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The Bull Case For China Louis Gave

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TITLE: The Bull Case for China: The Best Opportunity Right Now? | Louis Gave CHANNEL: The Master Investor Podcast with Wilfred Frost DATE: 2026-05-04 ---TRANSCRIPT--- China comes into this crisis, I think, better prepared than pretty much anybody out there, mostly through luck. China today has more oil in storage than the rest of the world combined. It has more natural gas in storage than the rest of Asia combined. It has more fertilizer in storage than the rest of the world combined. The reason China has all this is because 8 years ago, the US told China, “No more semiconductors.” And China thought, “Oh my god, they can block us from this. They can block us from anything. We better store up on everything.” Look, if you’re looking for places in the world that have uh deep deep vulnerabilities on their bond markets, uh there’s a few countries that stand out. What always matters is the percentage of bonds owned by foreigners. And today there’s three countries that stand out. Uh one is yours, the UK, and yes, bond yields are going up there. The other is mine, France, and the third is the United States. Uh these are the three countries that essentially depend on the kindness of strangers to keep the lights on. Now, when I look at China today, what I find is the country today that has the lowest cost of capital, the lowest cost of labor, the lowest cost of electricity, and has the world’s cheapest currency. And it’s not even close. And that makes for a very powerful combination. Welcome to the Master Investor podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, the edge. The Master Investor podcast is sponsored by Else, Interactive Brokers, the World Gold Council, and BMY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. My guest today is Louie Gav, the founding partner and CEO of Gavcow, one of the best and most unique research companies in the world, providing market research to buyside firms, as well as having their own 6 billion AUM buyside firm uh themselves. And uh when they were founded in 1998, they had a particular tilt to try and focus on Asia, which they felt at the time was undercovered, but cover uh all markets globally. Now, uh I’ve been an avid reader of Gavcow research for years since I graduated and joined Newton Investment Management in 2008. They are thoughtful and different and fantastic and it is a real pleasure to welcome Louie to the podcast. Louie, great to see you. This was a very very flattering introduction. I’m very grateful, Wilfrid. I think only about half what you said is probably true, but even if half is true, uh it’s uh it’s very flattering in itself. So, thank you so much for this.

Well, you’ve got a 45 minutes ahead to live up to it, which is good. I’ve I’ve set the set the bar high. I I’ve sort of switched Louis my plan on this in the last six weeks since since the war began and there’s so many uh global topics that I think as I kind of alluded to in the intro you write about and think about much more than than so many of uh the commentators we hear from and I want to get to all of that China, Japan, India, Brazil uh and uh very much more but need to kick off with the war and the impact that it may or may not have from markets here. You think the most likely outcome is that the US claims some kind of victory and walks away even if tolls exist in the straight? I think so. Uh look, let me let me kick off first with a disclaimer. I’m I’m not a specialist on the Middle East. I I spend most of my time looking at what’s happening in in Asia more broadly and and to be honest, more specifically in in China. Uh but what we’re really looking at is uh you know given what’s happening in in the Middle East um how does this impact uh our region and the rest of the world um and here there’s both dark clouds and uh and light clouds and and and silver linings pro perhaps of these dark clouds. The dark clouds is is obviously Asia most of the Middle Eastern oil was going to to Asia uh and and so this is this is a real problem for us. Um so so that that is that is the reality and that’s why I think everybody in Asia is pushing towards some kind of uh development even if the development means uh paying a toll on the trade of hormones even if uh with that money the IRGC stays in power longer and ends up reinforced at this stage I think everyone in Asia is like fine let’s just let’s just get that um so perhaps there’s an element of wishful thinking to to you know my position of saying look uh that seems like the most likely outcome at this stage because the US can’t regain the straight of Hormuz by military force uh and so the only way it’s going to reopen is through some kind of diplomatic settlement um now and you know the probably this again the sooner the better and I think most of the US allies uh rather in the region whether the you know the local countries uh or the Europeans or the Asian allies of the United States are pushing the United States in that direction, saying, “Look, we can’t keep this closed forever. So, get something done.” And and if that does get done, is that a massive positive for oil prices, or is in fact there’s still quite a a lot of risk and complication priced in to to that less negative outcome than we have