moment that geopolitical priorities began to supersede economic and corporate optimization. you know that that that's going to drive different leadership in the market and is a great opportunity for EM. So, yes, investors should be thinking about rebalancing, about increasing their their their ex-U.S. exposure, you know, in that in that light. I would say, you know, de-globalization presents an industrial renaissance. And so we would say wealth and savings are migrating from developed world consumers to the owners of real assets and industrial pricing power. You know as those industries as that you know as those priorities around whether it defense whether it energy security commodity security food and agriculture security infrastructure across Europe you know Europe having to fend for themselves in terms of the NATO security umbrella changing This is all related to the shifting geopolitics, a lot of it led by U.S. kind of policy pivot that we call it. You know, I would say that there's one more thing that all of that does that I think is critical importance when you're thinking about your capital allocation, your U.S. versus non-U.S. exposure. And that is the U.S. dollar, that the age of geopolitics and deglobalization triggers a bipartisan commitment in the U.S. It's kind of a domestic politics, geopolitical, and national security first environment. But all of those policies, bringing back manufacturing workers to the U.S., bringing back manufacturing to the U.S., reducing the current account deficit, those are definitely policy goals that I believe are likely to be achieved. But the collateral impact of that is a much weaker dollar. I would say that that goal requires either through terrorist protectionism or a weaker dollar. That's the only way to incent that manufacturing to come up. That's the only way to incent, whether it's biosecurity, energy security. You know, you want to make those investments. You need to incent those global multinationals or U.S. corporations to do something that's really not in their financial interest, but it's in the national security interest. Okay. To incent that, we need a weaker dollar. So we're already seeing that. That's why post-Liberation Day, I'd say we saw a surprising rolling over of the dollar. And I would say that's when we said we have entered – we have very likely entered a dollar bear market. We said it first post-Russia-Ukraine because that was the beginning of deglobalization. And so I'd say the confirmation, and you look at the action in the dollar, it certainly looks that way to me. Now, investors, allocators are going to wait for a, you know, some sort of a declaration of a confirmed dollar bear market to really move. You know, I'd say the critical mass of capital doesn't move until they can declare we are, you know, in a confirmed dollar bear market. That will be, you know, on the late side, you know, to begin reallocating if you're talking about shifting to non-U.S. and rebalancing your portfolio. We're not saying, you know, not to own U.S. equities. I think what we're trying to say is that we want to be in front of that moment of a large allocation decision making. You know, that will come coincident with the break in the dollar. I think another factor we haven't talked about is U.S. Federal Reserve. You know, we've lost the presumption of independence. That is a big factor. All of these other policy measures we're talking about is shifting the epicenter of inflation from offshore to the U.S. The U.S. is now the epicenter of the inflation impulse. That has not been the case in the last 30 years. In the age of globalization, it was the opposite. All the pressure was on the foreign central banks to have to defend their currency, to raise interest rates higher than normal, to keep real interest rates very high. That is now flipping. So the room to maneuver is on the side of non-U.S. central banks now, particularly EM where real rates are high, risk premium is high. This is another reason why we think it's still very early. So I would say, you know, at a minimum, you are, you know, significant overweight U.S. relative to non-U.S. You should begin covering that short position. You should be rebalancing, truing it up a bit. You should be adding a bit to your non-U.S., reducing a bit on the U.S. We believe that, well, U.S. equities are probably going to, you know, generate solid returns over the next five years, ten years, as they do. We've got great, you know, drivers here as well. We believe that EM can still outperform US performance in the next five or seven or ten years. Now, before we close out, just want to get back to risk considerations. And this does not have to be exclusive to AI, though, for EM equity investors. What's top of mind for you that should be considered? And any other final thoughts, takeaways you would like to share with our listeners? Sure. I mean first thing I would say it feels like every in the last few years at least every kickstart of an EM the beginning of an EM cycle of an EM super cycle you know something happens that defers that somewhat Obviously, the disruption to the energy markets, oil pricing, what's happening in Iran, you know, that would be a clear and present, you know, short-term risk. I would say for now it's probably creating a very attractive entry opportunity for investors that are underweight EM because we don't think that oil prices can stay elevated or escalate further for even an intermediate term. We think it's probably weeks or months and not quarters or years. and so but particularly Asia economies Asian corporations you know they are much more sensitive to Middle East oil flows and so countries like Taiwan Korea and India which are large weights in the EM index have been underperforming recently on that disruption so that would be you know that would be one kind of risk factor although for the time being, I would say, you know, if EM outperformed the U.S. by 10% last year, it was more than 10% at its peak earlier in the first quarter. It's now, you know, it's now down to maybe 5%, 6% this year. So there's been some relative give back. Maybe that's an entry point for investors that are significant underweight EM or international. The other risk factors, you know, I would say, The, you know, wow, we definitely feel there is this kind of significant long-term relative earnings growth improvement opportunity and a revaluation, which will lead to significant long-term performance, you know, over shorter-term periods. It's obviously that AI concentration. It's an issue. And any deferral of visibility on CapEx is certainly on some level going to impact a Taiwan semiconductor, most likely Korean memory and other related names in the EM complex. Long term, it's a great opportunity, but I'd say there's some similar risk. I think it's actually, as I said, it's probably less than the S&P just given the concentration. But, you know, Taiwan Semi being 13 percent plus of the EM index, Korean memory being another, you know, seven or so is definitely something to keep in mind when allocating to EM on an absolute basis. Well, Michael, a pleasure having you back here at the studio. Very generous with your time, a very rich and actionable conversation. So thank you for spending some time with our advisors, our listeners here on UBS OnAir. Great to have you back. Thank you so much. Always a pleasure. Thanks. As a firm providing wealth management services to clients, UBS Financial Services, Inc. offers investment advisory services in its capacity as an SEC-registered investment advisor and brokerage services in its capacity as an SEC-registered broker-dealer. Investment advisory services and brokerage services are separate and distinct, differ in material ways, and are governed by different laws and separate arrangements. It is important that you understand the ways in which we conduct business and that you carefully read the agreements and disclosures that we provide about the products or services we offer. For more information, please review Client Relationship Summary provided at UBS.com forward slash Relationship Summary. UBS Financial Services, Inc. is a subsidiary of UBS Group AG, member FINRA SIPC.
