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How to go invest in emerging markets as a foreigner
 

How to go invest in emerging markets as a foreigner

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A companion to the book, What Would Ben Graham Do Now, this ebook provides insight into a global emerging markets investing framework.

A companion to the book, What Would Ben Graham Do Now, this ebook provides insight into a global emerging markets investing framework.

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    How to go invest in emerging markets as a foreigner How to go invest in emerging markets as a foreigner Document Transcript

    • T R A D E S T R E A M I N G . C O M w h e re i n v e s t o r s l e a r n f ro m e x p e r t sHOW THE 3RD RICHEST PERSON IN THE WORLD TOOK $300K AND TURNED IT INTO $40 BILLIONOR, How to go long in emerging markets as a foreigner tradestreaming.com: where investors learn from experts
    • You can’t be a big investor and ignore the rest of the worldThe global investing landscape has changed, creating a “new center” ofeconomic power.This shift is distributing investing opportunities away from Wall Street andthe European marketsto multiple systemsaround the world.It’s definitely an excit-ing time for investorsas opportunities havebeen harder to find inhome (Western) mar-kets.If you’re a serious in-vestor, you can’t avoid the changing landscape. There’s so much happen-ing in the “rest of the world” (ROW).It’s the type of environment that famed investor Ben Graham would droolover. He’d see a world of opportunities and stick to his concept of value,looking at companies through a value prism, sticking to fundamentals.You have to be part of this.You cannot afford not to.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 1
    • We’re not in Kansas anymoreThe thing is, investing in China, Brazil, India -- not to mention Qatar, Ma-cau, or Saudi Arabia -- is hard.It’s different from our experiences searching for value in U.S. markets.These are fundamentally different systemsRule of law is NOT coming to China anytime soon. Key fact In fact, Jeffrey Towson, head of investments (previous) for the World’s 4th richest man, Saudi Prince Waleed (the Ara-bian Buffett), believes that the defining characteristic of investing inemerging markets is a lot of uncertainty.In emerging markets, there are no minority shareholder rights.There is no real corporate governance. At least, not like we’re used to inthe West.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 2
    • The KEY QuestionSo, the fundamental question for today’s investor is: How do you invest for the long term in an environment characterized by it’s instability?More specifically, how do you go long, via a buy and hold strategy, ride the eco-nomic value up (like Buffet and Waleed) in an environment that is inherently un-stable?5 Problems Going GlobalTowson believes the troubles investing globally fall into 5 different classesof problems:1. limited access to investments2. increased uncertainty in intrinsic value3. increased long term uncertainty4. limited minority investor shareholder rights5. outsider disadvantagesTr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 3
    • Towson, in his new book, What Would Ben Graham Do Now: Rethinking ValueInvesting for a Global Age, believes he has found the answer. The Answer: Combine about 70% of how Prince Waleed invests with 30% what Towson and Buffett have doneFind the ValueThe trick is not to buy a company in China, only to sell it in 6 months be-cause you’re nervous.Wealth is built in emerging markets by purchasing companies and holdingthem for 5 years.Ah...it’s hard but doable.Towson spent many years learning exactly how Waleed was able to buy a hotelon Monday in Jedda and sell a manufacturing business on Friday in China.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 4
    • Prince Waleed brings it Waleed’s Investments • more than 5% of Citigroup ? • more than 200 hotels (Movenpick, Fairmont, The Savoy) • EuroDisney • Canary Wharf Did you know that • News Prince Waleed (dubbed the Corp • Apple “Arabian Buffett”) built a • eBay $22 billion fortune off just • Priceline $30,000? • Bank of China • a Manhattan-sized real estate devel- opment (27 sq miles) Did you know Waleed em- • private Airbus 380 ploys only 2 or 3 staff peo- ! ....insurance companies, petro, ple to manage his global private equity funds, banks, etc. investing activities?Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 5
    • So, how does the world’s 4th richest man make billions and manage it with a 4-man office?Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 6