now? When you say positive, you mean all prices come back down? Yes. Sorry. Yeah. Sorry. No, no, just making sure we’re on the same page. Um, the look, I I think the big challenge we have is even if it reopens tomorrow, we now have a 6 weeks to two month air pocket in the global economy. Uh, because the ships uh that should be arriving now are no longer arriving. And then and even again, you reopen tomorrow, the ships are going to take quite a while to uh to come back out. Um, and so, however you cut it, you know, we’re we’re looking at a two-mon supply chain dislocation for the world here. Um, and and of course, it’s not just oil, it’s the natural gas, it’s the fertilizer, it’s the sulfuric acid, uh, it’s the ura, it’s the fertilizer, it’s like all these things. Um, and and these can can of course compound, right? If you don’t have the fertilizer today, you’re not planting. Um, so I think the inflationary shock coming from this is pretty much now baked in the cake. Uh, and of course the longer we stay closed, the the bigger the inflationary shock. Um, but that brings me to the silver lining to to this perhaps crisis is that uh in an age where all of a sudden we we have we are experiencing this massive inflationary shock. the I think that the times when the US and China could turn around and try to trip each other up and and you’d have these trade wars and these threats of tariffs and um this is now gone. Um I think because of this, China and the US are almost condemned to to get along. They might not want to, they might not like to, but Trump and she are scheduled to meet four times in the next 12 months, which has never happened, by the you’ve never had a US president or Chinese president scheduled to meet four times over a 12-month period. And I don’t think they’re going to meet to discuss the weather. Um, and and so you you have these four meetings which should be a reset of the USChina relationship. And I think in in the wake of the Iran war, it might very well be a very positive reset where essentially the US says, you know what, we can’t take two inflationary shocks at the same time. we can’t antagonize China and at the same time have the trade of hormuse close. It’s it’s sort of one or the other. Um I don’t think you can do both. That that’s really interesting. I want to unpack that in that positive view and China specifically in a moment. Just just dwell on the sort of negative view for me for a moment. I I think you said there the inflationary shock is already baked into the cake meaning in the economy to come. Is it priced into the market or are people underestimating the actual impact this is going to have on both inflation and GDP growth in a lot of those countries you mentioned across Asia? So I would say it really depends on on your markets. I think it’s increasingly you’re starting to see the crisis in the world’s poorer countries, the Pakistan, the Sri Lankas, etc. where you’re already seeing fuel rationing um where you’re already seeing food prices go up uh uh aggressively. To your question, is it priced in the markets? You could say, well, you know, fertilizer prices are now up by more than a third and gasoline prices are up uh by about 30% in in the United States and by 40 and 50% in Europe. So, you could say, well, S look, you know, it is priced here. Here it is. Um, is it priced uh in the price of equities of bonds? Um, to be honest, I I don’t think it is. And I don’t think it is again because perhaps we haven’t yet felt the full shock. And I think we haven’t yet felt the full shock for a few reasons. The first is up until a week ago, the boats were still arriving from the Middle East because they’d left 6 weeks ago, right? And it takes 6 weeks to go to most destinations. So we we haven’t had yet the empty boats. The empty boats are starting now when the ports literally no one is arriving. Um, so the the real shortages essentially start now, but they probably don’t really start for another 6 weeks or 2 months because in this misfortune that we’re now experiencing, um, at least we had two previous crises. Uh, we obviously had the COVID crisis of 2020 and we had the Russia crisis of of 2022. And with that, I think most businesses uh started already to move away from just in time inventories to ju to more just in case. Uh you’ll remember that this was one of the big themes that the just in case was one of the big themes uh following the Russia’s invasion of Ukraine. All of a sudden, everybody started to say, “Well, you know what? Maybe I should have a little more helium since Ukraine’s a big helium producer. You know what? Maybe I do need to store more electricity.” Um, and I do need to store to reup my grid. Um, so take Europe as an example. Uh, I think it’s fascinating that today the electricity price spike in Europe is nowhere near as bad as what we had uh in the Ukraine war. Um, so for now, I think we came into this crisis perhaps a little bit better prepared than the previous two, but you can only run down your inventories for so long. uh and this is why you know if this lasts another 6 weeks or two months I think the economic pain really starts to get felt and then the market pain will will be there as well. This episode of the master investor podcast with Wilfred Frost is sponsored by BMY Investments a trusted partner for many delivering financial solutions to investors and