Emerging Markets, Stablecoins & Why You Should Look Beyond the U.S. | Amy Oldenburg

Key Concepts

• Emerging Markets (EM)
• US Dollar Weakening
• Stablecoins
• Central Bank Digital Currencies (CBDCs)
• Tokenized Assets
• Bank Deposits and Lending
• Credit Card Disruption
• Global Trade Order
• Technological Innovation (AI, Digital Assets)
• American Exceptionalism
• China's Innovation
• Middle East's AI Push

Emerging Markets and Global Capital Allocation

The discussion highlights that Emerging Markets (EM) have historically been underinvested for the past decade, with capital largely concentrated in the US market. This concentration means that even a small reallocation of capital away from the US could significantly impact EM markets. The speaker, Amy Goldenberg, Head of Emerging Markets Equity at Morgan Stanley, notes that while the US has been performing strongly, there's an expectation for the US dollar to weaken going forward. This weakening would be beneficial for many EM markets.

Key Points:

• US Market Dominance: The US has been a dominant investment destination for approximately a decade.
• Capital Reallocation Impact: A shift in allocation away from the US can quickly move EM markets due to their smaller capital base.
• Dollar Weakening Outlook: There is an expectation for the US dollar to weaken in the future, which is positive for EM.
• Performance of Other Markets: Despite the focus on the US, markets like the European Union and EM have shown strong performance year-to-date, alongside Bitcoin and gold.
• Drivers for EM: Factors like tariffs, innovation trends, lower valuations, and reduced debt levels in many EM countries are contributing to their potential.
• Smaller EM Success: Smaller emerging European countries have performed exceptionally well.
• Dollar's Impact on FX: A significant fall in the dollar earlier in the year (around 9%) boosted performance in regions like Latin America.

The Convergence of Crypto and Emerging Markets

Amy Goldenberg, with 25 years of experience in EM, draws parallels between the dynamics of EM and the crypto space, citing shared volatility and similar market behaviors. Her journey into crypto is rooted in her early career in the internet era and her experience with emerging market FX trading.

Key Points:

• Shared Dynamics: EM and crypto share similar volatility and market dynamics.
• Early Internet Experience: Goldenberg's background in building early websites and her friends' work in music file sharing connect to the current focus on IP and creator content in crypto.
• EM FX Trading Experience: Experience in EM FX trading provides a foundation for understanding crypto market behavior.
• Crypto Adoption in EM: The narrative for crypto is significantly different in countries outside the Western world.

Real-World Applications and Drivers in Emerging Markets:

The adoption of crypto in emerging markets is driven by fundamental challenges that are often not understood by those in developed economies.

Challenges in Emerging Markets:

• Unbanked Population: A large portion of the population remains unbanked.
• Unreliable Banking Systems: Banks in many EM countries have historically been unreliable.
• Currency Devaluation: Currencies have experienced significant devaluation.

Technological Leapfrogging:

• Mobile-First Adoption: EM countries leapfrogged fixed-line telecom infrastructure and went directly to mobile, creating a generation of mobile natives.
• Smartphone as a Primary Asset: For many in EM, a smartphone is their most valuable asset, serving as their work, banking, social, and media hub.
• Innovative Solutions: Even with slower connectivity and older devices like flip phones, solutions were developed for payments.

Stablecoins and Emerging Market Perspectives

The discussion delves into how emerging market countries view stablecoins, particularly in the context of currency crises, capital flight, and capital controls.

