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A clearer path
By Brian Langis
Frontier Markets
ValueX Berkshires 2 14
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Brian is reachable
@absolut_brian
brianlangis.wordpress.com
seekingalpha.com/author/brian-langis
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Presentation Overview What are frontier markets?
Why invest in frontier markets?
When to invest?
How to invest? Where to invest?
BonusSuper Exotic Extreme Investing
Questions?
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Why the Frontier Markets topic? Canada is 3-4% of the worlds 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 investmentsopportunities
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. Dont want to be left behind.
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What are Frontier Markets?
Source: Bloomberg L.P.
Formally known as Third World Countries
Early stage of development - Good economic growthpotential.
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, thepotential for rapid growth and outsized returns make thesemarkets interesting to high-risk investors.
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Classifications The line is blurry MSCI - designates which group many economies belong to.
South Korea, developed according to FTSE but emergingaccording to MSCI.
FTSE, World Bank, IFC and others have differentclassifications system.
EMs and FMs are often lumped together.
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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
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FMs vs EMs October 31, 2013 to October 31, 2014
iShares MSCI EM vs iShares MSCI FMSource: Yahoo! Finance
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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.
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Perception vs Reality
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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
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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 comefrom 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 MarketsFTSE Move from commodity-oriented growth to economies that emphasize
innovation and knowledge.
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Perception: True Size
Photo Source: LeftL Peacefare.net Right: Kai Krause
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Why Invest in Frontier Markets? Its about showing up to the party early. First-mover advantage.
You get a head start. Theres a lot of punch left to drink. You getthe best deals before the herd shows up. (Selling to the herdshould 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 fortyyears ago. Its sounded crazy, very contrarian.
Still a lot of untapped resources.
Government reform efforts also present the potential for bothearnings growth and revaluation for frontier-market companies.
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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.
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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.
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The Right Recipe
South KoreaAsian miracle II
JapanAsian miracle I
Singaporeno natural resources, rich country
ThailandAttracting high-tech
Botswanabig strides in governance
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Where To Look?
Worlds 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
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Resources
Foreign stock exchange
Foreign broker firms
Foreign papers Industry association
Fund investments disclosing
Foreign Chamber of Commerce
Foreign financial sites
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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
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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
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Advice Approach
Macro factors such as GDP growth, the level of interest rates, etcetera are less important in deciding whether to invest in a givencountry.
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) Dont rely too much on statistics. GDP often understated.
(Bartering, household, underground economy etc) The emergence of the middle class in country Xthese are
gimmicks, just marketing stories for fund managers.
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Advice Approach
If direct stock picking, do not ignore management. Goodmanagement 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.
Dont be a cowboy. Would you invest in it even if it was American?
Prefer dividend paying Co. Can fake earnings. Cant fake dividend.Shareholder oriented.
Pick a broker that is recommended by Westerners or has Westernroots. Be careful of front selling.
Its good too double check with two different local brokers. Do business with the biggest bank Verify if the auditor is a familiar name
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Difficulties/Headaches
Friction or extra cost
High commissions
Taxes
Duties, Stamp duty
Share registration, custodian
Language and culture
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Management
Approach management like you are building your fantasy
football team.
Study their history and experience, operating and capitalallocation.
You can hire firms for background check.
Shareholder friendly?
Be skeptical of strong family run companies
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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
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Notable Real FM Countries
MyanmarMassive change in political direction Sri Lanka26 years of civil war ended in 2009.
IraqWar ending soon?
Cambodia, LaosTwo SEA countries thats catching up. New
Exchange. NigeriaBiggest African economy
Ghana + KenyaMajor reforms, fast growing
The BRVM exchange8 West Africa Countries. 37companies +66% 2yr return.
ASEAN
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A New Frontier
Source: IMF, Mckinsey
Myanmar - Reopen for business GDP growth8%. 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
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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)
ShopriteFood retailer in 16 countries, 1700 stores
SonatelEBITDA margin 51%, ROE 32%, 7.3% div
Enterprise Group LimitedP/E 2014 8.4x, P/B 1.6x, 2013ROE 27.4%
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Frontier Market Industries
Some stand out more: financial services; consumer goods andservices; 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.
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Notable Frontier Market Companies
Yoma Strategic (Singapore company in Myanmar) Square Pharma BangladeshBlue chip
GT CapitalPhilippines (large bank + power + Toyota
PPWSACambodian water distributor/management
BCEL, EDELLao bank and energy powerhouse NagaCorpCasino monopoly in Phnom Penh
Bidvest GroupSouth African conglomerates
DangoteMultiple African countries
ZainKuwait telecom, 49% Iraq and 41% Sudan John Keells HoldingsSri Lanka (hotel, food, ports)
Thai Beverage PLC - One of SEA's largest beverage companies
Ph P h W S l A h i
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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%
ROE5.62% ROA3.62%
Current and Quick Ratio4.2x and 3.4x
Dividend Payout Ratio12.50% (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,
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Frontier Market Multinationals
Source: Source: Forbes, May 2014. * Excluding financial institutions
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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.
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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 FundFrancis Daniels
Asia Frontier Capital - Pan-Asian + Vietnam
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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, TelecomArgentina SA.
Includes Saudi Arabia, MSCI does not.
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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
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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.
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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
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Foreign Subsidary
(Direct and Indirect)
Nigerian Breweries54% Heineken
Guinness NigeriaDiageo 46%
Nestle Nigeria
East African Breweries53% Diageo
Unilever Indonesia
Sonatel42% owned by France Telecom
Tanzania Breweries54% owned by SABMiller
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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.
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Extreme Investing
Defaulted North Korea Bond from the 1970s for about~0.15 on the dollar. The interest accrual, since their 1984default, amounts to more than 500 percent of the principal inunpaid 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)
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NK Mobile Connections
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More Exotic Investments
The worlds 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. Theres 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?
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Payday
People gather outside a former local bank, where pirates were dividing ransom paymentobtained 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 th d f th d thi i h t
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At the end of the day this is what
matters:
Dont buy a stock because its from an exotic high growthcountry.
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
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