How to Go Long Emerging Markets eBook

8/4/2019 How to Go Long Emerging Markets eBook

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HOW THE 3RD RICHEST PERSON IN THE WORLD TOOK

$300K AND TURNED IT INTO $40 BILLION

OR, How to go long in emerging markets

as a foreigner

T R A D E S T R E A M I N G . C O Mwhere investors learn from experts

t r a d e s t r e a m i n g . c o m : w h e r e i n v e s t o r s l e a r n f r o m e x p e r t s


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You cant be a big investor and ignore the rest of the

world

The global investing landscape has changed, creating a new center ofeconomic power.

This shift is distributing investing opportunities away from Wall Street and

the European markets

to multiple systems

around the world.

Its definitely an excit-

ing time for investors

as opportunities have

been harder to find in

home (Western) mar-

kets.

If youre a serious in-

vestor, you cant avoid the changing landscape. Theres so much happen-

ing in the rest of the world (ROW).

Its the type of environment that famed investor Ben Graham would drool

over. Hed 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.

T r a d e s t r e a m i n g . c o m! H o w t o G o L o n g E m e r g i n g M a r k e t s a s a F o r e i g n e r

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Were not in Kansas anymore

The thing is, investing in China, Brazil, India -- not to mention Qatar, Ma-

cau, or Saudi Arabia -- is hard.

Its different from our experiences searching for value in U.S. markets.

These are fundamentally different systems

Rule of law is NOT coming to China anytime soon.

In fact, Jeffrey Towson, head of investments (previous) for

the Worlds 4th richest man, Saudi Prince Waleed (the Ara-

bian Buffett), believes that the defining characteristic of investing in

emerging 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 were used to in

the West.

Key fact


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The KEY Question

So, the fundamental question for todays investor is:

How do

you invest for the long term in an environment

characterized by its 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 Global

Towson believes the troubles investing globally fall into 5 different classes

of problems:

1. limited access to investments

2. increased uncertainty in intrinsic value

3. increased long term uncertainty

4. limited minority investor shareholder rights

5. outsider disadvantages


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Towson, in his new book, What Would Ben Graham Do Now: Rethinking Value

Investing 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 done

Find the Value

The trick is not to buy a company in China, only to sell it in 6 months be-

cause youre nervous.

Wealth is built in emerging markets by purchasing companies and holding

them for 5 years.

Ah...its hard but doable.

Towson spent many years learning exactly how Waleed was able to buy a hotel

on Monday in Jedda and sell a manufacturing business on Friday in China.


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Did you know that

Prince Waleed (dubbed the

Arabian Buffett) built a

$22 billion fortune off just

$30,000?

Did you know Waleed em-

ploys only 2 or 3 staff peo-

ple to manage his global

investing activities?

Prince Waleed brings it

Waleeds Investments

more than 5% of Citigroup

more than 200 hotels (Movenpick,Fairmont, The Savoy)

EuroDisney

CanaryWharf

NewsCorp

Apple

eBay

Priceline

Bank of China

a Manhattan-sized real estate devel-opment (27 sq miles)

private Airbus 380

! ....insurance companies, petro,private equity funds, banks, etc.

?


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So, how does theworlds 4th richest man

make billions and

manage it with a 4-man

office?


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First steps

Tom Russo (of Semper Vic Partners) and others

like him have been investing globally for dec-ades.

The most natural way for investors to access

foreign markets with a value approach is to

mimic these investors activities.

Simply, these global investors identify multinationals doing business over-

seas and invest in the ones with exposure to the markets theyve 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 youre not buying a local Chinese company, youre buying

a German company.

That means we have the rule of law on our side and pretty shareholder-

friendly contract rights

This method allows us to capture economic value because it turns out that

Chinas government is not that concerned with Starbucks operating in their

country.

And this has been a solid strategy for 20 years.


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http://www.gurufocus.com/ListGuru.php?GuruName=Tom+Russohttp://www.gurufocus.com/ListGuru.php?GuruName=Tom+Russo


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2 Ways to Identify Value Multinationals

1) Outsource

1) go-anywhere funds: Invest in someone elses portfolio. While

many of us cant 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.

Heres a list of some of the macro mutuals investors like:

NAME TICKER YEAR FOUNDED ASSETS MANAGED

BlackRock Global Alloca-

tion Fund

MDLOX 1989 $53 Billion

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, founderof 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% overlapwith the MCSI Frontier Markets.


