What Matters Most for Global Investors Right Now?

Adam Turnquist [0:11] Welcome everyone to this week's LPL Market Signals podcast. I'm your host, Adam Turnquist, chief cross asset strategist at LPL, and I'm thrilled to invite Ron Temple as a guest on the podcast this week. I think it's a timely spot to have Ron. He is the managing director and chief market strategist at Lazard, a position and a firm he's been at for 25 years.

He's been on Wall Street for quite a while, we'll call it. We're not going to date him too far back, but a lot of great experience, boots on the ground type strategy. So Ron, welcome to the podcast.

Ron Temple [0:46] Happy to be here. Thanks for having me.

Adam Turnquist [0:48] All right. So we got a lot to unpack when you look at what's going on in international markets, especially emerging markets. And anytime you talk about markets, I feel like the starting point is AI. We've been so focused on AI really since the launch of ChatGPT in the fall of 2022, but the narrative seems to have changed over the last year or so where we're not just hyper-focused on the hyperscalers and the mega tech companies here in the U.S., it's gone international. How are you looking at emerging markets, the AI trade there? Is that a new narrative that's giving you some conviction?

Ron Temple [1:26] Yeah, so I mean, maybe if I just zoom out and stay at the AI level globally first. I mean, one of, you know, let's make no mistake, AI is going to be revolutionary for the economy. You could argue it already has been. I mean, all of us likely use it every day, if not throughout the day. And it's pretty easy to see how it could be productivity enhancing. Longer term, it's easy to argue that it could be disinflationary in terms of raising productivity, lowering the cost of services in particular and over time goods. And so lots of positives from a macroeconomic perspective.

And let's not understate, there are also a lot of potential negatives from a socioeconomic, political perspective, you know, what does it do to unemployment factors like that. But when it comes to investing around AI, you know, I think this is where it gets really prickly.

Ron Temple [2:13] And when I look at the U.S. versus EM, you know, I look at the U.S. numbers, if you look at Bain, McKinsey, Goldman, kind of the big forecasters tend to basically have forecast of total U.S. CapEx on AI of somewhere around six to 10 trillion dollars between, you know, through 2030.

And one of my concerns on the U.S. side is if you're an LLM creator, you're one of these frontier model developers and you're trying to figure out how to basically be in the lead at the head of the pack, at some point you have to figure out how to charge for all this. If you're putting hundreds of billions of CapEx to work, or in some of the cases, you know, companies have talked about over a trillion dollars of CapEx through 2030, you know, you got to be able to charge for it. And the reason I start there is when I look at China and the amount of CapEx on AI coming out of China, the numbers I've seen from B of A, Merrill, and Goldman Sachs are somewhere between 110 and 140 billion dollars this year versus a trillion dollars this year in the United States.

Ron Temple [3:18] And you can imagine cumulatively over time, the Chinese CapEx ends up being a fraction of the U.S. CapEx. You know, if you just look at this one year, the U.S. will spend seven to nine times as much on CapEx as the Chinese. And that basically means to me, if you're a Chinese LLM developer, so think of the likes of DeepSeek, Kimi versus OpenAI and Anthropic, you don't have to charge as much. And we've already seen that in the market that the Chinese models can be 80% cheaper, if not more, of a discount compared to the U.S. model.

So that part of the AI story I worry about, but that doesn't mean I don't want to invest in AI. I think there are a lot of parts of the AI value chains that have very defensible business models. You know, regardless of which model you use, you're going to use a lot more semiconductors.

Ron Temple [4:02] You're going to use more high bandwidth memory, you're going to use more cloud. And so I do think there are ways to play this, but, you know, some of the most attractive ways to play it in my view actually do look like they're in emerging markets. So there are parts of the value chain I want to play in the United States, parts of it I want to play, you know, in EM.

And when I look at the valuations on the AI related stories in EM, they tend to be a lot lower than in the United States. If you're talking about the chip space, you know, it can be anywhere from four times earnings on 2027 estimates for some of the Korean companies, you know, 15, 17 times earnings for TSMC. You know, those kind of numbers look a lot more interesting when you compare it to 20 to 30 something times earnings for some of the U.S. peers.

