Post on 21-Jun-2020
A clearer path
By Brian Langis
Frontier Markets
ValueX Berkshires 2014
Brian is reachable
brianlangis@gmail.com
@absolut_brian
brianlangis.wordpress.com
seekingalpha.com/author/brian-langis
Presentation Overview
What are frontier markets?
Why invest in frontier markets?
When to invest?
How to invest?
Where to invest?
Bonus – Super Exotic Extreme Investing
Questions?
Why the Frontier Markets topic?
Canada is 3-4% of the world’s market cap
The Toronto Stock Exchange is ~33% Energy, ~33%
Financials, then three big telecoms
U.S: ~5% of the world population. Not 100% of investments
opportunities
New opportunities + growth + diversification
Not an “us vs them”. Developed world is still an excellent
place to invest.
But the world today is different than the world twenty years
ago. Don’t want to be left behind.
What are Frontier Markets?
Source: Bloomberg L.P.
Formally known as Third World Countries
Early stage of development - Good economic growth
potential.
Next wave of emerging markets
Young population, rising income, growing middle class
Little market liquidity
Marginally developed capital markets
Yet to undergo much meaningful economic development, the
potential for rapid growth and outsized returns make these
markets interesting to high-risk investors.
What are Frontier Markets in Numbers
Source: IMF, Bloomberg, World Bank, MSCI index
30% of world’s population
13% of world’s GDP
Less than 3% global market cap
70% of countries with stock exchanges are not represented
by the MSCI All-Country World Index.
3% - Market Cap to GDP Ratios
23 of 25 fastest growing countries over the next 5 years are
frontiers
Classifications
The line is blurry
MSCI - designates which group many economies belong to.
South Korea, developed according to FTSE but emerging
according to MSCI.
FTSE, World Bank, IFC and others have different
classifications system.
EMs and FMs are often lumped together.
FMs vs EMs
Emerging Markets:
Already achieved economic lift-off
Some economic output comparable to developed economies
(China, Korea)
Stronger institutions
More correlation and integration with global market
Not as cheap, many more investors, a lot more coverage
Easy economic reforms already achieved
More efficient markets
FMs vs EMs October 31, 2013 to October 31, 2014
iShares MSCI EM vs iShares MSCI FM
Source: Yahoo! Finance
Developed Countries
Most of the major asset classes appear fully valued
Significant challenge of finding growth in a slow-growth
world
High levels of public and private debt
Political dysfunction
Aging populations among other problems
Reliable legal framework, more transparent, fully liquid.
Perception vs Reality
Perception Highly indebted /Poor fiscal shape
Poor
Wild Wild West of investing
Corruption, you have to bribe to get ahead
Poor corporate governance
Volatile
Mismanagement
Too commodity oriented
Uneducated/Illiterate
Malnourished kids, genocides, despots, disasters, despair
Reality
Growing middle class. Wage increase. (Buying cars, home, goods)
Lower debt-to-GDP ratios than developed markets. (Mostly infrastructure debt)
Corporate governance is increasing
IMF: Around 70% of world growth over the next few years will come from emerging markets.
Low correlation to global assets
Profits mostly dependent on local factors.
The financial crisis and banking crisis was not a feature of African economies.
Less volatile than Emerging Markets – FTSE
Move from commodity-oriented growth to economies that emphasize innovation and knowledge.
Perception: True Size
Photo Source: LeftL Peacefare.net Right: Kai Krause
Why Invest in Frontier Markets? It’s about showing up to the party early. First-mover advantage.
You get a head start. There’s a lot of punch left to drink. You get the best deals before the herd shows up. (Selling to the herd should be profitable.)
Capturing where the growth is going to be
There are GREAT BUSINESSES THAT ARE CHEAP
The point is to invest in the “BRICs” before it was cool.
Imagine investing in after WWII Japan, or Korea, or Thailand forty years ago. It’s sounded crazy, very contrarian.
