Portfolio Manager, Brian Kersmanc, sits down with CommSec Market Analyst Tom Piotrowski to discuss his outlook on the AI industry, the energy market, and investing in emerging markets.


Tom Piotrowski: Hi there. Thanks for joining us for the executive series. Today. I’m speaking with Brian Kurzman from GQG Partners and he is a portfolio manager there. Brian, really good to be able to get your perspectives today. Thanks to your time.

Brian Kersmanc: Thank you. Good morning and thanks for having me.

Tom Piotrowski: Now, I should say that GQG Partners was listed on the ASX, you’re located in Florida, in the United States. But they have a uniquely, I suppose not uniquely, but your perspective is global in terms of the remit that you invest in. What I want to pick up on is essentially where we finished off one of the conversations we had with Rajiv when he was last in was that, you know, there were issues developing in relation to challenges for Chinese growth and as a group you were being quite cautious on that outlook that you had for Chinese growth, and you were sort of creating a bit of a moat around China, investing in South America and in India, for example, those strategies have worked out quite well for you. 

Brian Kersmanc: Yeah. So, when we think about investing just in general, we’re looking for absolute returns, not necessarily with the relative share of underweight, underweight, underweight, overweight as versus any particular benchmark, although China is an absolute massive sort of economy within the emerging market space, it’s almost kind of like the US in comparison to the global landscape where half the listed sort of names or market caps are coming. So, there’s going to be some things that are always going to be interesting within the Chinese landscape. So, we do have some investment there. We’ve tended to shy away from a lot of things because quite frankly, there’s a lot of more interesting areas in other parts of the world that we’re finding from a risk reward stand point. And just the general setup is more interesting.

So for India, as a matter of fact, India has gone through this deleveraging process, sort of a country level. At the corporates, they’re fairly leveraged, even the consumers, and you’re getting more and more folks coming into the formalized banking system in the economy and the government is really taking the stance of we’re going to be a neutral party in the global stage. If folks want to reallocate some of their manufacturing to India, that’s great. They’re going to clear out some of that red tape. So, some of those things start to happen a little faster. And you’re seeing businesses that are kind of benefiting from that and thriving from that. So it’s been a really interesting case study just there specifically. And we can talk about other markets as well.

Tom Piotrowski: In terms of the you know, if you look at the way that different economies globally are recovering from the you know, you’ve had expansion, contraction, expansion, how are you looking at the Indian trajectory at the moment? Like the growth in the last couple of quarters has been quite breathtaking and you’re looking even more closely at potential opportunities over and above what you’ve done recently.

Brian Kersmanc: So, what we’ve seen, which is really interesting, just let’s take a step back and the emerging markets in general is that a lot of folks were very nervous when developed markets, the Federal Reserve and ECB, the Australian side, that the central banks were going through this rate hiking cycle. What we were noticing is that a lot of these emerging market economies are doing very front footed about their policy towards the monetary and when they’re raising interest rates. And also the participants in the economy, both from the banking system, the individual consumers, the corporates, they were much more used to and adept to dealing with higher inflation, higher interest rate policies versus, you know, quite frankly, we in the US and Australia, Japan, Europe, we’ve been used to essentially zero inflation and zero interest rate policy. So, we kind of had a view that with this front footed nature, the emerging markets were actually going to handle this a lot better than a lot of developed markets. I have to take an aside away from India for a second very well. But think about Brazil. Brazil raised the ceiling rate a thousand basis points a year in advance of the Fed coming off of zero.

Brian Kersmanc: They got up to 1400 basis points off the trough. That low point actually in the beginning of a cutting cycle right now. And what’s interesting about that is you’ve had no bank failures or blowups. The banking system is actually remarkably healthy. Non-performing loans are actually pretty low. Loan growth is coming through high single digit, low double-digit pace. It was really interesting to see the participants in that economy who really use and really thriving. India, you know, very similar situation, versus I mean, what’s happened to develop markets.

Tom Piotrowski:  Yeah.

Brian Kersmanc: We raise rates by 500 basis points, and you had multiple regional banks within the United States.

Tom Piotrowski: Howling in space.

Brian Kersmanc: Exactly. Exactly. So, I think it’s that that almost relative move and what you’re used to or not used to and how those economies are sort of adapted to that, which makes things really interesting over time. 

Tom Piotrowski: I suppose one of the things that unites your exposure in all of these emerging markets is the resource space, but particularly energy is something that has served you well. So, you looking at oil prices now for the US benchmark, flirting with $90 a barrel, this is being orchestrated by, you know, OPEC and Russia, to be frank. When it’s being engineered like that, do you have concerns about the sustainability for a price at these levels?

