Investment Adventures in Emerging Markets

Readers’ Questions Answered

This post is also available in: German, Spanish

I’ve been exploring and investing in emerging markets for over 25 years now, and people often ask me if I get tired of traveling. The answer is a resounding no! It’s not always easy to be constantly on the road (or in the air), but meeting people from all over the world and hearing about their lives gives me energy. While I can’t meet all my blog readers and Twitter followers in person, I appreciate hearing from you. Read on for my answers to a few of your recent questions. Thank you for taking the time to share your perspectives from around the world.

Q: Do you think Egypt should be removed from the CIVETS (the grouping of emerging market countries including Colombia, Indonesia, Egypt, Turkey and South Africa) given their current situation? Where do you see Peru and Chile in the EM World? Michael, Argentina 

A: I traveled to Egypt in December, and found that despite political turmoil, the business of daily life still generally continues to go on there. Our team made a number of company visits there, and found several firms that seem to be doing quite well. We need to realize that the international headlines don’t tell the whole story about what is going on in a country. We don’t really subscribe to the idea of grouping these particular countries (the “CIVETS”) together as an economic unit, but do plan to continue looking for opportunities in Egypt. As far as Chile is concerned, it has been a particular favorite of ours, as we have been finding many companies continuing to do well there. Peru has had problems in its mining industry but we think the country is still a good place for investment potential, albeit perhaps with fewer opportunities than in Chile.

Q: I’m of the opinion that Indian equities are well over-bought and recent reforms too meager. How do you feel about current levels? Akeem, India

A: We agree that many Indian companies still look expensive, but counterproductive government policies and recent corruption scandals have put downward pressure on the market this year. We’re now in a position where we feel there are good potential opportunities to purchase Indian companies at more attractive prices. The Indian government seems to have recognized the negative impact its policies have had on the market and recently reversed its position on allowing foreign firms to enter the retail sector. I think this change should have a positive impact going forward. 

Q: What do you think of the MENA region (Middle East/North Africa) and Egypt in particular at this point of time? From a top down view, I think Egypt is by far the most diversified market in the region and enjoys favorable demographic characteristics. George, USA 

A: Because of the negative news coming out of Egypt, many stocks have become more and more attractive from a valuation perspective not only in Egypt but also in other parts of the MENA region. The turmoil in North Africa is, in some cases, creating heightened interest in the Gulf markets. A number of investors from North Africa, Egypt, etc. are looking to invest in the United Arab Emirates, particularly Dubai, for example.

Q: We have friends in Africa (one from Nigeria and one who is a U.S. citizen living in Jos, Nigeria). They are very bullish on Africa in general and Nigeria specifically, but are presently concerned about the threat that Boko Haram is making and their desire to establish Sharia law. Intimidation by selective attacks seems to be limiting an otherwise pro-growth attitude. Can you comment on how you see this affecting outside investment in Nigeria specifically and Africa in general? Dave, Sweden

A: We are currently bullish on Africa and Nigeria in particular. There is no question that Boko Haram is creating problems but that is mostly in the northern part of the country where the people are predominantly Muslim. In the southern part of the country where Lagos, the financial and commercial center of the country is located, the impact has been generally more limited. So yes, Boko Haram has incited violence in some cases, but it has not affected the entire country. We have seen many businesses doing well there as the country appears to be forging ahead. We currently plan to continue to look for opportunities not only in Nigeria but in other parts of Africa such as Ghana, Kenya, South Africa, etc.

Q: It is very perplexing and painful when looking at the Shanghai, Sensex or Hang Seng Index to see them still much lower than where they were two years ago. According to current forecasts, it appears China’s GDP grew about 7.5% in 2012, the U.S. grew by some 2%, yet look at where the Shanghai index is vs the S&P 500. One can almost argue that this trend isn’t short term any longer. It is looking more and more like a long-term downtrend for EM capital markets, albeit fast-growing economies. Perhaps we need to start re-thinking our EM strategy or even our beliefs—what is your opinion? Rajdej, Switzerland 

A: Actually if you look over a 10-year period ending 2012, as a whole, emerging markets have outperformed the developed countries in eight of those 10 calendar years.1 In 2011, we felt underperformance of emerging markets as a whole largely stemmed from the tremendous number of emerging market company initial public offerings (IPOs) and follow-on issues that were issued the previous year – about $500 billion in 2010.2 A lot of money was drawn out of the secondary market to buy those IPOs. This year we have seen the overall performance of emerging markets improve1 and I’m optimistic about the potential for emerging markets to outperform in 2013. Please remember past performance does not guarantee future results.      

Q: I agree with the fact that the frontier markets are a long term investment play and require patience to win over. But what concerns me is that their growth story is based on a particular event/commodity. For example, oil for Saudi Arabia or gas for Qatar, from which they get maximum revenues. If these core sectors are hit, the other sectors cannot sustain the economy. In this scenario does it make sense to invest in companies having strong international presence (though global outlook is weak) or invest in domestic growth stories of the company? Rachit, India

A: Actually the most interesting investments to us in the frontier markets are currently not necessarily the resource companies, but banks and telecoms. A large percentage of the population in those countries do not yet have bank accounts, so the growth potential is large, in our view. The revolution in wireless communications has hit these countries with a tremendous force and the demand for cell phones and cell phone services has been moving up at a fast pace.


1. Sources: MSCI, S&P Dow Jones Indices. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI. STANDARD & POOR’S, S&P, and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC. Past performance is not indicative of future results. Indexes are unmanaged and one cannot directly invest in an index. Year-to-date through December 16, 2012: MSCI Emerging Markets Index +13.80%, MSCI S&P 500 +13.24%; MSCI EU: +13.29%.

2. Source: Dealogic.

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