Still a lot of untapped resources.
Government reform efforts also present the potential for both earnings growth and revaluation for frontier-market companies.
Why Invests in Frontier Markets High need for infrastructure development
Need FDI for everything
Low cost workforce
Low correlation to rich countries
Attractive valuation
Higher growth
Financing options limited
Technology leapfrog
Reverse “brain drain”
Remittance
Very inefficient. Limited information with limited liquidity drive major price/valuation swings.
What To Look For? Having the right demographic is not enough
You need legal framework. Can foreigners get a fair deal? Recourse.
Open to foreign investors.
Free market principles, pro-business
Stable government/regime
Quality of the potential investable companies.
Development of capital markets
Management/Partners
The right policies. Pay attention to policies that encourage economic growth.
The Right Recipe
South Korea – Asian miracle II
Japan – Asian miracle I
Singapore – no natural resources, rich country
Thailand – Attracting high-tech
Botswana – big strides in governance
The Wrong Recipe
Argentina, the “Paris” of South-America, Formerly one of the richest
country in the world.
1962 Myanmar, richest country in Asia.
Greece
2012 Mongolia
Current France?
When To Invest In FMs To Get the Best
Bargains When the outlook is the most miserable
Ignored due to multiple reasons
The herd “hot money” hasn’t showed up yet.
Interesting after a war, a crash, a recession, cycle
bottom…etc.
Major reforms on the way
The reasons above give you the best deals, low PEs
Stay out when there’s a mania.
Where To Look?
World’s worst stock market returns
The end of a recession.
The end a bear commodity cycle.
The end of a war.
Look at foreign stock exchange listing.
Look at 13F filings of funds or list of holdings
Read portfolio manager comments
Change in index component
Domestic country newspapers/news sites
Resources
Foreign stock exchange
Foreign broker firms
Foreign papers
Industry association
Fund investments disclosing
Foreign Chamber of Commerce
Foreign financial sites
“General” Risks Limited size, lack of liquidity, thinly traded
Family run companies / Poor governance
You can take on too much risk
May not follow the same rules of disclosure as Western corporations.
Capital control
Monitor changes in index components.
Geopolitical and currency risks are real.
Factor in costs and fees.
Export Dependencies
Strong USD
“General” Risk Continues
Ability to commit capital to any national market in large
volume, they are also capable of withdrawing that capital
quickly.
Anything from signs of weak earnings growth to an
unanticipated rate hike somewhere else in the world can
trigger a shift in sentiment and precipitate capital flight.
Be careful of countries too dependent on commodities
Advice Approach Macro factors such as GDP growth, the level of interest rates, et
cetera are less important in deciding whether to invest in a given country.
Be skeptical of local brokers/analysts Always bullish, otherwise is seen as a traitor Usually after own interest (Want money to increase fund size) If bearish, will lose job, potential government business, and corporate
finance deals
Academic papers – (guess who paid the academics)
Don’t rely too much on statistics. GDP often understated. (Bartering, household, underground economy etc…)
The emergence of the middle class in country X —these are gimmicks, just marketing stories for fund managers.
Advice Approach If direct stock picking, do not ignore management. Good
management reduces a lot of the risk.
Spend your time on businesses that you can understand better.
Focus on the “Blue Chips”. Find the best companies in the world. Don’t be a cowboy. Would you invest in it even if it was American?
Prefer dividend paying Co. Can fake earnings. Can’t fake dividend. Shareholder oriented.
Pick a broker that is recommended by Westerners or has Western roots. Be careful of front selling.
It’s good too double check with two different local brokers.
Do business with the biggest bank
Verify if the auditor is a familiar name
Difficulties/Headaches
Friction or extra cost
High commissions
Taxes
Duties, Stamp duty
Share registration, custodian
Language and culture
Management
Approach management like you are building your fantasy
football team.
Study their history and experience, operating and capital
allocation.