institutions worldwide. This sponsorship does not constitute financial advice. This episode is sponsored by the World Gold Council, the global experts on gold. They champion gold as a trusted strategic asset, provided marketleading research to help investors understand gold’s role and modernize how gold is owned, traded, and used, developing industry standards and market infrastructure. Learn more at goldhub.com. ju just before we move on uh to uh market specifics and and some of the positives um touch on Europe for me. Does does it affect everyone the same? Are there different short and long-term effects like like there are for Asia as well? So I think when you look at uh at the problem from the Middle East, there’s uh there’s several categories of products that that are uh being impacted. The the obvious one we all think about of course is energy. Uh and here you have if you look across Europe you have different countries whose economies are more or less energy intensive and whose own economy have to import more or less energy from from the Middle East. So if you take my own country of France we’re actually not in that bad a spot because we do have a lot of hydro and we do have a lot of nuclear uh for us to fall back on. And so uh we’re we’re a lot less dependent on imported energies than than say a Germany. Uh Germany also happens to be quite an industrial economy which is energy intensive. So Germany might might be more vulnerable to to what’s happening. It’s not like everything is smooth sailing for France because the other thing that the Middle East is extremely important for is fertilizer. And so far somewhat amazingly but grain prices have not moved up. If you look at wheat, if you look at corn, if you look at soybeans, if you look at all all the grain prices, they really haven’t moved up. So unless come unless come harvest time, uh, wheat prices go up, I think you’re going to get like massive food, massive farmer riots in France. Now, you could say, well, that’s an easy prediction that happens every year. Um, but, uh, I think this year is going to be come harvest time, September, October, it’s going to be particularly particularly bad. Well, I wonder whilst we’re on France, if to get your view on this, I wonder whether the back end of the year with the necessary the need to pass a budget and a looming presidential election whether the bond market reacts as well. Um I mean looking at the UK the 10 years back above 5% today. You’d kind of look at the the French bond market and think it’s it’s relatively calm all metrics considered. I wonder if that worsens as we near the back end of the year as well. You’re absolutely right. I think look if you’re looking for places in the world that have uh deep deep vulnerabilities on their bond markets uh there’s a few countries that stand out and for me the ratio has never been debt to GDP. I think that’s a that’s a a silly ratio. You’re comparing a stock and a flow. What always matters is the percentage of bonds owned by foreigners. This is a guide of whether domestic savings are enough to to essentially keep governments uh going along. Um you know governments need to fund themselves in one of in one of two ways. They could say okay fine I’ll fund myself through taxes but there’s people who don’t like paying taxes but who like lending money who have a high savings rate and who like lending money to to their government. China is a prime example of this today. Uh China has fairly low taxes. uh but has the lowest bond yield in the world because Chinese people save a lot and all the savings go into government bonds and so Chinese government gets to borrow cheaper than anybody and and as long as you borrow from your own citizens you can keep that going forever and you can keep it going for a very or forever is a long time but you can keep it for the problem becomes when you start borrowing from foreigners because one day foreigners wake up and say you know what why do I own all these French bonds or why do I know all these why do I own all these British bonds I don’t like the politics. I don’t like this. I don’t like that. I’m out. Um, and today there’s three countries that stand out that borrow disproportionately from foreigners. Uh, one is yours, the UK, and yes, Borneo are going up there. The other is mine, France, and the third is the United States. Uh, these are the three countries that essentially depend on the kindness of strangers to keep the lights on. Um, and that again, that doesn’t mean that that stops, but it means that all of a sudden you are vulnerable. Really interesting. And I I want to touch on the US side of that in in a moment. Before we move off the war, um you guys did a really interesting piece recently on defense stocks, which we all would have expected to be shooting uh through through the ceiling off the back of the war. They’ve rolled over somewhat. Talk me through your assessment of that. So, I’ve actually been bearish defense stocks for for a little bit. uh and my take is is actually quite different is that um warfare has changed massively. I I think Ukraine uh was a prime a first example of this and then um uh the Red Sea and the Houthis was a second and now we obviously have a third uh element of this. Uh the reality is that in the since World War II every effort by every military was first and foremost to control the sky. If you if