Ron Temple [4:46] And to be fair, comparing the Koreans to 2030 is unfair. If you look in the U.S., you know, most direct competitors maybe Micron, you know, trading at a six to seven times earnings. So on the chip space, you basically get some low valuations. I think there are a lot of ways to play this, whether it be the energy data centers, semiconductors, but the EM part of the story looks really attractive to me.

Adam Turnquist [5:10] Right. I think to sum it up, probably better economics at a high level when you're talking about roughly a trillion dollar, $900 billion delta in terms of the spend. And I think the label that you hear so much is the models are good enough. And when you start pricing to your point where you got to charge for it, if it's good enough and it's cheaper, I think that's going to be an interesting story over whether that's the quarters or coming years for the AI trade.

And on some fronts, better valuations as well. Would you call it a paradigm shift in terms of the EM trade, which was so tied to China, as goes China, as goes EM for a long period of time? Has it changed now from your perspective with AI being more of a bigger play in EM?

Ron Temple [6:01] Yeah, it's hard. I mean, when you're asking that question, I'm always reluctant to say it's different this time, but I think maybe what it highlights is just how much EM has changed over the course of the last 20 years. You go back to, you know, go all the way back to when the TMT bubble burst and you basically had massive U.S. underperformance and EM crushed every other global market from say 2002 to 2007. But it was more of a commodity play. To your point, it was, you know, China had this massive stimulus package. They had a huge fixed asset investment program. EMs were big commodity exporters to China. And you basically got a highly levered kind of tail on the China dog and it worked really well.

But if you look at the composition of EM markets today, basically the tech sector is, you know, over 40% of the EM index, much like if you did a fully loaded tech sector in the U.S., it's over 40% as well.

Ron Temple [6:54] So you've got a much higher return on capital, less asset intensive kind of balance sheet of the market. You've also had a lot of development in emerging markets in the financial services sectors. I mean, this is something all of us should understand pretty well from the businesses we're in.

But if you think about it, when you're a really poor emerging market, at most you need a bank account just to keep your money safe, but you don't have enough assets to need, you know, property casualty insurance, and certainly not life insurance or asset management products. But as you move up that income ladder, the financial services needs evolve and expand significantly. So you've had a development of the financial services sector, the tech sector. So this is not your father's emerging markets. It's a much more diversified economy with a much more diversified market.

Ron Temple [7:43] And yet it's trading at half the PE multiple of the United States.

Adam Turnquist [7:46] Right. You look at some of the countries and performance this year, pretty dispersed in terms of overall returns. You look at, let's go back to China for a minute and think about the economic shift. You talked about how the EM trade was all about China, all of the spending, very asset heavy. They seem to have shifted their focus being more on asset light tech, not so much on the property sector that hasn't worked out and it's been a major headwind for the economy. How do you think about China just from a macro view? Where's the opportunities, the risks that you see?

Ron Temple [8:26] Yeah, I'm going to sound more negative on this part because I, and it's an important reminder that the macro economy and markets are related, but they're different topics. China macro is outright negative in my view. If you look at the data that came out, you know, even in the last week or two, across the board, negative numbers except for industrial production, and I'll come back to that, retail sales growth year to date through August grew 1.1%. That's basically in line with inflation. So zero real growth in retail sales in China, fixed asset investment down materially, residential real estate investment down materially, property, I mean, you know, all the different aspects of investment down. And basically what you see in China is you're in year five to six of a housing crisis.

If you look at prices for previously occupied homes in Beijing, Shanghai, the other big cities, Beijing and Shanghai specifically prices are down 36% to 38% from the peak.

Ron Temple [9:23] In Tianjin, down 57%. The one outlier on the positive side is Chengdu down 22%. But 90% of Chinese people own their home compared to the United States at about 65%. And for the median household in China, the typical household has 60% of their assets in residential real estate. So if you imagine if your home were down, you know, 25%, 35%, 40%, you're not going to go out and go on a big trip. You're not going to splurge on some luxury goods. You basically stay at home, you don't eat out as much, you try to rebuild your assets and your balance sheet. And that's what we're seeing in the domestic economy in China.

And then add insult to injury. You know, we talked a little bit, you know, go back 10, 20 years ago, a lot of the economy and the growth was built around residential construction, infrastructure construction.