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http://www.jackassinvesting.com/http://www.jackassinvesting.com/http://www.jackassinvesting.com/http://www.jackassinvesting.com/http://www.jackassinvesting.com/


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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 FTs Global Graham Screener

2) OldSchoolValues many screeners

3) FinVizs all powerful screener

By investing in go-anywhere mutual funds or by picking stocks yourself,

youll be able (in part) to access some of the economic growth happening

all around us. Global rotation ETFs are on the way, as well.

Well see next the drawbacks to this basic strategy.


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But somethings smells amiss...

Towson argues that this strategy is conspicuously contorted -- can there be

a more convoluted way, less-direct way to invest in China by investing in aEuropean firm thats active

there??

Its like investing in Texas: I

love Texas, want to invest in it,

and do so by only looking for

Idaho firms operating there.

It makes no sense.

Investing in multinationals to

get emerging market exposure

avoids the fundamental question of how to go long in these markets.

This strategys 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 engage

with increasingly local businesses?


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So many choices

Over long term, how can you call yourself an investor and not buy Chinese

firms?

If China is the #2 economy in the world, you have to get comfortable with

investing there. No?

The beauty of the whole thing is like Warren Buffett says, you dont have to

swing at every pitch. In 2010, the U.S. is in recession, Shenzhen opens its

new stock exchange, catering to small cap and midcap companies.

In its first 6 months of operation, 100 companies went public. Thats not a

typo.

Dont need to swing at all of them.

A sea of companies are emerging in India, Brazil, Middle East. According

to Towson, almost all of them are mispriced.

Nobody talks about efficient markets in Saudi. Prices swing wildly, a veri-

table value investors dream. You just need a strategy and buy a basket of

these firms.


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13/22

So, how does Waleed begin his approach

Warren Buffett and Prince Waleed are both value investors.

They are both looking for a dollar selling for $.50 which will ultimately

grow to $1.50 in a couple of years.

Similarities end here, though.

Buffet = Americana

Buffett was shaped by the American economy, its developed status -- its

reflected in his strategy. He searches and hunts for value, for Coca Colas

trading at 70% of their intrinsic value.

Hes not worried about getting the opportunity to buy into a company -- he

just buys it. Nor is he worried about retaining his stake, or about other

shareholders or the government degrading his claim to his shares.

He just puts it in portfolio. And hey, American securities law helps here.

Waleeds Turn

Waleed, though, is not concerned about finding value -- the markets he

plays in are massively mispriced. Towson sees pure chaos in China. In

these markets, value investors dont need to look for footnotes on the in-

come statement to show a company is 10% undervalued.

In emerging markets, investors shouldnt be focused on finding value.

Theyre concerned about finding a way to get the company theyre inter-

ested in, in getting someone to sell them part of a closely-held firm.


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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 wont protect

them.

In emerging markets, the questions are:

I. how do I get the deal

II. how do i secure it?

Waleed looks for situations that offer an opportunity that he can step in as

deal 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 different

Lets say Buffett is interested in buying Coke at 70% off. He buys it, adds it

to his portfolio.

No problem.

Lets say Waleed wants to buy a hotel in Egypt, in Sharm al Sheik. On the

coast. So, Egypt...Its government from top to bottom, really political.

Real estate in these types of economies is commonly tightly held, often the

source of a familys wealth, their lifeline. Or, maybe its owned by a state-controlled conglomerate.

Its hard to get access and if you do, theyre only going to sell you a small

piece of the property (10%). So youre a minority shareholder of a private


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company in a no-rule-of-law economy -- otherwise known as sucker at the

table.

Waleed creates value, accessWhat Waleed would do in this scenario is approach the owner of the hotel

and tell him, I dont want 51% of the company. I understand that retaining

control is very important for you and your family. I want 20%. But when I

buy, Im bringing the Four Seasons with me.


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And the day we buy it, were going to turn it into a Four Seasons and your

balance sheet is going to get a big bump and at the same time, your income

statement will go up. Well add pure economic value the day we buy it.

Now Waleeds got a deal in Sharm al Sheik (which he did, though not 20%)

and hes secure in his claim (theyre not going to risk losing the 4 Seasons

franchise).

Using All Types of Capital (not just $$)

If Buffett is searching for mispriced value, Waleeds looking for ways to

add value to a partner to ensure he gets access.