you control the sky, then chances are you’re going to control the battlefield. And uh controlling the sky was an extremely extremely expensive proposition. You know, fighter planes cost a fortune, satellites cost a fortune. Um and with the Ukraine war, we found out that actually controlling the sky cost a few tens of thousands of dollars. The drone warfare has completely upended um the the military equation. It’s all of a sudden why pay $275 million US for an F-35 C plane. Um and uh not only the controlling the skies, but the the delivery of firepower um has also been upended. With a $50,000 drone, you can now sink a billion dollar battleship. Um, and so that that equation and and to take down the $50,000 drone, you need a $2 million Patriot missiles. So that the spending has become so asymmetric. And you’re seeing this today in uh in the Gulf of the Persian Gulf where the US Navy can cannot be within a thousand miles of Iran. Um, which then raises a whole question mark like what’s the point of a navy if you can’t get it close to where the battlefield is? Uh because who wants to these uh um aircraft carriers now cost $6 billion if they can be taken out by a $50,000 drone? You know, the maths the maths just don’t work. Um and so we are living through right now essentially an upending of both the financial and the I would say the the geopolitical infrastructure of the past 80 years. You and I grew up in a world in which we had three key assumptions that we could take for granted. Um the first assumption that everyone took for granted is that you saved in US treasuries whether you were an individual, whether you were a company, whether you were a government, you saved in US treasuries because in a crisis that was the most deep liquid markets and you could transform your treasuries into commodities. Um, so if you’re Japan and there’s Fukushima and you decide to shut down your nuclear power plant, you can sell your treasuries and buy oil and coal and natural gas and you know and you’re you get through the emergency that you’re having. That assumption was uh essentially broke down with the Russia Ukraine war. When we seized Russia’s uh treasuries, we said uh you you only get access to treasuries if we say you do. we being the western world and really being the United States. Um, so that was the first assumption and and the response to this. Everybody turned around and said, “Fine, then I’m going to buy gold instead.” And so central banks became huge buyers of gold. Gold prices tripled. The second assumption was by buying gold is I can transform my gold into oil or into food or into fertilizer whenever I need because the US Navy controls the world’s seaways because I can always have my stuff my fertilizer delivered by the US Navy. That assumption has just been destroyed. So that’s a second assumption that has now been uh left for rebels. Um, and therefore you have to question, going back to your question on defense, if the US Navy can no longer control the seaways, what’s the point of spending all this money on defense? I’m I’m much better off buying $50,000 drones and $80,000 ballistic missiles from China. So these defense companies live off the sale of systems that cost millions of dollars and that are now obsolete. And that’s where we are in warfare today. Ju just to pick up on something you said in the middle of that, the second big assumption we’ve lived our lives on that the US will keep uh the the the waterways open. Uh, I guess we touched on this on the top, but we presumably don’t know what follows that yet and and what is the big implication of it that everyone’s going to have to do more homegrown and whilst we transition for countries like the UK to be able to do more of that, we’re going to have higher inflation. That’s exactly right. I think what what ends up on the other side of this, look, if you’re India, let’s take India as an example because India is really impacted by what’s going on in the Middle East right now. Uh, India has roughly 700 billion US dollars in treasuries that they kept for the rainy day. That was the the rainy day fund. Uh, well, the rainy day just just occurred. It’s like it’s right now. And they’re looking around saying, “Okay, what I need is fertilizer. What I need is food. What I need is natural gas. What I need is energy. And I can’t transform my US treasuries into the fertilizer that I need.” Uh literally India called up China because China still has fertilizer and China said and India said name your price. I know you have uh storage. The reason China has storage of everything. China today has more oil in storage than the rest of the world combined. It has more natural gas in storage than the rest of Asia combined. It has more fertilizer in storage than the rest of the world combined. The reason China has all this is because 8 years ago the US told China no more semiconductors. And China thought, “Oh my god, they can block us from this. They can block us from anything. We better store up on everything.” So they stored up on everything. So China comes into this inventories loaded up. So now everybody, Philippines, Thailand, India is calling up China say, “Hey, can we buy some of your fertilizer? Name your price.” China’s like, “No, mate. Sorry. I’d love to help. I’m keeping mine because I, you know, got to take care of my own people first.” And so to answer your