    • First stepsTom Russo (of Semper Vic Partners) and otherslike him have been investing globally for dec-ades.The most natural way for investors to accessforeign markets with a value approach is tomimic these investors activities. Simply, these global investors identify multinationals doing business over- seas and invest in the ones with exposure to the markets they’ve targeted.Typically, these types of investments cluster around companies selling re-tail products, tobacco, alcohol .These types of firms all tend to be fairly successful with this approach --they capture emerging market growth and avoid inherent problems be-cause ultimately you’re not buying a local Chinese company, you’re buyinga German company.That means we have the rule of law on our side and pretty shareholder-friendly contract rightsThis method allows us to capture economic value because it turns out thatChina’s government is not that concerned with Starbucks operating in theircountry.And this has been a solid strategy for 20 years.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 7
    • 2 Ways to Identify Value Multinationals1) Outsource 1) go-anywhere funds: Invest in someone else’s portfolio. While many of us can’t invest in macro hedge funds, scouring the globe looking for opportunities, we still have options. Called go- anywhere funds, many mutual funds have loosened the invest- ment mandates and look very much like hedge funds themselves. Here’s a list of some of the macro mutuals investors like: NAME TICKER YEAR FOUNDED ASSETS MANAGED BlackRock Global Alloca- MDLOX 1989 $53 Billion tion Fund FPA Crescent Fund FPACX 1993 $6.5 Billion Ivy Asset Strategy WASAX 1997 $28 Billion PIMCO All Asset PASAX 2002 $23 Billion 2) frontier markets: According to asset manager Mike Dever, founder of Brandywine Asset Management in his new book, Jackass Invest! ing, frontier markets (think Vietnam, Pakistan, Jordan) are less corre- lated to other markets in general (0.69 to developed markets and 0.59 to emerging markets). Compare that to 0.92 correlation developed and emerging markets have to each other. Dever recommends the Forward Frontier MarketStrat Fund (FRONX), with a 95% overlap with the MCSI Frontier Markets.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 8
    • 2) Find the hidden gems yourself 1) piggyback the best global investors: using a tool like AlphaClone, you can monitor what some of the best hedge fund managers are doing in their portfolios and just ape them. Create a portfolio of the best of the best. Consider investing in the most popular ADRs among all hedge funds. 2) use stock screeners: filter out the noise and find those stocks that fit the same criteria Graham describes himself in Security Analysis. I suggest: 1) The FT’s Global Graham Screener 2) OldSchoolValue’s many screeners 3) FinViz’s all powerful screenerBy investing in go-anywhere mutual funds or by picking stocks yourself,you’ll be able (in part) to access some of the economic growth happeningall around us. Global rotation ETFs are on the way, as well.We’ll see next the drawbacks to this basic strategy.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 9
    • But something’s smells amiss...Towson argues that this strategy is “conspicuously contorted” -- can there bea more convoluted way, less-direct way to invest in China by investing in aEuropean firm that’s activethere??It’s like investing in Texas: Ilove Texas, want to invest in it,and do so by only looking forIdaho firms operating there.It makes no sense.Investing in multinationals toget emerging market exposureavoids the fundamental question of how to go long in these markets.This strategy’s popularity shows investors are still uncomfortable with this,stretching in Twister-like fashion to get around the problem.If the world, according to Towson, is “multipolar, colliding and over-whelmingly local”, how do increasingly globally active investors engagewith increasingly local businesses?Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 10
    • So many choicesOver long term, how can you call yourself an investor and not buy Chinesefirms?If China is the #2 economy in the world, you have to get comfortable withinvesting there. No?The beauty of the whole thing is like Warren Buffett says, you don’t have toswing at every pitch. In 2010, the U.S. is in recession, Shenzhen opens itsnew stock exchange, catering to small cap and midcap companies.In its first 6 months of operation, 100 companies went public. That’s not atypo.Don’t need to swing at all of them.A sea of companies are emerging in India, Brazil, Middle East. Accordingto Towson, almost all of them are mispriced.Nobody talks about efficient markets in Saudi. Prices swing wildly, a veri-table value investor’s dream. You just need a strategy and buy a basket ofthese firms.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 11
    • So, how does Waleed begin his approachWarren Buffett and Prince Waleed are both value investors.They are both looking for a dollar selling for $.50 which will ultimatelygrow to $1.50 in a couple of years.Similarities end here, though.Buffet = AmericanaBuffett was shaped by the American economy, its developed status -- it’sreflected in his strategy. He searches and hunts for value, for Coca Colastrading at 70% of their intrinsic value.He’s not worried about getting the opportunity to buy into a company -- hejust buys it. Nor is he worried about retaining his stake, or about othershareholders or the government degrading his claim to his shares.He just puts it in portfolio. And hey, American securities law helps here.Waleed’s TurnWaleed, though, is not concerned about finding value -- the markets heplays in are massively mispriced. Towson sees pure chaos in China. Inthese markets, value investors don’t need to look for footnotes on the in-come statement to show a company is 10% undervalued.In emerging markets, investors shouldn’t be focused on finding value.They’re concerned about finding a way to get the company they’re inter-ested in, in getting someone to sell them part of a closely-held firm.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 12
