February 15, 2021 BARRON’S 33
markets, their recovery [from Covid] will
be faster. The vaccine, of course, helps,
but more important is the psychology.
importantly, the psychology of a cur-
rency revaluation is very powerful
for investors. The first question that
[emerging market] investors often
ask is if they will lose money on the
currency.
India is the biggest country weight-
ing in your portfolio. Why?
India just announced its budget and a
number of dramatic changes that are
going to have a big impact driving eco-
nomic growth there—including open-
ing up the insurance market to foreign
investors and increasing privatization
of state-owned enterprises. It’s a great
stor y. We ownAPL Apollo Tubes
[ticker: APAT.India], which makes steel
pipes and [should benefit from] spend-
ing on infrastructure. We also own
Persistent Systems[PSYS.India], a
software company that does a lot of
work with companies like IBM, and
Metropolis Healthcare[METROHL-
.India], which does medical testing.
Latin America has been out of the
spotlight. What are the opportuni-
ties there?
Brazil is the place we are focusing
[on]. We own retailerLojas America-
nas[LAME4.Brazil], which has [an
online retail] partnerB2W Digital
[BTOW3.Brazil] that is the equivalent
ofAmazon.com[AMZN]; a software
company,Totvs[TOTS3.Brazil], and
[medical diagnostics company]Fleury
[FLRY3.Brasil]. With lockdowns, dis-
tance diagnosis is coming to the fore.
Once these testing companies have
your records, they can recommend
hospitals, doctors, medicines. It’s a
matter of data collection, which
is very important.
Chinese stocks have had some of
the biggest gains recently, but there
are regulatory questions—Beijing
scuttling the Ant Financial initial
public offering, and new antimo-
nopoly measures. What’s the risk?
The Chinese government realized you
couldn’t have these internet companies
taking over the financial system, which
they were well on their way to doing.
It’s why I believe they stopped the IPO.
The government also was worried that
retail investors might get burned be-
cause they were also planning to regu-
late these fintech companies. China’s
not alone. The U.S. is looking at [regu-
lation]; Europe is looking, too.
What do you think about recent
efforts by the U.S. to restrict
China’s access to technology?
The U.S. made a mistake restricting the
transfer of technology. Now, if I were
sitting in Beijing, I would say, “Taiwan
Semiconductor Manufacturing
[TSM] is the biggest [chip company]
in the world, and even though we con-
sider it our province, we can’t control
that.Samsung Electronics[005930-
.Korea] is next; it’s in Korea. The U.S. is
next, withIntel[INTC].” What you’re
going to get—particularly now with big
semiconductor shortages—is the Chi-
nese working overtime to produce their
own chips.
That’s going to take a while.
No question. TSM is basically a
foundry. They do the physical produc-
tion, but hundreds of little fabless
Taiwanese companies create all the
software that’s necessary to go into
these chips. We own several: Taiwan’s
eMemory Technology[3529.Tai-
wan],WIN Semiconductors[3105-
.Taiwan], andParade Technologies
[4966.Taiwan]. Return on capital em-
ployed is very good because all they
need are offices and a computer.
What about the risk to Taiwan
as U.S.-China tensions flare?
It’s a risk we have to accept. These fab-
less companies have strong ties with
Apple[AAPL] andMicrosoft[MSFT]
and usually have some base in Silicon
Valley to service them so they can still
operate without being in Taiwan.
What do you like in China?
We haveYum China Holdings
[YUMC]. They have done a [good] job
in improving the way they operate. We
also ownAK Medical Holdings
[1789.Hong Kong]. There’s a lot to be
done in [developing the healthcare
system].
Are you worried about the U.S.
and China decoupling?
I don’t think it’s going to happen. The
government can say one thing, but the
companies can say another. They don’t
have to be in the U.S.; a lot are setting
up in Dubai or the Cayman Islands.
Should investors be worried about
the recent push to delist Chinese
companies that don’t comply with
U.S. auditing oversight?
It would be very easy for [Chinese
companies] to meet the accounting
standards. It’s a matter of pride [for
the Chinese government] to refuse to
allow these companies [to open their
audit books]. And look at the turnover
of these companies on the New York
Stock Exchange! Do you think the
brokers are going to allow these turn-
over conditions to go away? I doubt it.
It takes two to tango: U.S. authorities
will probably let up, and the Chinese
will adjust their accounting over time.
There’s also increasing scrutiny of
China’s human-rights issues, such
as in Xinjiang and Hong Kong.
How does your ESG approach
allow for China investments?
We don’t look at the macro level in
that sense. We know Xinjiang is a
problem. We know human rights gen-
erally are a problem. A lot of people
would say you’ve got to do something
about human rights and change soci-
ety. If we tried to do that, think of how
many real democracies there are in
the world today, particularly in emerg-
ing markets. It’s very difficult.
We look at the individual company
to determine how they’re doing on
measures of ESG, and culture. It’s
amazing, over the years since I began
investing in China, the improvements
we’ve seen. The government has be-
gun to impose certain ESG standards
on these companies, which is a sign
policies are moving in that direction.
In your latest book,The Inflation
Myth and the Wonderful World of
Deflation,you suggest that the
recent worries about inflation
are misguided. Why?
I wanted to denigrate the whole em-
phasis on inflation numbers. You hear
the Federal Reserve saying, “Inflation
has gone up by a half-percent; we’ve
got to do something,” or economists
saying, “You have to have at least 2%
inflation, otherwise it’s no good for the
economy.” This is all insane. Inflation
numbers are based on a basket that’s
changing every year. If you go back 10
years, the basket’s completely differ-
ent and the quality of products has
changed dramatically. Because of tech-
nology, we’re getting a deflationary
trend where things are getting
cheaper—and that’s accelerating in the
emerging countries. This measure is
not a very good way to make policy.
How should we measure inflation?
You should look at wages and income
and measure the quality of life. As an
old timer, the quality of my life has
gotten a lot better: I can write an email,
or the computer can access all this
information—that didn’t exist when I
was getting my Ph.D. at MIT. Prices
are going up, but the reason is cur-
rencydevaluation. Throughhistory,
there’s absolutely no currency in the
world that has maintained its value.
What does that mean for the dol-
lar’s status as the reserve currency?
The dollar peaked last March, and now
it’s way down to 2018 levels. You’re
seeing a number of things here. First,
don’t underestimate cryptocurrencies.
When you think of all the people who
don’t want their wealth to be revealed,
they’re using cryptocurrencies.
No. 2: The dollar is still the largest
investment currency, but the euro is
the largest trade currency. A lot of that
has to do with zero interest rates,
which make trade financing [in the
euro] very attractive. And then you’re
seeing the yuan coming up. China has
already concluded currency swaps
with a number of countries.
You’re going to find a general retreat
from the U.S. dollar—not today or to-
morrow. It’s a slow process. The most
critical aspect for the dollar is the de-
gree to which it can be used and traded
around the world; that’s very impor-
tant to people. One of the reasons it’s
difficult for the Chinese to have a re-
serve currency is because they want to
control it so much, but it’s remarkable
that it has appreciated about 10%
against the dollar since the middle of
the last year. It shows the demand.B
As people begin to feel safe, you’ll see
economic activity pick up very fast.”
“You’re going to find a general retreat from the U.S.
dollar—not today or tomorrow. It’s a slow process.”
Money Matters
The dollar is still
the world’s No. 1
investment cur-
rency, and the
euro is the larg-
est trade cur-
rency. But de-
mand for China’s
yuan is growing.
10%
The amount by
which the yuan
has appreciated
against the dollar
since the middle
of the last year