A global investor sees opportunity in emerging markets.
Our guest this week is Sudarshan Murthy from GQG Partners. Sudarshan is a co-portfolio manager on all GQG investment strategies, which include global equities, US equities, and emerging markets. Before joining GQG in 2016, Sudarshan worked as an Asian equities analyst for Matthews International, and he was also a sell-side researcher at Sanford Bernstein. Before his investment career, Sudarshan worked in IT services at Infosys Technologies and in banking. He holds degrees from the National Institute of Technology in India, the Indian Institute of Management, and the Wharton School of the University of Pennsylvania.
“Turning Tides in Emerging Markets: India, Indonesia, and Brazil are making waves,” GQG Research, Feb. 18, 2025.
“GQG’s $19 Billion Fund Says Chinese Stock Rally Is ‘Confusing,’ ” by Ishika Mookerjee, Bloomberg, March 1, 2024
“India has moved from red tape to red carpet”: PM Modi in virtual address at G20 meet, Financial Express, Aug. 24, 2023
“Navigating the Herd Mentality in Indian Markets,” GQG Research, Nov. 15, 2024
“Sudarshan Murthy speaks with Gabriel Mellqvist from EFN Ekonomikanalen about elections,” GQG Partners Instagram, Nov. 8, 2024.
“What are the potential impacts of the new US administration’s tariff policies?” GQG Facebook video, Jan. 9, 2025.
Dan Lefkovitz: Hi, and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes. Our guest this week is Sudarshan Murthy from GQG Partners. Sudarshan is a co-portfolio manager on all GQG investment strategies, which include global equities, US equities, and emerging markets. Before joining GQG in 2016, Sudarshan worked as an Asian equities analyst for Matthews International, and he was also a sell-side researcher at Sanford Bernstein. Before his investment career, Sudarshan worked in IT services at Infosys Technologies and in banking. He holds degrees from the National Institute of Technology in India, the Indian Institute of Management, and the Wharton School of the University of Pennsylvania. Sudarshan, thank you so much for joining us on The Long View.
Sudarshan Murthy: Thank you for having me here.
Lefkovitz: Absolutely. So you are a co-portfolio manager on all of GQG’s investment strategies, with Rajiv Jain and others on the team. So you manage global equities and US and emerging markets. Maybe you can talk a little bit about the pros and cons of having such a broad investment remit versus specializing, as you’ve done in previous roles, in a particular region or particular market.
Murthy: If you look at our investment approach, we have the same team following the same process across our strategies. And really what we are trying to do is, we are trying to look for the best 50 companies that we can own, give or take, and build a high-conviction yet diversified portfolio. Now, the way we go about this is, we are looking at, when we are underwriting each business, we’re looking at what’s going to be the underlying earnings growth that we can see from this company over the next five years. So, we forecast our earnings in US dollar terms for the next five years. And it doesn’t have to be precise. If someone tells you that they forecast EPS to the second decimal point--the real world is too messy. What’s more important is to be approximately right than trying to be precisely wrong. So if you get it directionally right, whether something is a 10% grower versus a 20% grower, that’s more important.
Now, we forecast these earnings in US dollar terms for the next five years. We have a view on earnings beyond those five years because that will determine the multiple that an investor pays five years out. And then we discount all of this at a constant 7% rate. And that tells us whether a business is accurately valued or not.
Now, to your question, same team working across different geographies, different sectors--we see a lot of value in that. There’s so much of cross-pollination, so much of learning that happens. And actually, I witnessed that at the early stage when I joined GQG. One of the first businesses that I built conviction was this Indian telecom company. And it is a conglomerate. They’re building out their mobile network. And what really helped me build conviction, unlike previously, was because I’d also looked at some of the US businesses, similar businesses. So there’s this learning that I was able to appreciate that, “Hey, I’m getting this, the fact that they’re building this awesome backend, backhaul is actually a big deal. It’s going to be a differentiating factor versus competition.”
So that aha moment, when we’re looking at the business, I think it’s an example where it got figured because we were looking at a global business that was doing something similar and we were able to use some of the learnings when I looked at this Indian company. But there are, as with everything else, the choices that you make come with positives and negatives, right? There’s always trade-offs involved. And here the trade-off is the learning curve probably is somewhat steeper, but once you get that going as a team, it can be incredibly powerful.