Ron Temple [10:09] They were very labor intensive jobs. The growth now that's really driving the Chinese economy is much more oriented towards electric vehicles, solar panels. And what we're seeing is these are much less labor-intensive manufacturing endeavors. China last year installed more robots than the rest of the world combined. And so what we're ending up with is an economy that I would say is a K-shaped economy, similar to the U.S. but different, where you've got good GDP growth. But when you look at how the median consumer feels in China, they don't feel like it's a good growth story at all because the job market is weak and their balance sheet has basically been ripped apart by the housing crisis.

So the domestic economy doesn't look good. I mentioned the one good data point was industrial production. Yeah. The one thing that's been saving China's bacon is exports.

Ron Temple [10:58] In 2025, they had a trade surplus of $1.18 trillion. If you look in the last six months, every month this had a trade surplus of over $100 billion per month. China's basically exporting all this production it cannot sell at home to other countries around the world. Now, exports to the U.S. have gone down after President Trump put the tariffs in place in 2025, but what we've seen is a massive increase in exports to Southeast Asia, a big increase to Europe, and I would argue a lot of those exports to Southeast Asia end up in the United States.

They just go through a third country to try to dodge some of the tariffs. So bottom line is I think the rest of the world is kind of waking up to the fact that they've already seen a lot of their manufacturing hollowed out by Chinese competition, but now it's getting even more dangerous.

Ron Temple [11:43] And I think in the next year you're going to see Europe push back much more strongly. And that could be a real challenge on the Chinese macro front. But luckily when we buy stocks, we don't buy GDP, we buy companies. [laughs]

Adam Turnquist [11:54] I like it. Have you been surprised by the export activity in China? If you flash back to, we'll go Liberation Day, April 2025, China was hit pretty hard. They've been in the crosshairs of the administration with tariffs. But you look at their export activity, it almost seems they've been a beneficiary of the tariffs because they've diversified their exports in relatively resilient ways. Has that surprised you in terms of how they've adapted and been able to kind of navigate around these tariffs?

Ron Temple [12:28] I'd say yes and no. I mean, it's interesting. The Chinese economic model is really different in that if you think about it, it's not really a profit maximizing model. You know, one of the stats someone pointed out to me years ago was if you look at Chinese GDP, it's up about 400% in the last, I think 20 years, 19 years. But the Chinese equity market is flat. And so effectively, it's the one country in the world I can find where when the economy grows, corporate profits don't necessarily grow in sync.

So the reason I started with that is the model is when the central government decides there's a strategic industry, whether it be electric vehicles, semiconductors, something else, every province then starts competing with each other to see how quickly they can gain notoriety with the central leadership and try to get the promotion by basically driving ahead on that strategic industry.

Ron Temple [13:20] So what you end up with is 100 EV producers in a country like China, you know, the vast majority of them lose a lot of money, but it doesn't matter because the whole goal is to gain market share. And then at some point, you know, they basically beat each other over the head until there are four or five survivors, but they have massive scale, they have world-class products at the lowest price in the world, and then they go on to dominate the global market because they never had to worry about a market cost of capital. They didn't have to worry about making any money.

And so effectively, you know, multiple aspects of this competition are very unfair, which is why I think it's legitimate to be protecting Western industries. So all of that's to say, in some ways, I'm not surprised because their model is built for market share, not profit.

Ron Temple [14:08] Central government doesn't care if they make a profit. They want social stability, they want jobs, and they want to basically have economic independence from the West. And frankly, their strategy seems to be working.

Adam Turnquist [14:19] All right. So you painted a, I don't want to say negative picture for China, but a little bit of a bearish case, we'll call it. Where does that leave us as we go into next week's President Trump, President Xi meeting? And then of course, we have to talk about the possibility of stimulus. That's been their go-to economic activity falters. They go to the bazooka moments we've seen over the years with Beijing.

What are your views there? What do you expect coming out of either the president, the upcoming summit next week or are we going to hear anything from Beijing on further stimulus?

Ron Temple [14:58] So first of all, on the stimulus, let's do that one first. I mean, a lot of economists and strategists have been waiting for five years for the big stimulus package. The bazooka was going to come any day now. You know, that's the triumph of hope over reality. And I think, you know, we should probably stop holding our breaths on that. The Chinese central government, you know, from what I hear from China, they look at the GDP numbers and they say, "We're growing very well. Thank you very much. We don't need stimulus."

