Tag Archives: FDI

Markets irrational longer than you remain solvent, exhibit #274

2013.12.Irrational markets

Source: Russell Investments

There’s an article out on Seeking Alpha yesterday, called “Manufacturing Growth and Capital are Moving from China to Mexico“, nominally about the Mexico-China relationship to the US, but also more broadly (in my interpretation) about how we react to and measure growth in developing economies.

The key thesis here has to do with the spillover effects of China’s decelerating growth and who will pick up the slack. This may not necessarily be an exact zero-sum game, but it is to a certain extent, at least as long as Americans are still gaming, eating, drinking, driving and whatever else they demand to do, and as long as China and Mexico remain the second and third biggest trading partners of the US.

That Mexico will pick up some of this slack is a foregone conclusion. But just how much it benefits is what remains to be seen, and at least among its boosters, is what drives all this excitement we’ve been seeing about Mexico ever since the current administration was elected. Specific to this article, which was written by an equity analyst out of California called Erik Gholtoghian, the currency deficit between Mexico and China is particularly telling:

“…the Mexican peso has weakened dramatically against the dollar since 1990, almost 80%, and the peso is down 2.44% against the dollar over the past year. In other words, the Chinese yuan has strengthened 34% against the dollar since the revaluation began in 2006, but over the same time, the peso has weakened 20% against the dollar. This means the yuan is 54% stronger against the peso just over the past seven years. The result will be greatly decreasing exports from China to Mexico and increased exports from Mexico to China.”

All fine and good, but there’s something missing here and after discussing this with some folks I know around Mexico City, it strikes me that this is partly about Mexico but also about how to approach investment prospects for many emerging and frontier market countries.

I’ll begin with a basic metaphor to illustrate what I’m thinking of here. When you jump up in the air, how can you remain airborne as long as you do? Gravity should theoretically pull you back to earth, and in fact it eventually does. But there is a brief moment when you can defy the theory of gravity, due to the relationship between your body’s mass, your muscle strength and the actual gravitational force of the earth.

In the case of Mexico, economic reality has been suspended in this theory-defying space for a few years now and it’s a matter of time before indicators on the ground (no pun intended) reflect a closing of this gap. Think of it as the reverse situation of the dotcom bubble or the real estate bubble. This is the basis for value investing (as opposed to speculative investing) and at a bird’s eye level is no different from the approach Warren Buffet uses in evaluating stocks. Company ABC has low costs, stable contracts with a diversified customer base, competitive quality products and whatever, they should be making X profits per year but they’re only making a fraction of that…therefore, buy.

Here’s another comparable situation: Billy Beane, he of Moneyball fame, used the same approach when he was managing the Oakland A’s baseball team in the early 2000s. He saw underpaid players who may not hit home runs and may even have crappy batting averages, but also never seem to strike out and wind up finding their way across home plate one way or another. He exploited this for as long as he could, until the rest of baseball caught on, copied it, and eliminated his advantage. By this metaphor, Mexico’s economy is slowly being recognized by the Billy Beanes of the investing world. The difference is that Billy Beane kept his mouth shut because he knew he was on to something. Meanwhile, these investing gurus can’t stop praising Mexico as the next big thing, partly because everyone else jumping on the bandwagon makes it a self-fulfilling prophecy (which is where the baseball comparison stops) and partly because the nature of today’s evolving media universe sort of demands everyone to stake his claim as an “expert” in something.

Another difference with the Mexico situation is that there are a lot more variables that could prevent the benefits of this growth from reaching ordinary Mexicans (corruption, red tape, narco, etc) and the persistent failure of commentators on Mexico to recognize the unpredictability and range of these other variables can appear very misleading. Sometimes this failure seems to be because the commentator in question is clueless/stupid/ignorant/etc. Sometimes it’s because they have a vested interest in a positive outcome and are therefore disinclined to (publicly) focus on downside risks (here’s one recent example of this).

There is also the perennial issue of timing, which is the great bugbear of economics and investing in general. Going back to the gravity metaphor, we can predict with decent accuracy how long you can stay airborne as a result of the very specific estimate of Earth’s gravitational force being 9.81 meters per second squared. One of the main reasons for this specificity is that Earth’s gravitational force is independent of human behavior. Mexico’s economy does not enjoy the same luxury for all of the previously mentioned reasons and more.

As John Keynes is supposed to have said, “Markets can remain irrational longer than you and I can remain solvent.”

Personally, I don’t believe anything – good or bad – until I see it.

