Investment Adventures in Emerging Markets


In the search for good investment opportunities around the world, I have made many interesting company visits. This time, I particularly wanted to share some of my noteworthy observations from Argentina, where we had our semi-annual analyst conference earlier this year.

Argentina has been experiencing steady growth throughout the years despite the country’s economic problems, from double-digit inflation to a shrinking trade surplus. We saw one good example of the improvements in the country when we arrived at the Ministro Pistarini International Airport, which, since its privatization, is in much better shape than it was in the past. Besides the bright and airy new wing, the customs and immigration process was quick and efficient. We then checked into a modern hotel in the Puerto Madero area in Buenos Aires, which is another good example ofArgentina’s transformation. Puerto Madero was a rundown port with derelict red-brick warehouses, but thanks to creative entrepreneurs, the warehouses lining the port canal have been transformed into offices, restaurants and apartments. The hip and wealthy have migrated to the area; across the canal are a slew of new high-rise, high-end apartments, and a half hour’s walk from the hotel along the canal is a floating casino that is seeing brisk business.

On our first company visit, we met with executives of a telecommunication services firm. We were told that operational results had been positive as a result of strong consumption growth patterns and a favorable macroeconomic environment. The company has continued to report solid results in both mobile and fixed-line operations, and it has also maintained reasonable EBITDA (earnings before interest, tax, depreciation, and amortization) margins despite the challenging inflationary environment and the fact that mobile and broadband penetration are approaching saturation in the country. Although the company estimates that high usage is likely to keep revenues growing at a healthy pace, it warned that margins could deteriorate moderately on the back of wage pressures. These are some of the factors we take into consideration when we evaluate the attractiveness of a potential investment.

We also visited a leading Latin American producer of crude steel, with production operations in both Argentina and Mexico. What was interesting to us is that the company appeared to have a very attractive cost structure due to its integrated operations, state-of-the-art steel facilities, access to diversified sources of low-cost raw materials and other input and operational efficiencies. The company improved operations in the first quarter of 2011 as a result of solid volumes and better prices, and it indicated that it expected higher product prices and margins in the second quarter as well. However, a key factor that the company has to consider—and that also factors into our evaluation process—is the rising cost of raw materials such as iron ore and coal.

Another interesting visit we made was to an energy-related company, a leading global manufacturer and supplier of pipes and associated services for the oil and gas industry, among others. The company has production, distribution and service capabilities in key markets across South America, North America, Europe and Asia. Management informed us that the oil and gas industry had been witnessing a new cycle of investments and that the company was operationally prepared to service this growing market. Moreover, they pointed out that the sustainability of this cycle is likely to be supported by high oil prices, paving the way for higher drilling activity worldwide.

During our trip, we took one day out to visit the delta of the Rio de la Plata (River of Silver) and the riverside town of Tigre, whose name is derived from “tigres” or jaguars that were hunted there in the past. The delta is a complex of tightly packed canals and islands that reminded me of the Mekong river delta in Vietnam and the Chao Phraya river delta in Bangkok, where you can explore hundreds of winding canals. The Rio Plata delta is a popular summer holiday spot with thousands arriving by car or train from Buenos Aires. The waterways are filled with picturesque summer houses, where the only way to get around is by boat.

All in all, we were very pleased with our trip and the discussions we had with the different companies we visited. We look forward to returning to Argentina for more visits like this.

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