And there is an interesting, you know, at least from my old stereotypes of what communism was meant to be as kind of a more egalitarian outcome. You know, Xi Jinping in particular seems to be very opposed to what he considers welfarism. And so there's this strong resistance to improving the social safety net, which is what I think is precisely what is needed to raise domestic consumption.

Ron Temple [15:44] And just to give you a sense, there are about 160 million people in China out of the 1.3 billion who are kind of elderly rural residents who live on a pension of $35 a month. I mean, you can't live on $35 a month in parts of Sub-Saharan Africa, much less in China.

And so, you know, one of the other stats I'll throw at you is median life expectancy in China in 1950 was 45 years old, sorry, 48 and a half years old. Today it's 78 and a half years old, but the retirement age only went up once late in 2024 to basically 63 for white collar workers and 58 for blue collar. So effectively, you've got a lot of people who save way too much because they're afraid they'll outlive their savings. They need to spend more. They need more of a social safety net.

Ron Temple [16:27] I'm not holding my breath. So stimulus, don't hold your breath. I'd love to see more social safety net and a floor put under housing, but not likely to happen. On the summit, I think you should expect a lot of fanfare. This is Xi Jinping's first visit to DC in a decade. You know, the last visit, you know, obviously quite a long time ago. I think you know, it's a state visit, so again, lots of fanfare.

But I don't think you should expect a lot from a substantive perspective. What is most important perhaps in the discussions this week is extending the trade truce that was agreed in Busan, South Korea in October of last year. So that was a one-year truce that ends in the middle of November. And basically that truce limited U.S. tariffs on China and basically maintained the flow of critical minerals and rare earths to the United States from China.

Ron Temple [17:19] So that's probably the most important outcome. Our geopolitical advisory team at Lazard thinks that will get done. The U.S., by the way, has been holding off on imposing additional tariffs on China. The speculation is a 7.5% additional tariff that will be on top of existing tariffs related to excess industrial capacity and production. I think the reason the administration has held off on that is to have leverage over the Chinese to say there's more pain to come if you don't extend this deal.

I do think you will see the Chinese announce a number of big commercial transactions. Apparently, Xi Jinping is bringing a delegation of business people so they can sign big deals to buy airplanes, to buy agricultural products, kind of typical stuff we get around each of these summits. And then I think you're going to see also on the commercial trade side, discussions around restrictions of high-tech exports from the U.S. in exchange for, you know, lower restrictions in exchange for guaranteed critical minerals rare earths.

Ron Temple [18:17] So you'll see more of those. On the geopolitical front, by the way, let's not underestimate. I think you'll see Taiwan and Iran will be topics. There was speculation that in May when Trump went to Beijing that the Chinese would bring up Taiwan. And reportedly what the Chinese want is for the U.S. to change its official position from the current position is that the U.S. does not support Taiwanese, a declaration of independence by Taiwan. The Chinese want that to be changed from not supporting to opposing. Sounds subtle, but it's a very important diplomatic nuance, would send a very negative message in my view to Taiwan and other Asian allies.

And by the way, the other part of the U.S. stance historically has been that we oppose any unilateral change in the status of Taiwan. You know, this would also represent kind of moving from that unilateral change, by the way, means both Taiwan declaring independence and Beijing forcing unification.

Ron Temple [19:14] If we switch to just opposing Taiwanese independence, that says a lot to the Taiwanese people. The other topic is Iran where the U.S. is likely to hope that China will exert some influence over the Iranians to agree to a peace agreement. You know, it's not clear to me on the positive side, Beijing does have an interest in this war ending. 40% of China's goods exports go to low and middle income emerging markets that are suffering the most from higher oil prices.

On the other hand, it's been a geopolitical windfall for the Chinese to see the U.S. bog down in Iran, to see us deplete a significant portion of our defensive interceptors that would not be available in case China decides to do something with Taiwan by force in the not so distant future. So I think those are some of the topics. There are others, but we'll save that for the next podcast. Right.

Adam Turnquist [20:00] The Iran situation's certainly going to be interesting to see if we hear any commentary there. Iran, I think their biggest exports go to China. So obviously oil a big factor and China has also drawn down some of their reserves, but there's been a lot of demand destruction in China.