question, the end result, whether you’re UK, whether you’re in India, whether you’re Philippines, is you’re going to turn around and say, you know what, what good are these US treasuries? What good is this stock of gold? I can’t sprinkle my gold on my fields to grow food. I can’t put shove my US treasuries in the gas container of my car for the gas container to get going. So everybody around the world coming out of this. So even if it ends tomorrow, the reality will remain that the US no longer controls the world’s waterways. And in that environment, everybody’s got to build up inventories. So depending who you are, uh you need different things. Like Chile isn’t going to build a copper reserve and Canada isn’t going to build an oil reserve. They don’t need it. They they’ve got it here. On this front, Europe as an aggregate is really the the main thing is we’re energy deficient. That that’s broadly it. like the rest of the stuff we can actually produce as an aggregate in Europe. And so the end result of this is that everybody’s going to turn around and need to have much smarter energy policies. Um and here this is perhaps another silver lining to this crisis is that our energy policies in Europe have been completely upside down. I think that the crisis of Ukraine, the crisis in Iran is forcing us to review this and saying, “Okay, you know what? We need to do what China did, which is embrace energy in all of its form. So, solar, bring it in. Wind, bring it in. Nuclear, bring it in. Natural gas, oil, coal, we’re going to do it all. Uh, today, China produces more electricity than the US and Europe combined. And the cost of electricity in China is a fraction of what we pay in Europe, uh, or or even what North Americans pay. This is going to have to change. And I think it is going to change. And by the way, that’s another reason to think one of the silver linings of this crisis is people will now suddenly turn to China that both Europe and the United States and they’ve been pushing China away for the past 8 n years. They’re going to turn around and say, “Actually, you know what, China? I will have those solar panels. Please, because I need them. So, please send them over. You know what, China? The sub$10,000 electric cars that you produce, I would like them. Please um send those over. Um, you know what, China? Those cheap wind wind um uh turbines, those um those clean coal power plants, those nuclear power plants that you produce at half the cost of France, we’ll take we’ll take them all. Thank you very much. We need them. Um so coming out of this, I think is is a much more realistic appreciation of our own uh of our own weaknesses, whether in Europe and North America. I think to the large extent in Europe and North America, we we over overestimated our strengths. We’re like, you know what, we can ramp up our cost of electricity. We can afford to have completely idiotic energy policies and our system will cope. Turns out it won’t. Le let’s touch then on your view on China because it s sounds like the war just doubles down uh on the view you’ve held for for a while which is that you think China is structurally undervalued. Oh abs look uh China comes into this crisis I think better prepared than pretty much anybody out there mostly through luck. Mostly through luck. Again, the I think it’s hard to underestimate the trauma for the Chinese policy makers of the 2018 decision to block China from semiconductors. Um the the Chinese policy makers genuinely panic. You see this in the bank data. Uh it’s one of my favorite charts to explain what’s happened in China the past 78 years. If you look at bank data at bank lending to real estate and the consumer starting in 2018, it plummets and all the money goes to to the uh to industry. But what happened in 2018 when we blocked them from semiconductors is the Chinese policy makers turned to the banks and said guys we need to become self-sufficient on every single industrial vertical. Um because they’re blocking us on on semiconductors today. Tomorrow it could be car parts, it could be tires, it could be turbines, it could be anything. Um they they clearly want to trip us up. So we have no choice but to become self-sufficient. And and so all of China’s savings, which happened to be massive, it’s it’s by now a big economy and with a very high savings rate, all of China’s savings were redirected essentially into building up national resiliency. And so today, and and I I think the crisis that ended up happening for China wasn’t the crisis that they’d expected. I think the one they they were expecting was that at some point the US would ramp up the import restrictions into China. So, it’s not the crisis they were expecting, but uh but at least they got ready for a crisis. Uh so, coming into this, they’re ready for it. None of us are. Nobody else is. This episode is sponsored by Interactive Brokers. Building wealth starts with the right broker. And Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs, and unmatched financial strength. That’s why the best informed investors choose IBKR. Learn more at ibkr.com/master investor. This episode of the Master Investor podcast is brought to you by Else, the leading global financial markets, infrastructure, data, and analytics provider. To learn more about how Else connects businesses, investors, and markets worldwide, visit elseg.com. So, so