Brian Kersmanc: So, it’s a really interesting question. And we’ve had a view for a while that there has been an underinvestment in energy in totality. So we were fully supportive of the energy transition, but we do believe that there’s going to take some transition period within there and we need to still maintain that production in the meantime, Now covid could actually set that back to some extent in limited production. We thought we’re investing a little under that trend before. But what’s really interesting, if you actually look at West Texas Intermediate inflation adjusted price and you go back, we’re kind of in the 2009 range right now. So, we think about if oil is a problem, a demand problem, because we know with a supply, and where it’s coming from.

If we have a demand problem when we buy oil on an inflation adjusted basis. So, if I go back to that time frame, are we in a post GFC sort of environment where consumption is just lower and or are we going to have a shale boom and bust cycle after? Probably not. So I would actually argue we’ve seen all the inflation happen in all these other areas and oil is still sitting at $90 a barrel.

I would argue that we’re, we’re pretty tight right now. So, we’ve actually I mean, we’ve reduced some of our exposures and energy simply because there’s other more interesting things in other parts of the market that reemerged. And we have still pretty strong weighting in sort of the energy space across the board in emerging and sort of on a developed market side too.

Tom Piotrowski: Some of your other significant exposures. Turn around tech and you’ve got some nice exposure to the chipmakers that I mentioned, the portfolio from Apple, you’re not a big holder of. I’m interested to get your viewpoint on what’s happened with Apple in recent times, not only because of its relevance for the organization, but in terms of this more aggressive tilt that we’re seeing from China in relation to its approach to US organizations. Obviously, wildlife is the beneficiary of all of this. Does that make you less excited about getting back into China?

Brian Kersmanc: Yeah. So, I’m going to take a step back from commenting on specific names. So, I apologize.

Tom Piotrowski: Of course. No, no, no.

Brian Kersmanc: In the event where we happen to be active in any one of these particular areas. But what I can tell you is this is something that we continue to think about in terms of there is a back and forth that continues to happen between the U.S. and between China. And there were certain names that we owned last year that we said, you know what? I can’t understand fully what this risk is. I’m going to back off a little bit. And that’s sort of a dynamic of our process, is that if there’s a risk that I can’t fully quantify, let’s take a step back. And I truly believe in the compounding of that business. I can reengage that later once the risk is a little bit more known and fully assessed.

So, do you think that there is continuing push pull? I think there are certain businesses in there that there is a mutual need on both sides.

Tom Piotrowski: Yep.

Brian Kersmanc: So, I think that you have to sort of throttle back your expectations of what could be impacting or not impacting on the other side. But it is a material risk. You have to think about that in that sense. But I think if you look at the total ecosystem in general, there’s a lot of investment going on and we can talk about artificial intelligence and all those sorts of things that’s coming off the back of sort of what’s happened recently within the developed markets that are even offsetting some of the pressure that you may have from this back and forth between the US and China. And quite frankly, a lot of the manufacturing is relocating to the extent it can. So you a little bit of a loss of a consumer on one side, but maybe you have a little bit more of an opportunity elsewhere in some of these things.

So that’s part of what we have to bake into these conclusions. And then what are you paying for for those risks? So you get along as well.

Tom Piotrowski: I mean, that the that point that you make about what you’re paying for. You know, you’ve seen these extraordinary gains for the some of the chip makers in your portfolio. Do you stand back and think of that from a secular perspective, given the fact that this is something that will likely run a generation? Or are you just going to be ruthless and say, you know what, this has gone further than we thought when we bought in. We’re going to just tip out.

Brian Kersmanc: So, this is a really interesting dynamic of our process. And we have people on our team both within the PM team and then on the analyst team. We hired a group of folks who disagree with each other essentially. So, we have contrasting views on this specific topic that we debate and discuss, which we believe is strengthen our process because you’re never fully, you know, everybody thinking and bought into one side of a trade or one side of the thesis or not.

So, as we kind of think about this, one of the things that we really like to focus on is, yeah, there’s a lot of hype associated with some of these things. We are seeing real numbers come through and real conversation is coming through with a lot of these organizations in terms of their investing. So it’s almost like a gold rush to some extent.

And if I can participate in the folks selling the picks and shovels to the gold rush, yeah, I’m very confident to do so, even if those folks don’t have gold in the medium term. But what you really need is if you’re going to take this longer-term view is you need to make sure that there’s that headroom to support that growth.

So price action is one thing, but the fundamentals are actually improving at the same rate or even faster than what the price action is coming through, even how sort of strong a price action of a of certain names have happened in the market, especially in the US tech side of things. But the fundamentals are improving at a faster rate. That actually means are multiple compresses.