You can hire firms for background check.
Shareholder friendly?
Be skeptical of strong family run companies
How To Invest? Developed world Multinationals
Multinationals offshoot
Direct stock picking
ETFs/Mutual Funds
Private Equity Funds
Debt market
ADRs, GDRs
FM companies getting listed on a major exchange. (FTSE, NYSE, HK, SG)
Frontier Market Multinationals
Notable “Real” FM Countries Myanmar – Massive change in political direction
Sri Lanka – 26 years of civil war ended in 2009.
Iraq – War ending soon?
Cambodia, Laos – Two SEA countries that’s catching up. New Exchange.
Nigeria – Biggest African economy
Ghana + Kenya – Major reforms, fast growing
The BRVM exchange – 8 West Africa Countries. 37 companies +66% 2yr return.
ASEAN
A New Frontier
Source: IMF, Mckinsey
Myanmar - “Reopen for business”
GDP growth – 8%. GDP to triple in the next twenty years.
Strategic location. Port, trade, etc…
Need FDI in everything
Reforms under way
Elections of 2015 will be huge
Risks: Ethnic clashes, corruption, legal, banking, a lot of
unknowns, etc…
Africa
57 countries, 19 stock exchange
African companies getting listed on the FTSE.
Nigerian banks: P/E 6x, P/B 1.2, 20% capital ratio.
Kenya banks: more expansive 2x P/B, but more sophisticated
(credit cards, home loan, etc…)
Shoprite – Food retailer in 16 countries, 1700 stores
Sonatel –EBITDA margin 51%, ROE 32%, 7.3% div
Enterprise Group Limited – P/E 2014 8.4x, P/B 1.6x, 2013
ROE 27.4%
Frontier Market Industries
Some stand out more: financial services; consumer goods and
services; hotel and tourism; selected property segments;
power, manufacturing and export driven industries.
Renewable energy and agriculture are interesting because
there is a lot of support from the development banks.
Consumers do shop. Buy basic goods and services.
Shift from agriculture and textile to manufacturing. Adopt
latest technology.
Notable Frontier Market Companies Yoma Strategic (Singapore company in Myanmar)
Square Pharma Bangladesh – Blue chip
GT Capital – Philippines (large bank + power + Toyota
PPWSA – Cambodian water distributor/management
BCEL, EDEL – Lao bank and energy powerhouse
NagaCorp – Casino monopoly in Phnom Penh
Bidvest Group – South African conglomerates
Dangote – Multiple African countries
Zain – Kuwait telecom, 49% Iraq and 41% Sudan
John Keells Holdings – Sri Lanka (hotel, food, ports)
Thai Beverage PLC - One of SEA's largest beverage companies
Phnom Penh Water Supply Authority
(PPWSA) Fiscal 2013 Numbers / US$
Water utility company, $1.22/share, $106 million market cap
Price below 2012 IPO of $1.55
Revenue – $37.2m, yoy +12%
Profit – $9.3m, EPS: $0.107, yoy+10.6%
ROE – 5.62%
ROA – 3.62%
Current and Quick Ratio – 4.2x and 3.4x
Dividend Payout Ratio – 12.50% (2012: 7%)
Dividend per share: $0.013 (2012: $0.006) +116%
Great management, 99% billing collection, monopoly
Valuation: Forward P/E 10x, P/B: 0.62x,
Frontier Market Multinationals
Source: Source: Forbes, May 2014. * Excluding financial institutions
Global Multinationals
Nestle, Unilever
Mastercard
YUM! Brands (KFC is always the first)
Total SA (Iraq, Iran, Kazakhstan, Africa…)
Philip Morris International
Diageo, Pernod Ricard, Brown-Forman
Heineken, Anheuser-Busch InBev, SABMiller
Compagnie Financiere Richemont S.A.
Value investor Tom Russo specialize in that area.