I, you know, clearly you think China is undervalued. You’ve made a very good good case for that. I guess my question is to to what extent given that since those postcoid lockdown lows, equities in China have have rallied uh and the currency has has begun to rally obviously in a more measured way. Is this the start of a 10-year bull market for those types of assets? Look, I believe it is and and you know, you mentioned valuations, which are of course an important component of any investment decision, but at GFCAL, when we look at markets, we like to look at them actually through four prisms. Um, and valuation is only the last one. The the very first prism we look at is is the fundamentals. You want to make sure when you invest somewhere that a you’re not fighting policy makers, that you have policy tailwinds rather than policy headwinds. Uh, and you want to make sure that whatever you’re investing in makes sense. Now when I look at China today, what I find is the country today that has the lowest cost of capital, the lowest cost of labor, the lowest cost of electricity, and has the world’s cheapest currency. And it’s not even close. And if if people don’t believe me, I always tell everyone, you have to go over there. You stay in Four Seasons Hotel for 100 US a night. You have some of the best meals you’ll have in your life for $25 per person. Incidentally, if you go back to 2010, 2009, 2010, uh, back when everybody was telling you that the US was going to face a lost decade, that it was going to be Japan all over again, that it was a new normal. Um, back then, the US had the cheapest cost of capital in the world. It had one of the cheapest cost of labor. It had by far the cheapest cost of energy thanks to the to the Shell revolution. Um, and and the US dollar was one of the cheapest currencies in the world back then. Um and that makes for a very powerful combination. That’s a very very potent combination. Today you have that combination in China. And yes, the big difference from recent years is you now have policy makers that are clearly committed to a wanting a stronger currency which encourages the Chinese savings to stay at home instead of of fleeing abroad like they’ve been doing 2018 to 2024. The currency was broadly heading lower. Um since then you now have a a stronger currency and you also have a government that essentially each time the market’s gone down 10 15% uh steps in to bring it back up. So so that that’s the fundamental bit. Uh the second pillar we look at when we look at a market is uh we look at the momentum. Um I’m I’m a bit of a coward and I hate fighting the market. Uh I uh yeah, you don’t want to I don’t like fighting. I played for rugby for 30 years and fighting people who are much bigger than you is tough. It’s a it’s a hard way. It’s a hard way to make a living. It’s a tough day at the office when the the guys on the other side are much much bigger than you. Now the market is it you know I start from the premise the market is much bigger than me. So I like things with with broadly positive momentum rather than negative momentum. Now today the remn is has the best momentum in the world. It’s up uh 6 12% against the US dollar over the past 12 months. Um and in itself that’s fascinating because historically the Chinese central bank each time there’s global uncertainty they would freeze the value of the remn. This time they’re not doing it. It’s literally grinding higher every single day. So that’s the momentum. The third thing you look at is the investor positioning. And and on this front I take a lot of comfort in the fact that half of the meeting I still have people tell me China is uninvestable. Um and uh so it’s it’s it’s the second biggest economy in the world. It accounts for roughly 18% of GDP and you’ll be hardressed to find anyone that has more than 5% of of China in their portfolio. Meanwhile, you know, to compare and contrast with the US, the US is roughly 25% of global GDP, and the US is roughly twothird of the world Msei. Um, so when you look at the US today and you say, you know what, I’m just going to buy the world MSEI, which is the world index. Therefore, I’m going to be 2/3 in the US. You’re making the bet that over the next decade, twothirds of global profits are going to acrue to American companies. Uh now if you think that’s the case that’s great for a number of reasons which probably deserves a whole other call um that I I think that’s highly highly unlikely. So the in terms of investor positioning I’m very happy being long China. Uh the the fourth uh reason is the valuations the one you highlight the the one you started with. Um and yes China as a market the currency is the cheapest in the world and it’s not even close. uh the bond market is the one of the only major bond markets that has delivered very adequate positive returns to investors for the past five years. Uh I think everywhere else in the world you’re essentially in most markets in the world, the US, Europe, UK, Japan, you’re in a situation where essentially policy makers are robbing Peter to pay Paul. they keep taking they keep crushing the bonds and following policies that essentially mean currency debasement and bond debasement so that equity markets can stay up. Uh and China is not at all in that situation. Uh the bond markets have have actually delivered very very decent uh returns for