Going to the Taiwan story, that's always been kind of on the back burner, but it comes to the front burner, especially at a summit like this. When you look at if there were a change in the declaration, the wording, as simple as it is a wording change, is that, in your view, just a step along the path for the eventual invasion or whatever you want to call it of Taiwan? And that's just a check the box kind of exercise before that can happen?

Ron Temple [20:53] Well, first of all, let me say, I don't think President Trump will agree to that change. Okay. Or at least maybe I should say I don't think he will and I hope he won't. And the reason I say I don't think he will is I think it would be bipartisan condemnation of such a move because it would be seen as a betrayal of Taiwan. And I think everyone who's listening to this would know the Republicans and Democrats have a long history of being unified on a bipartisan basis in support of Taiwan.

And so I think it. And by the way, even within President Trump's own cabinet, I think there would be strong resistance to this, including especially from Marco Rubio and J.D. Vance. So, you know, I think it's unlikely, but as it relates to the idea of an eventual unification of Taiwan with China, you know, our geopolitical team is less worried about the next, say, 12 to 18 months, I'd say 12 months.

Ron Temple [21:44] And the reason I highlight that time horizon is a lot of people ask us, you know, if the U.S. really has run down its interceptors in the Middle East and it's basically kind of bogged down dealing with Iran, is this a window of opportunity for the Chinese to move on Taiwan? But our view is the key date to watch really is January of 2028 when the Taiwanese presidential elections are going to be held.

And the reason that's important is if you're Xi Jinping and you're sitting in Beijing, you know, his ideal outcome is that there's unification without a single shot fired. I mean, the last thing Beijing wants is to damage any of those semiconductor fabs that they desperately want to end up having control of. So you don't want economic damage, and you would like a peaceful unification, a la Hong Kong. So the key thing for Xi Jinping is January of 2028, the two leading parties are the KMT and the DPP.

Ron Temple [22:36] The KMT has a historically more pro-Beijing bias and would be more likely to negotiate some kind of agreement with the Chinese over time. If they win the election, Xi Jinping might see that as a windfall and basically say, "I don't need to do anything militarily. Let's just see if this works in the right direction." If the DPP, on the other hand, wins, they have a more pro-independence kind of trajectory from a policy perspective, and they're not unwise enough to declare independence because that is a red line for the Chinese that could be a catalyst for a conflict, but they're moving in that direction.

And if they win the presidential election, you know, there's a risk that Beijing would look at that situation and say, "Okay, Taiwan is moving in the wrong way from a Beijing perspective at the ballot box. And we've got one more year of President Trump being in office." And the reason that's relevant is, as I just said, it's pretty bipartisan across most traditional Republicans and Democrats to be kind of pro-Taiwan, more hawkish on China.

Ron Temple [23:36] But Trump has been the anomaly in that regard. He, you know, it's very publicly committed by John, you know, John Bolton and his books from being national security advisor, that Trump questioned frequently why and how the U.S. would defend Taiwan. He talked in his campaign about Taiwan stealing the semiconductor industry, demanding they pay for protection. So there have been a lot of kind of comments from the president that raised questions about his commitment to Taiwan.

So if you're Xi Jinping and the DPP wins, it looks like Taiwan's not moving your direction electorally, and you've got one more year of a president who hasn't been very clear in his commitment to defending Taiwan. Would that be the window of opportunity for the Chinese in anticipation of thinking after January of 2029, if you get J.D. Vance or Marco Rubio, they're more hawkish. If you get a Democrat, they're more hawkish.

Ron Temple [24:24] Maybe they would see that as their chance to act. So 2028, in my view, is the year to watch on Taiwan, at least in the intermediate term. And obviously, I'm going to be really keenly focused on watching the run up to those elections to see any kind of tea leaves we can read. And I do think for investors, it'll be an important time to think about, you know, what milestones would you want to see? How would you want to act in terms of portfolio exposures if you thought things might head in a more negative direction in that regard?

Adam Turnquist [24:51] All right, good stuff on that. And I'd be remiss if we didn't talk a little bit about the dollar, just given the focus on emerging markets. Just give your high-level views on what's going on in the dollar and your, I guess, longer term view as well on how you see the Greenback trading over the next, call it six to 12 months.

Ron Temple [25:11] Yeah. Short term, I think the dollar remains stable to maybe even a little stronger because with the Fed having hiked rates, you know, basically the dot plot was very clear, even though Kevin Warsh did not contribute a dot, you basically had 16 out of the 18 dots saying we're going to get another rate hike by the end of this year.