Key Points:

• Stablecoin Novelty: Stablecoins are a relatively new phenomenon, with significant volume growth only in the last four to five years.
• Global Transaction Dominance: Approximately 80% of US dollar stablecoin transactions occur overseas, not within the US.
• "Genius Act" Impact: The "Genius Act" has significantly amplified discussions around stablecoins.
• Government Reactions: The primary question is how other countries will react to stablecoins.
• Korea's Stablecoin Initiative: South Korea's president has announced a stablecoin initiative, the implications of which are yet to be seen.
• CBDC Projects: While some Central Bank Digital Currency (CBDC) projects exist, they haven't gained significant traction.
• Future of Stablecoins: Uncertainty exists regarding whether the future will involve numerous company or country-specific stablecoins, or a few dominant ones.
• Tokenized Assets as Alternatives: The potential for tokenized money market funds or yield funds to offer direct payment and yield generation is discussed as an alternative to stablecoins.
• US Dollar Denomination: Currently, stablecoins are predominantly US dollar-denominated, which benefits the US by creating a new buyer of US debt. Stablecoins are estimated to be the eighth-largest holder of US treasuries.

Morgan Stanley and Major Banks' Views on Stablecoins

The perspective from major US banks, including Morgan Stanley, on stablecoins is explored.

Key Points:

• JP Morgan's Model: JP Morgan, with its extensive correspondent banking business, finds its internal stablecoin valuable for operational improvements.
• Morgan Stanley's Different Model: Morgan Stanley's business model leads to a different perspective on stablecoins.
• Impact on Bank Deposits and Lending: Significant questions surround the impact of stablecoins on bank deposits and lending businesses, as many banks rely on deposits for lending.
• Future of Lending: The potential shift in lending models due to actionable and yielding deposits is a key consideration.
• Credit Card Disruption Debate: While stablecoins function like debit cards (direct payment from funds), their ability to disrupt credit card companies in the near to medium term is debated. Credit cards offer a line of credit, a different business model.
• Off-Ramp Solutions: Stablecoins could offer off-ramp solutions in emerging markets.

Macro Views on Emerging Markets and Technological Innovation

The conversation shifts to broader macro views on the global EM space and the interplay between traditional macro themes and technological innovation.

Key Points:

• US Exceptionalism Debate: The first half of the year saw discussions about the end of "American exceptionalism" as global markets performed strongly.
• Rotation to Rest of World: A rotation to other global markets has occurred, with the Eurozone and EM equities showing strong performance.
• Technological Innovation as a Colliding Theme: AI and crypto innovation are strong themes, particularly in Korea and the US, and these themes are seen as colliding with the rotation to other markets.
• "Innovation 3.0": China is highlighted as a leader in "Innovation 3.0," with significant advancements in electric vehicles and robotics.
• China's Market Performance: China's market has seen a significant rebound, up over 40% in the last year, attracting investor interest.
• Middle East's AI Push: Saudi Arabia and the UAE are actively investing in AI, with selective market performance in the region.
• Holistic Future Vision: The speaker anticipates a convergence of these trends (macro, digital assets, AI) over the next five to seven years.
• Interconnectedness of Themes: The speaker believes that technological innovation and the rotation to the rest of the world are not mutually exclusive and are, in fact, connected.

Notable Quotes:

• "I think the thing with EM is the US has been just blazing for like a decade now. Everyone's kind of sitting in those allocations."
• "If we see any sort of allocation away from the US, it doesn't take too much capital to start moving some of these markets."
• "If we look forward on some of these markets, we do think there's still an opportunity for that dollar to weaken going forward. Definitely beneficial to not all of our markets, but a lot of our markets."
• "Obviously, it's not going to be a straight line, but I would definitely keep an eye on the rest of the world."
• "I mean, it's not even about sending payments. It's just like let's start with like having uh a bank account. A lot of people in these countries the unbanked population is still huge."
• "I think the hardest thing for investors these days is um, you know, it's very extreme."

Conclusion and Takeaways

The discussion emphasizes that while the US has been a strong performer, the global investment landscape is evolving. Emerging markets present significant opportunities, driven by factors like potential dollar weakening and technological innovation. The rise of stablecoins and digital assets is creating new dynamics, particularly in emerging economies where traditional financial infrastructure is less developed. Major financial institutions are actively exploring these developments, though their approaches vary based on their existing business models. Ultimately, the future is likely to see a convergence of macro trends and technological advancements, creating a more interconnected and dynamic global economy. Investors are advised to keep a close eye on developments outside the US, as these markets are poised for growth and innovation.