China. Um but the overarching theme for me in China, this is you know how I’d look at the broader markets. The more important thing for me when I look at China and the reason I am excited about the market today is that there is a new development. Having been in China since 97 have live having lived there and Beijing and Nanjang and in Hong Kong u what I now see in China for the first time is the emergence of truly worldclass companies. um companies as all that money has gone into industrial investment as all the money’s you know essentially got taken from the stock market from the real estate market to push up uh the China’s capacity of production and as you’ve seen companies start to leaprog companies in the west in so many fields you’re now seeing companies emerge that you know are going to be world champions the obvious example is a BYD I know you already have BYD cars on the streets of the UK um but Wherever you travel and for for the listeners who travel in the emerging world increasingly wherever you go you see Chinese cars that are genuinely worldclass cars then you’ve got robotics and automation uh where essentially China is taking over the world um you have sorry go ahead oh no I I was just going to just off the back of the the the very convincing bullcase there on uh China wanted to move on to a couple other markets before we before we run out of time off off the back of that briefly. I mean, does this bullish for the rest of Asia? Yeah, it’s um look, growth is good news, right? I I start off with that premise. Um a big a pie uh a rising tide lifts all boats. A bigger pie is, you know, feeds everyone. Um it’s Asia. I think the the broader Asian markets have struggled from the fact that Asian Chinese growth has been very lackluster for the past seven or eight years because of these policies of redirecting all of the savings into national resiliency. Um and so yes uh a policy focused more on to reboosting consumer confidence, a policy focused more on you know moving or reducing Asia’s dependency uh on the US dollar allowing countries like Vietnam, like Indonesia uh you know like Thailand and others the ability to industrialize on credit on the cheap without dependency on the US dollar. I I think all of that is a tide that uh um brings all boats up. I want to bring it back uh before we conclude just to the US market um if we can Louie and and the extent to which you think it is currently priced for perfection and and what happens if we do see which there’s been quite a lot of hints of of late the AI capex cycle just start to roll over a little bit. Do you think we’re priced as if that can never happen at the moment? Uh so look I I do have an immer I do have this emerging market bias. I’ve been doing emerging markets for 30 years and one of the first rules I think you learn in emerging markets is that uh if you go from being really really stupid to just plain stupid that’s like such an improvement that a lot of assets can get rerated massively. You can make lots of money and that move from really really stupid to just plain stupid. By the same token and to your point of your question, if if things are priced more or less for perfection, if you go from perfection to just maybe just a tiny bit stupid, uh then then you have then you have a a big problem. Now, what strikes me as as interesting in the United States is that the growth of the past 30 years in in the US equity markets was essentially premised on the idea of very capital-like business models. I actually wrote a book about this back in uh 2004 called our brave new world where and I I talked about platform companies highlighting that the model of you know companies used to be vertically integrated with companies that designed the good, produced the good and sold the good but that the the model of the future was the company that designed the good and sold the good and let the manufacturing bid in the middle to somebody else, somebody in China, somebody in Poland or in Morocco or wherever else. um and in so doing you ended up with much higher returns on invested capital and much more stable returns on invested capital. And so the point of my book in 2004 was that the companies that successfully transition from the old vertically business integrated model to the platform company business model uh those would rerate massively all the more so since as you become less and less capital intensive and you generate these cash flows the only thing you can do with this money is buy back your shares. Um, and I think that’s what you’ve seen at Microsoft and that’s what you’ve seen at Apple and that’s what you’ve seen at Amazon. These guys have been the ultimate platform companies. The growth and the outperformance of the United States was primarily premised on this capital light business model. And what’s fascinating is the new generation of leaders today are saying look that was then AI is going to be such a massive thing that we now have to embrace a massively capital inensive business model. We’re going to become more capital intensive than a steel plant. We’re going to become more capital intensive than the auto industry has ever been. We are going to plow so much money uh into data centers, into accumulating chips, into building our own power plants to feed our data centers because the productivity gains that are going to come from AI are going