Now I would note, by the way, the other thing that came out of the summary of economic projections from the Fed was the median participant in the summary of economic projections said inflation would stay above 2% until 2029, which arguably fits into the market view, which is currently pricing three more rate hikes by July of next year, of 2027. So the reason I bring all that up is if you think currencies are driven theoretically by changes in expectations of interest rate differentials, that was a mouthful, it's changes in expectations of interest rate differentials - Yeah.

Ron Temple [26:02] That argues the U.S. is likely to have a bit more hawkish monetary policy than previously expected anyway over the next, say, six to nine months. I would argue the U.S. has different drivers of that monetary policy response, meaning it's not just the Iran war, it's the AI CapEx boom, it's resilient GDP numbers, a full employment economy, evidence of accelerating shelter inflation and services ex-shelter inflation that's been sticky. So the Fed has a broad range of inflation concerns, whereas if you look at Europe and Japan, it's primarily Iran and it's energy.

And so over the next six to nine months, I can easily imagine rate hike expectations outside the U.S. easing and rate hike expectations in the U.S. remaining quite firm, which would be stronger for the dollar. On a three to five year view, I have a core conviction that the U.S. dollar will weaken, and it's largely based on the fact that I spend about 60 to 65% of the year outside of the United States meeting with big asset owners, think sovereign wealth funds, superannuation funds, and large high net worth intermediaries like yourselves.

Ron Temple [27:09] And, you know, what I've heard consistently for the last two years, and I purposely say two years because it predates the Trump second term, is a discomfort from a risk management perspective with how much money foreigners have in the United States. If you look at the MSCI All Country World Index, it's 63.5%, give or take U.S. equities. The second biggest country is Japan at 5%. NVIDIA is 4.9%, so literally one American company's as big as the second biggest country.

So from an equity perspective, people have a tremendous amount of capital in the U.S., 41% of the Bloomberg global aggregates in U.S.. So a lot of those investors are saying, "I've just got way too much capital in the U.S., but I don't want to sell the stocks and I don't necessarily want to sell the bonds because they like the underlying investments. But what I'm hearing them say is instead of selling the asset, maybe I'll raise my hedging on the currency.

Ron Temple [27:59] I used to hedge 40%, maybe now I'll hedge 60 or 80%." And I think that's going to lead to dollar pressure over the next several years. And by the way, the more people hedge their currency, the less attractive U.S. Treasuries will become. And I think you will see selling of U.S. Treasuries, which means to me you're going to get higher long-term interest rates even relative to today's roughly 5% on a 10-year.

So I do think dollar weakening will be a contributor to EM returns and non-U.S. returns in general. Maybe not for the next six months, but looking on a three to five year view, which I think is the horizon we should all use, it's likely to be a tailwind for non-U.S. investments on top of some solid fundamentals, especially in the case of EM.

Adam Turnquist [28:39] Right. We've had reoccurring question marks over the dollar as a natural hedge for foreign investors, especially Liberation Day, the April 2025 period where the dollar did not act as the natural hedge. And I think that was a wake-up call amid this trade of the hedging side. You start to see dollar hedging ramp up. It's, I guess, moderated a little bit in some of the data that I've looked at. And then of course, the debasement trade where currency or foreign central banks are diversifying away from the dollar. Gold's been a big beneficiary there.

Yeah. So I think it's going to be interesting. You look at 10-year yields in the U.S. where they're at now, call it around 5%, and the correlation to the dollar, and they've completely decoupled. Usually, the dollar would be at least 3% to 4% higher from here based on that regression.

Adam Turnquist [29:29] And we're just not seeing it. It hasn't kept up with yields, so any type of mean reversion there. Maybe yields are too high and they move lower or the dollar temporarily moves high. We'll see how it all plays out. But I think we'll leave it there just for the sake of time. One last question, Ron. I know you have a crazy travel schedule. Where's the next trip? Anywhere exciting? Are you home based for a little bit?

Ron Temple [29:54] No. I'm on a plane again on Monday. So it's a combination of Toronto, New York and Houston this week. But it's all North America for now, but thanks a lot.

Adam Turnquist [30:06] Well, appreciate you joining us this week and thanks for tuning in everyone. Take care.