    • And then, if they do get it, efforts are made to retaining the minority inves-tor stake , keeping claim to the asset even though the law won’t protectthem.In emerging markets, the questions are:I. how do I get the dealII. how do i secure it?Waleed looks for situations that offer an opportunity that he can step in asdeal maker to structure a deal that gives him access.Buffett looks for mispriced companies and buys them.One takes a deal maker posture, the other is an analyst.Same but differentLet’s say Buffett is interested in buying Coke at 70% off. He buys it, adds itto his portfolio.No problem.Let’s say Waleed wants to buy a hotel in Egypt, in Sharm al Sheik. On thecoast. So, Egypt...It’s government from top to bottom, really political.Real estate in these types of economies is commonly tightly held, often thesource of a family’s wealth, their lifeline. Or, maybe it’s owned by a state-controlled conglomerate.It’s hard to get access and if you do, they’re only going to sell you a smallpiece of the property (10%). So you’re a minority shareholder of a privateTr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 13
    • company in a no-rule-of-law economy -- otherwise known as sucker at thetable.Waleed creates value, accessWhat Waleed would do in this scenario is approach the owner of the hoteland tell him, I don’t want 51% of the company. I understand that retainingcontrol is very important for you and your family. I want 20%. But when Ibuy, I’m bringing the Four Seasons with me.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 14
    • And the day we buy it, we’re going to turn it into a Four Seasons and yourbalance sheet is going to get a big bump and at the same time, your incomestatement will go up. We’ll add pure economic value the day we buy it.Now Waleed’s got a deal in Sharm al Sheik (which he did, though not 20%)and he’s secure in his claim (they’re not going to risk losing the 4 Seasonsfranchise).Using All Types of Capital (not just $$)If Buffett is searching for mispriced value, Waleed’s looking for ways toadd value to a partner to ensure he gets access.Waleed has political access. Towson did deal with Waleed that exemplify’show Waleed uses political access in his favor.The Prince proposed building a 1 mile high skyscraper in Jedda. He wentto the King directly, said the city was crumbling and in poor shape. Let’sbuild this thing toturn the cityaround.He added so muchvalue on the deal,he got a royal de-cree to build it.That’s a politicalTr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 15
    • approach.Towson explains how the rest of us can deal globally:For guys not like Waleed, I can find a good tech company in Ohio. It’s good atdeep sea drilling. Then I can go to Singapore firm and say, let us buy into you.We’ll bring you the best technology capabilities -- that will bring so much value toyour company. You don’t have to own these capabilities -- you can make a phonecall.If you start with posture of adding value to partner/company, you can getaccess to deals in 1000 ways:I. reputational capital: bringing a good reputation is important when partnering with global firmsII. political access: many deals around the world require co-opting the authorities into the deal. This access is valuable.III. money: Of course, access to deep pockets can get you a deal almost anywhere.IV. technology: Different geographies have differing access to cutting-edge tech. Don’t assume foreign firms already have this access.V. brand capital: Like reputational capital, a global (or parochial) brand carries sway. Access to brands means access to deals.VI. foreign customers: No one turns away customers. If you can bring a foreign firm access to a local market in your geography, that’s golden.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 16
    • If you think about posture and take a 30,000 foot view of emerging econo-mies, it’s totally a logical posture to help firms move along the develop-ment curve, rather than just looking to buy mispriced valueSo, in some ways, the successful global investor is a hybrid of different ca-pabilities: you can equally apply this framework (looking to provide value)to private equity investors, value investors -- they’re both acting like a nextgeneration investment banker. In fact, you can even apply this to businessdevelopment executives.Determine which source of capital you can use to secure foreign deals andget cracking.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 17