to be so gargantuan. So the first thing we have to acknowledge is that the quote unquote successful companies in the United States are have completely changed their stripes. They’ve moved from low capital intensity to massive capital intensity. Do I still want to pay 30 times earnings, 35 times earnings for a capital intensive business? You have to come to one of several possible conclusions. The first is to say, you know what, they’re right. AI is like it’s going to be such a gamecher. They’re right to do this. Uh that that’s option one. Option two is to say, you know what, maybe they’re doing this because they’ve had a zero cost of capital for 20 years. And so while before they were all capital disciplined, they’ve lost all that capital discipline. They’re like Chinese companies of 10 years ago. When Chinese companies of 10 years ago who had zero cost of capital and would throw anything on the wall to see what sticks. Um because when you’re valued at 35 times earnings, you don’t have to be capital disciplined. Uh so that that’s the second option. Uh and going back to the point where you go from being very uh smart to perhaps not quite as smart. Um or or you do like I do uh which is to say you know what maybe that falls into the too hard bucket. Uh maybe like the the deciding this one is like yeah maybe AI is going to revolutionize the world and these guys are going to be right on uh all these investments. Although the odds that they’re all right at the same time seems low. Um because you know you need you still need winners and losers. Mhm. Um, so perhaps I’m going to try to do something else. Uh, perhaps I’m going to go into the parts of the market that that aren’t quite as crowded. Um, I I don’t think I’m, you know, you said we we talk to the smartest people, etc. I really don’t think I’m the smartest guy in the room. I never was the biggest rugby, like biggest player on the rugby field. I’m not small, but I was never the biggest guy. Um, and I know I’m not the smartest guy in the room. And right now it feels to me like all the smartest guys in the AI room and they talk to each other all day and they debate all day etc. So I I just feel like I need to go into a less crowded room because the odds of me winning in that room are too low. It’s a really fascinating take uh Louis and uh appreciate it a lot. We are basically out of time so I’m going to jump to the final question which is is I flagged you before we ask it to to everyone. Maybe you’ve hinted at some of your answer already, but but what is your overriding piece of investment advice for our listeners? Um, it’s a tough question to answer, of course. Um, but I would say look, the the first thing you have to know as an investor is to know yourself, right? And it’s an easy thing to say for a guy like me who’s in his mid-50s who’s gone through a few cycle. But the and I I now know having made a lot of mistakes along the way, I now know the situations I’m good in and the situations I’m bad in. And um and so much of this game is making sure to not put yourself in the situation where you’re going to make the the the wrong decisions. So that that’s number one. Now to to put yourself in the best possible decision when it comes to investing, diversification does help. Um but when you embrace your portfolio construction and your diversification uh which allows you to sleep at night and at least for me allows me to not panic and you know when things go against me etc because hopefully not everything goes against me at once. Uh you I think you have to build you have to build a portfolio a diversified portfolio in a smart way. Um and a smart way essentially for me there’s four asset classes that each each have their own life cycle and each sort of sometimes are correlated with each other sometimes are not for different reasons and these four asset classes for me are of course equities of course fixed income but energy and metals uh these are the four main asset classes and a divers a well diversified portfolio so if you want to rest at night just say you know what I’ll put a quarter in each, go to bed, and you’ll actually do fine over time. You’ll do you’ll do great. Uh if you want to be smart, you eliminate one or two out of the four, and you focus on the on the other two, and you focus hard at picking the best components of of the other two. Uh that’s what we try to do in our firm. Uh it actually does take work but uh but that’s my approach to financial markets but it corresponds to my it just corresponds to my own sort of uh behavior and ability to withstand shocks. Well Louie, it has been an absolute pleasure having you on with us today. Really uh do appreciate it. Um and uh we thank you so much for your time particularly I know as you’ve got a busy day ahead of you there in New York. Louis Gav, thank you for joining us. Thank you so much for having me. Next week on the Master Investor podcast, we will be joined by Dan Niles after what’s going to be a very busy week of tech earnings. Uh, nobody better to hear from than Dan. Please make sure to hit subscribe or follow on your podcast or video app to make sure uh you don’t miss that and any future episodes. But thanks again for listening. The Master Investor podcast is sponsored by Else Interactive Brokers, the World Goal Council, and BMY Investments. 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