Notable Funds/ETFs
iShares MSCI Frontier 100 ETF (FM)
ASEAN ETF - Global X FTSE ASEAN 40 ETF (Singapore,
Thailand, Indonesia, the Philippines and Malaysia)
Templeton Frontier Market Fund
Frontaura Global Frontier Fund (Pure)
Matthews Asia (Many Asian funds)
Africa Opportunity Fund – Francis Daniels
Asia Frontier Capital - Pan-Asian + Vietnam
Templeton Frontier Market Funds
As of September 30, 2014
AUM $2 billion,70 companies, 40% financials, MER 2%
P/E = 11.3x
P/B = 1.94x
P/CF = 7.59x
5yr annualized return: 7.73%
Top holdings: United Bank LTD, Zenith Bank PLC, Telecom
Argentina SA.
Includes Saudi Arabia, MSCI does not.
Frontaura Global Frontier Fund LLC
AUM $175m, 55 companies, 33 countries, 41% financials,
16% cash, MER 2%
P/E: 6.1x
P/B: 1.1x
Dividend yield: 5.3%
ITD CAGR (Oct. 2014): 10.a% vs -2.2% MSCI Frontier
(Seven years)
Top holdings not disclosed
Africa Opportunity Fund
Code AOF. Managed by Robert Knapp and Francis Daniels.
Value and contrarian.
56% annualized return between 1998-2006
Read: Reflection of a Value Investor in Africa.
Great way to buy into the African story.
Notable Region - ASEAN
Sources: Financial Times, The World Federation of
Exchanges, China Daily
300 million people
10 + 5 countries
Trading/political block. Free trade
Combined market cap: +$2 trillion
High GDP growth
Foreign Subsidary
(Direct and Indirect)
Nigerian Breweries – 54% Heineken
Guinness Nigeria – Diageo 46%
Nestle Nigeria
East African Breweries – 53% Diageo
Unilever Indonesia
Sonatel – 42% owned by France Telecom
Tanzania Breweries – 54% owned by SABMiller
Bonus Extreme Investing
WARNING
For informational purposes.
Do your own research.
Not an investing recommendation.
Information need to be verified.
This is not an endorsement.
Extreme Investing
Defaulted North Korea Bond from the 1970s for about
~0.15 on the dollar. The interest accrual, since their 1984
default, amounts to more than 500 percent of the principal in
unpaid interest.
Orascom Telecom (EGX:OTMT) – 1m+ subscriber in NK.
Owns 25% of Koryolink. Only 4% mobile penetration.
Invest in Chinese companies operating in NK.
South-Korea companies operating in NK
Alternative assets: Coins, stamps, art.
Special Economic Zones on the rise. (Rason)
NK Mobile Connections
More Exotic Investments The world’s first pirate exchange, Harardheere, Somalia.
Open 24 hours a day, the exchange allows investors to profit from ransoms collected on the high seas, which can approach $10 million for successful attacks against Western commercial vessels.
There’s now approximately 72 maritime companies.
You can provide cash, weapons or useful materials.
Ransoms collects between $2 to $4 million. $9.5m for the Smyrni, a Greek tanker.
Risk: Attacks are dropping. 237 attacks in 2011, 75 in 2012, 15 in 2013. Is the market hitting a bottom?
Payday
People gather outside a former local bank, where pirates were dividing ransom payment
obtained for the freeing of the Spanish ship Alakrana, as they wait to collect their money in Haradheere,
northeast of Somalia's capital Mogadishu, November 18, 2009.
REUTERS/Mohamed Ahmed
At the end of the day this is what
matters:
Don’t buy a stock because its from an “exotic high growth country”.
Valuation. Buying below its intrinsic value. Value < price. Low/reasonable valuation.
Margin of safety
Adjusted EBITDA good for comparing cross-country companies.
Predictable, consistent cash flow
Look for increasing FCF, and ability to re-invest
Reliable financial statements
Excellent management/partners