Whats Emerging in Emerging Markets The New Frontier

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Whats Emerging in Emerging MarketsThe New
Frontier
CFA Society of Dayton December 9, 2009 Lawrence
Speidell, Founder, CEO Portfolio
Manager Frontier Market Asset Management
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Its not about the money
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(No Transcript)
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Its about people
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Its about people
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Its about people
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Its about people
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Its about people
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Its about people
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Peraliya, Sri Lanka
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Frontier Market Opportunities

• One World or Two
• Convergence
• Stock Opportunities
• Inefficiencies
• Reasons for Optimism

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One World or Two
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Emerging/Frontier Countries Under 10,000
GDP/capita
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Frontier Countries Not in MSCI Emerging Markets
Index

• .

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Power Consumption versus Population
http//www.worldmapper.org/display.php?selected11
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One World or Two
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One World or Two
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One World or Two
Cuyahoga River 1971
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The Poor World Human Capital and Financial
Opportunity

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Economics Growth
Source IMF, November 2009
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Convergence
1791
686
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Convergence
The GUM Department Store 1991
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Convergence
The GUM Department Store 1991 and 2002
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Chinathe Country
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Pudong
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Night Life
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The Once and Future King(s)?
From Wall Street to the Great Wall Burton
Malkiel 2008
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China, U.S., India 1,2,3 by 2050
Source Siegel, Jeremy, Future for Investors
(2005), Sunit Singhania, 2008
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Emerging Exports
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Chinas Banks
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China Stimulus

• Stimulus package US586 billion, over two years gt
  16 of Chinas 3.5 trillion GDP. An equivalent
  package in United States would exceed US2.25
  trillion
• public housing
• rural development
• highways, rail, airports, power grid
• health care and education
• the environment
• technological innovation
• Sichuan province post-quake reconstruction
• increasing agriculture subsidies and social
  security payments
• nationwide VAT reform
• (10) abolishing the credit quota system and
  supporting credit growth for priority sectors.

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Chinas Road Construction
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Urbanization 10x Productivity
Urban 2005 2030 China 40.5 60.5 India 28.7
41.4
Source GaveKal 0604
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Middle Class In China
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2,000 to 12,000 is the sweet spot for
consumption(Penetration of durable goods
relative to annual income)
12,000 90,000 RMB
2,000 15,000 RMB
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Middle Class In China
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Economics Banking

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Financial Opportunity NO Sub-Prime Mortgages
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Middle Class Resource NeedsOil
Source BP Statistical Review of World Energy,
U.S. Census global population database,
respective state statistics bureaus for GDP.
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Comparison of Chinese and US Autos as Percent of
Population
Middle Class Resource NeedsOil
Source Morgan Stanley FactSet
As of 31-Dec-05
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Comparison of the Pace of Chinese and US
Passenger Vehicle Penetration
Middle Class Resource NeedsOil
Source Morgan Stanley FactSet
As of 31-Dec-05
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Wages

Source Lockheed Corporation
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Wages
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Demographics

• .

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A Virtuous Circle of Frontier/Emerging Market
Trade
China needs Africa has to sell
Zambia DRC
Angola Cameroon E. Guinea Gabon Nigeria DRC
Ghana Niger South Africa Zimbabwe
Mauritania South Africa
South Africa
E. Guinea
Source Deutsche Bank, 7 December 2006
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Education Strathmore University, Nairobi
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Work Ethic
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Technology
Source Human Security Centre, UBC
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Entrepreneurship
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China in the Frontier
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Middle Class - Bangladesh
Bashundara City Mall, Dhaka, Bangladesh
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Vietnam versusIndia
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Middle Class
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Stock Opportunities
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Bata Shoe, Bangladesh

• Founded 1894 in Czechoslovakia by Bata siblings
• Survived nationalization during Communism
• Operations in Bangladesh since 1962
• Worlds largest shoe manufacturer in over 50
  countries
• 2009e PE 10.3x, ROE 53, Yield 6.7, Earn.
  Growth 25
• Auditor KPMG

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Checklist Bata Shoe - Bangladesh
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• Swissport, Tanzania
• ChinaTanzania Relationship
• Sidecar Investment
• 2009e PE 5.2x, ROE 53, Yield 15.3, Earn.
  Growth 15
• Auditor PWC

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BRD Groupe Societe Generale, Romania

• Leader in underpenetrated market loans/GDP 40
• Prudent banking during boom
• Profitability and market share gains
• 2009e PE 10.3x, ROE 18, Yield 2.4, Earn.
  growth 20
• Auditor Ernst and Young

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Botswana Stock Exchange
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Inefficiencies

• Few Chartered Financial Analysts
• Locals more Important than Foreign Investors
• Bangladesh 3 in 2008 versus 6 in 2007 per
  Equity Partners Limited
• Kenya 10 per Kestrel Capital
• Malawi 40 per Trust Securities
• Vietnam 40 per Ho Chi Minh Stock Exchange
• Uzbekistan 75 foreign per Eastkom Securities

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Inefficiencies - Local Behavior in Bangladesh

• Our retail investors are just trying to follow
  the others, keen to know what the so called
  gamblers are going to buy
• I heard this share's price will jump, because
  some gambler is going to buy it
• In our market, we have some stocks like Apex
  foods, Apex tannery, Apex footwear, Apex
  Spinning, Apex weaving etc. These companies are
  doing different kinds of business. Some are
  involved in textiles, some in foods and some in
  footwear.
• If there is a good news for say Apex footwear-
  that is involved in footwear business, all
  companies that name begin with Apex will start
  rising.
• They are acting as a group even though the
  business is different and the owners are
  different for some companies.