Waleed has political access. Towson did deal with Waleed that exemplifys

how Waleed uses political access in his favor.

The Prince proposed building a 1 mile high skyscraper in Jedda. He went

to the King directly, said the city was crumbling and in poor shape. Lets

build this thing to

turn the city

around.

He added so much

value on the deal,

he got a royal de-

cree to build it.

Thats a political


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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. Its good atdeep sea drilling. Then I can go to Singapore firm and say, let us buy into you.

Well bring you the best technology capabilities -- that will bring so much value to

your company. You dont have to own these capabilities -- you can make a phone

call.

If you start with posture of adding value to partner/company, you can get

access to deals in 1000 ways:

I. reputational capital: bringing a good reputation is important when

partnering with global firms

II. 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 almostanywhere.

IV. technology: Different geographies have differing access to cutting-edge

tech. Dont 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, thats golden.


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If you think about posture and take a 30,000 foot view of emerging econo-

mies, its totally a logical posture to help firms move along the develop-

ment curve, rather than just looking to buy mispriced value

So, 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 -- theyre both acting like a next

generation investment banker. In fact, you can even apply this to business

development executives.

Determine which source of capital you can use to secure foreign deals and

get cracking.


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Prime destinations

So, 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? Its

overvalued -- whats the urgency to go there? Im more interested in Macau and

Qatar 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 its a lot like Israel, in that there is natural gas

all over the place. Not only does it have a booming economy but the coun-

try doesnt have that many skills, yet. Theres not a deep bench of man-

agement strength there yet. Towsons friend opened an office in Latin

America and China (called the company, Sino-Latin) and does resource

deals between the two geographies.

You want to hunt for areas where not so many people are looking...Towson

wont do Real Estate in Shanghai or Beijing anymore. He thinks its hyper-

competitive. Hes looking elsewhere.

Like in Macau. Its doing amazingly well. Another Towson friend is doing

early stage investments there and seems to be doing amazingly well.


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If youre flying into Bejing to buy China-- thats kind of a fad right now. In

fact, Towson publicly hopes China crashes. He lives there, so hes there/

hes invested, but is reall focused elsewhere.

Towson really likes Saudi Arabia. Everyone talks about Libya/Egypt with

all their political problems, but the net result of all the unrest in Middle

East has bolstered Saudi. Saudi has had its biggest economic boom in 6

years. GDP has gone up 6%.

It turns out when people get nervous about the Middle East, the price of oil

goes 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 market

doubled in 18 months. Boom times there now.

Where to research foreign opportunities

Towson doesnt find the standard value investing thinking all that helpful

when looking at emerging markets. Sure, he still reads all the standards

texts (like Greenblatt and Greenwald), but hes looking to local sources to

size 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 Saudi

Local Newsletters: For Towson, the days of reading the Wall Street Journal

to learn about China are over. This foreign approach is no longer enough


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to invest in China. Investors need to read in the local language. In China,

its almost all Chinese blogs these days.

The days of westerners flying into China with translators and money are

almost over. You almost cant do business in China today without speak-

ing Chinese. You can -- youll just be at a big disadvantage.

Its like trying to do business in the U.S. not speaking English. Its fairly

easy to learn Chinese -- it takes two years. There are plenty of tutors out

there to teach.

Reverse Chinese Merger Fiasco

Weve read a lot recently about Chinese reverse mergers, Chinese stocks

that now trade on U.S. exchanges. A few prominent researchers believe

many of these companies have severely cooked their books.

Look at this fiasco. A lot of this happens because these firms are listed in

the U.S. -- so, their accounting/auditing firms are all here. If they had beenon the ground in China doing typical scuttlebutt-type research, talking to

customers 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 werent little frauds, like embellishing their

revenues 20%. Its like they were claiming they had $150M in revenues and

they had $1M. The scale of the fraud is so big, theres something about the

investing process that has clearly broken down. If you were on the ground,


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you would have picked this up. You would see that the factories were

empty.

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 Middle

East. Previously, Towson served as Head of Direct Investments for Middle

East/North Africa for Prince Waleed. Waleed is the worlds 4th richest

person, the largest foreign investor in the U.S., the biggest shareholder of

Citigroup and the worlds second-largest media owner. You can find out

more about him at www.jeffreytowson.com


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How to Go Long Emerging Markets eBook