Lefkovitz: So I wanted to turn to emerging-markets equities, although maybe later in the conversation we can talk about the US and other markets. But GQG just published a really interesting paper called “Turning Tides in Emerging Markets,” and there’s some great historical perspective. You look at various cycles of emerging-markets performance. But you also note that we’ve been in a prolonged period of underperformance for emerging-markets equities. 2024 was another down year for emerging markets relative to the US. How do you explain the disappointing returns for emerging markets extending back so long, decade-plus now?
Murthy: Yeah, but these things, they go in cycles, as you pointed out. If one takes a really long-term view, let’s say since the late ‘80s, you can actually break it down. To phases when emerging markets like a bull market did well and those are then followed with a bear market. We often joke that good times lead to bad behavior and that produces bad outcomes. And tough times create good behavior that leads to good outcomes. Does that explain it, but look, if you look at it, late ‘80s, early ‘90s bull market in EM, what triggered it? One of the reasons is that both India and China realized that they had to liberalize. China probably did more than India and that benefited them over the next 30-plus years. India went in for a partial liberalization, which had its ups and downs at the time.
But then if you look at the late ‘90s, there were some excesses in EM and that led to challenges. But then that also set the ground for a better regulatory framework in EM. I do feel that the Asian financial crisis was a wake-up call to many of the regulators--be it the banking regulator in Thailand or Indonesia and across various countries--and that did tighten norms and make it more conservative. And you can see that in the long term, right? Indonesian NPL numbers was around the 30% during the Asian financial crisis, if not higher, and that over time has continued to come down. Pre-covid, it was about mid-single digits. And those kind of improvements happened because the regulators are being very proactive on taking steps.
The bear market of the late ‘90s did set the groundwork for the bull market that happened, right? And at the same time, you had the dotcom crisis in the US. So, you got a situation where the US stock market was perceived as somewhat not that an great investment and EM did well. And in that particular phase, the 2001 to 2010 time frame, China was clearly the engine. It did a large part of the global improvements.
But your question was 2010 onwards. I think there are two aspects to it. One is US exceptionalism post-GFC has been held by low interest rates. And EM has had its challenges for the last 15 years. It goes back to what I was mentioning earlier: Good times produce bad decisions and then creates bad outcomes, and then tough situations create good behavior and sets up the stage for good outcomes.
At the same time, if you look at countries like India, Brazil--they have made some significant reforms that are going to help them for the long term. I’ll give the example of India before jumping to Brazil. India introduced the bankruptcy law and real estate reform, both in the 2016 time frame. Now, the bankruptcy law is actually a big deal. Because I remember I started my career as a lending officer in an Indian bank 25 years ago. And the joke at that time, which my bosses would tell me, is that when you’re lending to a business, the management comes in a shabby ambassador car, which is one of those old-fashioned cars that you would have at that time. But when they come to renegotiate the loan, they’re coming in a nice Mercedes car. So, but that was true. That kind of behavior, there’s an element of truth behind it. And the reason for that is banks did not have the power to enforce terms on management that was defaulting. They could go to court, but that would take years, if not decades.
The bankruptcy law kind of changes that. Now, banks know that they can take management to court. In a span of few months, they can take the assets away from the management, and that creates a virtuous cycle. It promotes good behavior on all the stakeholders. And you can see that over time, the banking sector in India is much better than what it was before. Now, you see a similar dynamic in Brazil, for example, the SOE reform law, introduced somewhere around 2016. That acts as a deterrent for executives in the SOEs. They realize that if they commit bad behavior, they can literally go to jail. And that’s a wonderful deterrent.
Lefkovitz: I want to come back to both India and Brazil later, but I did want to ask you, you mentioned interest rates, US interest rates. And there used to be this perception that the performance of EM equities and debt were very closely tied to US interest rates. When US interest rates were cut, that was good for EM, and when they were tightened, that was bad. What’s your view on the relationship?