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One World or Two
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One World or Two
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One World or Two
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Volatility is lower than Emerging Markets
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Risk Volatility is low
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Correlations are low among frontier countries
The average correlation of 20 Frontier Markets
with Bangladesh is 0.29. The average correlation
of 20 Frontier Markets with Botswana is 0.35
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Correlation is low
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Liquidity

Firm Capacity estimate based on holding 10 days
volume
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Valuations Frontier Markets are Attractive
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Valuations Frontier Markets are Attractive
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Valuations Frontier Markets are Attractive
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Numbers
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Optimism Emerging and Frontier Market
Capitalization Benefits to being Early Mover

111 billion Frontier Markets
Emerging Markets
Represents free float market capitalization as
of June 1st 2009. Source MSCI, BGI.
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Source MSCI, BGI
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Optimism versus the Tyranny of the Media
Source Human Security Centre, UBC
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Optimism Fewer Conflicts
Source Human Security Centre, UBC
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(Frontier Countries in Blue)
Source The Heritage Foundation, 2008
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Optimism Pew Survey

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Optimism Pew Survey
Kenya
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Optimism Pew Survey

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Optimism Determination
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Optimism Determination
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Optimism Determination
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Optimism Determination
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Optimism Determination
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Optimism Determination
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Its about people
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Conclusion Reasons for optimism
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Our Investment Process Bottom-up Driven
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Risk Control Through Diversification

• 40-50 stocks in up to 30 countries
• Limit stocks to 10 and countries to 25
• Portfolio Characteristics (Weighted Averages)
• Price / Earnings Ratio 8.3x
• Price / Book Ratio 2.0x
• Return on Equity 26
• Estimated Growth Rate 24
• PEG Ratio P/E to Growth 0.35
• Average Dividend Yield 5.5
• At time of initial investment

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Risk Control Through Diversification

• 47 Stocks in 23 Countries

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Performance
Inception Date October 1, 2006. Net performance
is calculated for a typical investor, individual
returns may vary with contribution date and other
factors. Past performance is not indicative of
future returns. Performance is preliminary and
un-audited, and subject to change.
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Education Strathmore University, Nairobi
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People
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Review the fundamental basis of conviction in
secular domestic growth in frontier markets. What
are the risks identified and does this differ on
time horizon per region?

• Demographics The strong growth of frontier
  countries is underpinned by the young population.
  Except in Eastern Europe
• Technology The frontier countries have
  leapfrogged over generations of developed world
  technology (in wireless phones, for example).
  Submarine cable just arrived in Mombasa. Rising
  protectionism could hurt
• Labor Costs are low (50/mo in Dhaka versus 250
  in Shanghai), and education is improving (MBAs at
  Strathmore University in Nairobi) Rising
  protectionism could hurt. Economic softness has
  cut remittances
• Natural Resources Abundant in many frontier
  countries and largely unexplored in all of them.
  Prolonged recession will postpone demand
• Politics and policies are improving Peaceful
  transitions of power are becoming the norm, and
  advice from global institutions (World Bank
  IMF) is improving. Stress from the global
  financial crisis could cause regression
• Capital Inflows of FDI, portfolio investment and
  aid have been strong, especially from China.
  Recession has reduced flows, especially in E.
  Europe where foreign currency borrowing caused
  problems

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Convergence
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Coping With Challenges
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Coping With Challenges
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Relative Economics

Source World Bank and CIA World Factbook,
Frontier Markets include those countries
included in the MSCI Frontier Index, the SP
Frontier Index and the SP Extended Frontier 150
Index and excludes those countries also
classified as Emerging Markets. 1. GNI per Capita
is for 2007 except Bahrain (2005), Kuwait (2005),
Oman (2004), and UAE (2005). Qatar is excluded
from the GNI per Capita calculation. Population
is for 2007 GDP Growth Rate is for 2007 except
Bahrain (2005), Kuwait (2005), Oman (2005), Qatar
(2005) and UAE (2005) Population Growth Rates are
2008 estimates
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Emerging/Frontier Growth IMF July 2009Two
Worlds?
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One World or Two
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Risk Correlation is low
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Risk Commodity Correlation is low
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More Peacekeepers and Tribunals
Source Human Security Centre, UBC
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One World or Two

• Average 5 year historic and forecast GDP Growth

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SourceIMF and BGI
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Emerging Exports
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China Exports 40 GDP, but Net Exports only
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Emerging Market Exports
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Our Philosophy

• We are value investors in Frontier Stock Markets.
• In these markets, there are few foreign investors
  and simply getting annual reports can be
  challenging, but the rewards for careful and
  patient analysis can be great.
• We seek companies with good growth prospects
  offering quality products and services, solid
  management, and transparent accounting practices.
• We look for companies that Graham and Dodd would
  like for their value and Warren Buffet would like
  for their growth.

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Research Trip Bulgaria, Romania, Slovenia,
Croatia, Serbia (July 2009)
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Takeaways

• Short term pain BUT Long term --
• Improving demographics and politics
• Tax and employment policies
• Low labor cost
• Location as gateway to Old Europe

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Stock Opportunities

• Great Businesses
• Simple operations
• Growth potential
• Sidecars and monopolies
• Strong Management
• Experienced
• English speaking
• Trained abroad
• Good Information
• Annual Reports (Big 4 Audits)
• Investor Relations Websites