    • Prime destinationsSo, where in the world should you look first for deals?Towson was at conference end of 2010. It was one of many BRIC confer-ences (Brazil, Russia, India, China) but quickly, it turned into a China con-ference.Towson:Maybe to be a little contrarian -- I said, Why are we thinking about China? It’sovervalued -- what’s the urgency to go there? I’m more interested in Macau andQatar this year than China. Parts of Guangming, western side but Shanghai, Bei-jing, too much money flooding around there right now.Towson likes Qatar, saying it’s a lot like Israel, in that there is natural gasall over the place. Not only does it have a booming economy but the coun-try doesn’t have that many skills, yet. There’s not a deep bench of man-agement strength there yet. Towson’s friend opened an office in LatinAmerica and China (called the company, Sino-Latin) and does resourcedeals between the two geographies.You want to hunt for areas where not so many people are looking...Towsonwon’t do Real Estate in Shanghai or Beijing anymore. He thinks it’s hyper-competitive. He’s looking elsewhere.Like in Macau. It’s doing amazingly well. Another Towson friend is doingearly stage investments there and seems to be doing amazingly well.Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 18
    • If you’re flying into Bejing to buy China-- that’s kind of a fad right now. Infact, Towson publicly hopes China crashes. He lives there, so he’s there/he’s invested, but is reall focused elsewhere.Towson really likes Saudi Arabia. Everyone talks about Libya/Egypt withall their political problems, but the net result of all the unrest in MiddleEast has bolstered Saudi. Saudi has had its biggest economic boom in 6years. GDP has gone up 6%.It turns out when people get nervous about the Middle East, the price of oilgoes up. When Libya tales some of its oil supply offline, only Saudi has thecapacity to step in and produce more. So, oil revenue flooding Saudi.Last time boom in Saudi of this magnitude was 2005 when its stock marketdoubled in 18 months. Boom times there now.Where to research foreign opportunitiesTowson doesn’t find the standard value investing thinking all that helpfulwhen looking at emerging markets. Sure, he still reads all the standardstexts (like Greenblatt and Greenwald), but he’s looking to local sources tosize up opportunities.Local investment research: Towson spends most of his time reading Mid-dle Eastern reports from local securities firms.• Jadwa: first securities firm in SaudiLocal Newsletters: For Towson, the days of reading the Wall Street Journalto learn about China are over. This foreign approach is no longer enoughTr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 19
    • to invest in China. Investors need to read in the local language. In China,it’s almost all Chinese blogs these days.The days of westerners flying into China with translators and money arealmost over. You almost can’t do business in China today without speak-ing Chinese. You can -- you’ll just be at a big disadvantage.It’s like trying to do business in the U.S. not speaking English. It’s fairlyeasy to learn Chinese -- it takes two years. There are plenty of tutors outthere to teach.Reverse Chinese Merger FiascoWe’ve read a lot recently about Chinese reverse mergers, Chinese stocksthat now trade on U.S. exchanges. A few prominent researchers believemany of these companies have severely cooked their books.Look at this fiasco. A lot of this happens because these firms are listed inthe U.S. -- so, their accounting/auditing firms are all here. If they had beenon the ground in China doing typical scuttlebutt-type research, talking tocustomers and competitors, they would have picked this up really early on.Towson accredits the mishap to different geographies, a big language gap,and cultural differences.These U.S.-listed Chinese firms weren’t little frauds, like embellishing theirrevenues 20%. It’s like they were claiming they had $150M in revenues andthey had $1M. The scale of the fraud is so big, there’s something about theinvesting process that has clearly broken down. If you were on the ground,Tr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 20
    • you would have picked this up. You would see that the factories wereempty.About Tradestreaming Tradestreaming is where smart investors learn from experts. Lead by Zack Miller, Tradestreaming brings tips, tools and technologies from the smartest people on the planet to help you become a better inves- tor.About Jeffrey Towson Jeffrey Towson is a specialist in global, cross-border investing and the author of What Would Ben Graham Do Now: Rethinking Value Investing for a Global Age. He has de- veloped more than $15 billion in invest- ments across the US, China and the MiddleEast. Previously, Towson served as Head of Direct Investments for MiddleEast/North Africa for Prince Waleed. Waleed is the world’s 4th richestperson, the largest foreign investor in the U.S., the biggest shareholder ofCitigroup and the world’s second-largest media owner. You can find outmore about him at www.jeffreytowson.comTr a d e s t r e a m i n g . c o m! How to Go Long Emerging Markets as a Foreigner 21