Murthy: Look, I think any company in emerging markets that has gone through cycles learns how to adapt to higher interest rates. And generally, these economies run at higher interest rates. So going from, let’s say, 8% to 12% is not as bad as when someone goes from a 1% to a 5%. The impact is a lot higher. And when we talk to management of companies in these countries, you realize that they had to be a lot more sophisticated in navigating this. So for example, what does that mean? The systems are built such that pricing decisions can be taken much faster… They’re able to manage changing prices at a faster rate. It’s stable stakes for them. The other part of your question is, in an increasingly deglobalized world in so many ways, countries that have a large domestic market can be attractive because they are somewhat insulated from everything else that happens. Those companies are somewhat insulated from what’s happening elsewhere.
Lefkovitz: Since it’s so topical, I wanted to ask you about tariffs, US trade policy, whether they are influencing your team’s positioning at all on EM or, really, more broadly?
Murthy: Yeah, if you look at our holdings over time, many of these companies tend to be focused on the domestic market. Countries like Indonesia, India, Brazil, these are large countries with a rapidly growing middle class. So they have a strong domestic component. In fact, one of the things that I do feel that investors have to be careful is some companies that are exposed to, let’s say, a Chinese company that’s exposed to Western technology, so you just need to be a lot more careful on that.
Lefkovitz: And what about the US dollar? The US dollar has been strong for maybe a decade-plus, and its strength has really diminished the returns for equities for US investors holding foreign equities. I wonder how currency broadly and the dollar strength in particular fits into your investment thinking.
Murthy: When we’re underwriting the businesses, we are forecasting our earnings in US dollar terms. So that’s where we make the adjustment. But again, I’m not an expert in currency, but I do feel that these things happen in cycles. So maybe one can build a case for a mean reversion for the dollar strength.
Lefkovitz: So I just wanted to make sure that you mentioned all of the different factors that you see as helping to turn the tides in emerging markets. You definitely talked about economic reforms and some of the steps that have been taken in various markets. Were there other factors that you think are catalysts for emerging markets?
Murthy: We’ll mention some of the reforms, but these are now large markets. India has nearly $5 trillion market cap. And I do feel that increasingly as these companies and these countries continue to grow--because we are seeing earnings growth; we are seeing top-end growth in the businesses here--I do feel that it becomes increasingly hard for investors to ignore.
The second aspect is when an investor is investing in, let’s say, US tech, or even the financial sector, which tends to, in many ways, act in line with tech, the true diversification probably comes from EM investments. And one could argue that this diversification going forward will continue to increase.
Lefkovitz: You’ve cited India, Indonesia, and Brazil in particular as markets where you’re finding a lot of opportunity and where you feel like there’s a really constructive backdrop. What about China? Chinese equities did have a great year in 2024. Our listeners will probably have heard about the stimulus packages. How are you and the GQG team approaching the opportunity in China?
Murthy: What China has accomplished as a country is really remarkable. The kind of GDP growth rates that they’ve sustained for several decades now, ensuring that millions of people are out of poverty and in the middle-class lifestyle, is truly remarkable. But as investors, if one had invested for the long term in Chinese stock market, it would have been hard for us to have made returns. So I was looking at some numbers just before our conversation: If you look at since early ’93, the MSCI China Index is down more than 20% on nominal terms. And of course, if you include dividends and so on, you’re still making an annualized return less than 2% per year. Now, why is that the case? Because clearly China has produced such world-class companies in so many areas. The key reason is that earnings growth has not been sustainable. There’s been lack of earnings growth that you find over the long term in China when you compare that to the US or India or Indonesia for that matter. So it goes back to what I mentioned earlier, that we follow earnings growth, because our opinion, over the long term: Market cap goes in line with earnings growth. Not in the short term. In the short term, there will be sentiment, there will be re-rating, re-rating, all those things happen. But over the long term, earnings growth is what drives market cap. And for us, this challenge has been that we have seen earnings growth hard to come by in China, in many of the companies, which also probably explains the long-term stock market performance. In the time period that I said, since early ’93, the S&P has compounded more than 10%. India and Indonesia have compounded anywhere from 8% to 9% in US dollar terms. That’s because of earnings growth.
Lefkovitz: A lot of investors these days use the term “uninvestible” in relation to China. They just avoid the market, and we see a lot of investment strategies in Morningstar’s database these days with “ex-China” in them. But GQG doesn’t go that far, right? You don’t subscribe to the China’s uninvestible view.