Tom Piotrowski: Yeah.

Brian Kersmanc: And what’s really interesting, again, if you assess and get a really good sense of what that headroom is to support a certain multiple on a go forward basis, even a tapering off of growth in price in these businesses because the fundamentals are getting better. They’re growing so quickly, you start to see a natural multiple compression over time and it brings it back to sort of a a reasonable range.

So that’s how we have to think about these things. Now the danger is and where you get trouble in some really high growth investments. And so one of the reasons we avoided some of these in the end of 2020 into 2020 I’m sorry, end of 2021 into 2022, is that when the headroom dries up or you over extrapolate with that headroom is, that’s where you can really get in trouble and that’s why we’re ultrasensitive in terms of especially in these high multiple names, because the air gets really thin out. so speaking of generalities, I apologize.

Tom Piotrowski: No, no, no specifics.

Brian Kersmanc: But that’s how we would generally think about some of the things that are going on right now within the space.

Tom Piotrowski: So, I suppose continuing on from that point in terms of the next, you know, you’ve seen a lot of here in this space, what’s the next thing that reassures you in terms of the length of the runway for earnings as far as the next five years are concerned?

Brian Kersmanc: Yeah. So again, I think it’s a further confirmation that the investment that folks are doing in this space is actually driving results and benefits for that consumer. Now I’ll be blanktly honest, I think there are some areas that are overhyped. I think there are some areas that are under hype and some areas that are appropriately hyped and we’ve taken advantage of things in all three of those buckets.

So, if you think of a situation like search. And the initial inclination was with generative AI and to that search was going to get absolutely dominated by this. And one of the things that we were sort of thinking about, talking about as a team is how many people use, you know, ChapGPT, for example, to go find, you know, McDonald’s around the corner or what have you.

And nobody said yes. Yeah, they’re still using their traditional sort of methods and search engines to go through with that. So, do you really need ChapGPT to write you a five-page term paper to go find a restaurant around the corner? Are there other means They’re still really valuable. So I think there are some areas where people like to overhype some of what’s going on and they forget the strength and the power. And some of the organizations that are very well-established in some of these areas.

Tom Piotrowski: To what extent you’re looking at the second derivative of that, for example. So you know what that technology can do in terms of affecting employment, in terms of affecting productivity in your view. So the isolated industries or companies that are going to be the ones that see that catapult effect, but being able to deploy this very nimbly and get the runs on the board equally fast.

Brian Kersmanc: So, I think it’s too early to make a wholesale call on what we think this is going to do in general. I think there is a broad-based implication that there’s going to be productivity enhancements in a lot of different areas. So, you think about the creative aspect. You know, one of the things that we were talking about sort of on our own roadshow this week here in Australia is that when within digital marketing, we’re leveraging generative AI to create the imagery.

Yeah, now you would have had to employ groups of people to create those images. And so, versus we can see a single sort of command prompt to go in there and sort of generate this thing that makes us more of a nimble organization, that sense to be able to punch above our weight to some extent with that sort of thought. But I think it’s a productivity enhancer as well.

Tom Piotrowski: So, by now in saying that you’re almost saying it’s a deflationary contributor to activity or growth at a time when the markets are hyperventilating about inflationary factors, does that make you think differently about the macro picture in that respect? 

Brian Kersmanc: So, there’s a couple of puts and takes and you can’t necessarily distill this down to these mega sort of trends. So yes, they will have somewhat of a deflationary impact. We’ll see what that is. But going back to the energy side, yeah, sorry, going back to the energy side of things, that that is a massive fiscal tailwind or headwind to consumer over time. So if you do have very tight energy markets, things start tightening up in a very big way. Energy feeds into literally everything else that we do. So we may get some productivity enhancements on this side and maybe it takes some time to get there. But really you got to worry about that inflationary aspect of energy as well.

And not just energy, other commodities that we’ve underinvested in sort of extracting and pulling out of the ground to do all the other things that we need to do to build more data centers, to build more renewable energy projects and all these other types of things that are coming down the road. So you have to think of all these things in concert. And what we try to do is just take a very nuanced view. And every one of these things in terms of the companies we’re investing in and what that macro implication will be on top of that fundamental bottom-up thesis.

Tom Piotrowski: Brian, we’re out of time. Unfortunately, we could talk for a lot longer, but I’m really grateful for your time. Thanks for visiting.

Brian Kersmanc: Thank you so much.

Tom Piotrowski: And thank you very much for joining us for the executive series.

Views and opinions are expressed as of September 15, 2023.

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