Murthy: We are underweight China in our EM strategy. We are significantly underweight China. So for us, the thinking is really, let’s look at the best 50 companies that we can own and then build a high-conviction portfolio, but at the same time, we want to make it diversified. The high-conviction top 10 names would be anywhere from around 40% of the portfolio. It’s meaningful. So, what that means is that we are benchmark-aware, but we don’t let the benchmark drive our decision-making. So at the end of the day, it’s actually very simple. We’re just trying to see which are the best 50 companies that we can own that’s going to deliver high-single-digit, low-double-digit return annualized over the next five years. It doesn’t mean that we’ll own these companies for the next five years, because that’s actually a mark of intellectual arrogance--that I think I know how the world will look like for the next five years. In that case, we are happy to change the portfolio, upgrade the portfolio. Tomorrow, if I find a better name that we can own, why restrict ourselves?
Lefkovitz: Let’s talk about India, because it is a market where you are finding a lot of opportunity. It’s an equity market that’s produced some really strong returns going back a long time now, although those returns have been diminished by the currency effects for US dollar, a lot of European investors. The rupee has weakened, so that’s diminished returns. But talk a little bit about what you’re seeing in India. There has been a correction lately, and the Indian market, as of this recording in early March, has seen some losses.
Murthy: For the long term, India has delivered earnings growth that’s comparable to what one sees in the US. Slightly lower, but comparable, in US dollar terms. Right? Again, over the long term, we go back from early ’93 to now, you are looking at a market that’s compounded in US dollar terms anywhere from 8% to 9%. Now, the areas that we are excited about is the banking sector is doing well. Again, you can take a long-term view on that sector. You can take 10-year view, and these are well-run banks. In fact, most places in EM, the banks have to be well-run, be it Brazil, be it India, China, because they’re used to dealing with complex situations. We’re also yet excited about the opportunity set in utilities and infrastructure space in India. The Modi government’s emphasis over the last 10-plus years on building out public goods has a multiplier effect. There are a few companies that, both in the private sector and the state-owned sector, that can have a meaningful impact in this transition. Because, remember, India is still moving from a low-income to a middle-income country. There are a lot of opportunities for growth in power sector and so on.
Lefkovitz: There was this quote from the paper, “The Turning Tides,” an emerging-markets paper, that I underlined, “red tape to red carpet.” Can you explain what that means?
Murthy: Yes. There are a lot more hurdles for entrepreneurship in India. It’s been a long journey where India has liberalized its economy since the early ‘90s and reduced regulation. That continues, even under the current administration, where there is a widespread consensus that the private sector has a key role to play in delivering goods. And it doesn’t matter which part of the political spectrum you are in in India. As the middle class becomes more numerous, politicians realize that one of the better ways for them to continue to win elections is to deliver on public goods. And part of that is to create jobs, part of that is to ensure that there’s enough electricity, water, and those kind of things. And they’re leveraging the private sector. In some ways, there’s a competition among various states in India because it’s a very decentralized setup. Competition among them to roll out the red carpet to attract private sector investments.
Lefkovitz: You have another paper called “Navigating the Herd Mentality in Indian Equities.” You talk about how sentiment waxes and wanes, and flows over time have been quite dramatic in their ups and downs. Do you think that’s what’s happening now with the Indian equity selloff?
Murthy: There’s some element of that. Part of the reason why we wrote that paper is when you look at the data, we found that, surprisingly, foreign investors’ buying and selling decisions many times act as a contrarian signal. Now, if I to speculate, it’s probably because these investors tend to traffic in similar names, similar businesses, be it tech or consumer staples or banks. Whereas they tend to be underweight in utilities and industrials. So that could be one element. But it points to a larger question. As investors, there are clearly not very good investors in the US and Europe who invest in India, but rather than let their decisions have an impact, it’s better that for us, that we look at earnings growth and let that guide our decision-making.
Lefkovitz: We could focus an entire episode just on India, but I also wanted to get to Indonesia and Brazil because those are probably markets that we’ve heard less about lately. Indonesia, obviously a huge population and natural resources rich. There was a leadership transition recently. What do you see as the opportunity there?
Murthy: Some of the banks in Indonesia, the regulator in Indonesia, as I was pointing out, they clearly learned the lessons from the Asian financial crisis. And subsequently, the system has become a lot stronger and more robust. Now, the Indonesian banking sector, it’s very consolidated. The top four banks account for more than half the nation’s assets. And these are they’re attractive valuations or businesses that should be anywhere from high-teen to 20%-plus ROEs. And should grow probably a high-single-digit, low-double-digit annualized.
Lefkovitz: And Brazil, it was one of the world’s worst performing equity markets last year. There’s been fiscal challenges, political problems going back a number of years. What do you see from Brazil that you like?
Murthy: Brazil, clearly the markets were somewhat concerned with some of the comments made by members of the President Lula’s government. And you could see that even in the currency, but again, Brazil, when you look at the banking sector--somewhat similar to Indonesia, the private banks are consolidated, very well-run, high margins, and are very attractive valuations. Then as you pointed out, Brazil is also blessed with commodities. And there are some pretty strong companies in those areas that are blessed with some very high-quality resources. And I think another aspect in Brazil is that the institutions have evolved over the past 10-plus years. And there are lots more checks and balances in their government, in their system, than what especially foreign investors give credit for.
Lefkovitz: And from a macro perspective, you wrote that the economy has surprised on the upside postpandemic.
Murthy: Yeah, I mean, look, Brazilian companies tend to be very resilient. They can cope with high interest rates. In fact, I remember talking to a Brazilian bank CEO when the Silicon Valley Bank issues happened in the US, which was essentially asset liability, mismatch in duration. And this person was joking that their interns would have found this out. Obviously, he was joking. Because in a place like Brazil, you can’t make those mistakes. It’s a very tough, unforgiving environment for those kinds of mistakes.
Lefkovitz: You have an interesting chart showing the decline in foreign ownership of Brazilian equities. Can you talk about that?
Murthy: Well, I think somewhat similar to what we’re discussing about India. But foreign investor sentiment in Brazil is on the lower side, and the chart shows, below the long-term average in terms of their holdings.
Lefkovitz: There was an interesting insight about sentiment overall toward emerging markets that you made that you think that the negative sentiment now globally toward emerging markets is similar to what we saw toward the US during the financial crisis and toward the energy sector during the pandemic. Can you talk about that?
Murthy: Yes. See, anytime investors start putting blanket statements, I do feel that creates opportunities because, if you paint with broad brush strokes, one misses out the nuances. Now, these countries are in a much better shape than what they were 10 years back, 15 years back. Reforms have continued. They are larger, they are more meaningful in the global context. So I do feel that some of the negativities somewhat are misplaced.
Lefkovitz: You also make the point that some developed markets these days are exhibiting some of the negative attributes that are traditionally associated with emerging markets.
Murthy: Yeah. So I think that some of the excitement, hype, and fear that you see about generative AI are things that you typically associate in an EM context. This is a hype cycle then for Polar Bear Panic.
Lefkovitz: Yeah, you talk about how you’re still positive on the US, given all the high-quality US companies, but you do see some clouds on the horizon. What are those clouds?
Murthy: One is, as with any new technology, and generative AI being one, there tends to be a typical hype cycle and then people start getting worried. And that’s natural. When you look at the iPhone, when it was first launched, at that time it was just a better Nokia phone. The true power of the iPhone emerged a couple of years later when you had new apps like Uber, Lyft, and so on. So any new disruptive technology, it takes time. So just like for the iPhone, mobile native business models took a while to emerge, it’s likely that in generative AI, AI-native business models will take some time to emerge. But at the same time, when we talk to companies and large companies and so on, they’re still talking about how they’re going to use AI to cut costs, be it programming, sales force, call centers. But very few companies are talking about how they can use AI to generate revenues. But that’ll happen. And it’s just a question of time. There’s nothing wrong with that. And from what we can tell five years from now, it’s likely that generative AI will have a big impact on the world. But there could be air pockets for the next one to two years.
Lefkovitz: Do you feel like we’re seeing an air pocket now?
Murthy: It is, right? When you look at the investors’ reaction after DeepSeek came, people worried not so much how much DeepSeek had spent, but it was more like they were able to show productivity improvements of a significant magnitude. And will that then impact the end demand for semis.
Lefkovitz: Sudarshan, these have been great insights. Thank you so much for joining us in The Long View.
Murthy: Of course, thank you for having me here.
Lefkovitz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow on socials at Dan Lefkowitz on LinkedIn.
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