Frontier Markets Opportunities and Risks, Bloomberg Edition

As part of last month’s Bloomberg Dealmakers Summit in London, the following roundtable took place, featuring Timur Issatayev of Verny Capital, Parag Saxena of New Silk Route LLC and Danladi Verheijen of Verod Capital Management. It’s 22 minutes and all worth it, but if you want the single most profound statement for my time, fast-forward to 15:10, when Parag Saxena has the following to say when asked about investment risks in South Asia:

“If you stay away from purely government-granted things you can probably do all right but sometimes that is where the opportunity is so it’s hard. To me the big surprise that I learned in India, having been in the investment business for 31 years and thinking that I have made already most of the mistakes that I was going to make in my investment life, the one that surprised me in India, and I know it’s true in Pakistan and Bangladesh too, is the lack of talent. So when I invest in the U.S., which I continue to do, I know that even for a pretty tough to fill job, in 120 days to 180 days I can fill almost any job. And so typically now at my age, I get resumes from my friends’ children. I used to get them from my friends at one point and now I get them from my friends’ children. And in the US I think it’s going to be hard to actually place them because there is so much talent available for a limited number of jobs. In India, I find myself grabbing every resume because I can hire baristas for somebody that wants a summer internship job, we have a restaurant company and cellular tower company and we need CEOs, so I can hire CEOs for those companies, and everything in between. So the biggest surprise to me, and the opportunity, is training for lower level jobs. And that’s a real unexpected risk, because time is the enemy of internal rate of return and if it’s going to take you more time to fill these slots and you can’t get stuff done, you have a real problem.”

Here’s the video in full:

How Oil Divides The Economies Of Africa Into Winners And Losers

I can’t get this article from the FT’s William Wallis out of my head. The headline is “Currencies pressed by trade imbalances” but this really only captures a small slice of the picture. Check it out:

With import demand outstripping export growth in some of the continent’s fastest expanding economies, rising trade imbalances are putting pressure on currencies. African and international investors hedge against this by spreading risk – one factor that is driving African banks and businesses across borders.

But even an expansive footprint is not always enough. MTN, the continent’s leading telecoms provider with a presence in 21 African countries, announced that currency swings had weighed heavily on its earnings.

More broadly says Razia Khan, head of Africa research at Standard Chartered Bank, widening current account deficits are the result of an investment and consumption boom, new resource exploration activity and “the scaling up of output”. Ghana fits into this category. It is also on the risk radar this year as heavy investment in oil and gas infrastructure continues, with only modest increases forecast for oil output.

A weak currency does not help those African countries with limited capacity to ramp up exports in response. Kenya cannot for example suddenly double tea production. So, it is forced to defend its currency to avert importing inflation.

Loose monetary policy in major developed economies has driven a rush of short-term funds into African markets. David Cowan, Africa economist at Citibank, says the way in which central banks defend their currencies and the margins that foreign investors earn will be one determining factor in how long the appetite endures.

I don’t disagree with any of this but would point out that this is all just the tip of the iceberg and there are a lot of ways to slice this.

One is that just six of Africa’s 53 countries account for two-thirds of the entirety of Africa’s $2.0 trillion economy. In descending order of nominal GDP: South Africa, Nigeria, Egypt, Algeria, Angola and Morocco. I think a pie chart best demonstrates this relationship:

2013.03.20.Africa 2013 GDP composition

Another is to think about how much of Africa’s total economy is driven by oil exports. Let’s try the following table to demonstrate this:

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InfoGraph of the Day: Chinese Companies and Risk in Africa

This is really impressive and makes me really rethink my previous notions of a political risk framework, particularly in the context of Africa. No more preface necessary:

2013.03.14.China risk in Africa

Sourced from Africa-Asia Confidential.

China Latin America Trade: Who’s Dependent On Whom?

Yes, I am obsessed with charts. And if you’re still reading this blog with any regularity, you are too. Especially if they’re about China Latin America trade.

I finally had a chance to dig through a BBVA report from last month entitled, “How dependent is Latin America’s Economy on China?” Following are the essential takeaways.

  • Commodities have always taken a significant share of Latin American exports; the level of commodity exports concentration had been declining until the start of this century, which coincides with the further involvement of China in global markets.
  • The shift of China’s economic model makes it the biggest contributor to world commodity demand and the top importer of Latin America’s natural resources.
  • There is a positive China effect on commodity exports concentration; the dependency on Chinese demand for sample commodities has indeed increased during the last decade.
  • However, Latin American countries’ economic growth is far less dependent on China than the commodity exports figures might imply.

Now with those overview bullets out of the way, the first chart that strikes me is shown a few different ways but all with the same conclusion. This is one of the versions, demonstrating the proportion of each country’s exports that are commodities:

2013.03.12.Latam-China commodity exports percent share total

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TRANSCRIPT: Nomad Capitalist Report Radio Show Interview

terraqueous-globeI was interviewed for the weekly Nomad Capitalist radio show over the weekend, hosted by Andrew Henderson. On the agenda: the Africa-China relationship, putting the hot-or-not test to Frontier Markets and the nuances of investing in Mexico. Here’s the link and here’s the mp3:


And here’s the transcript:

Andrew Henderson:   I want to start with a piece that you touched on recently, commodities, and emerging markets’ domination of reserves of commodities, explain that a little bit and let’s get into what exactly that can tell us.

Ulysses de la Torre:     Thanks for having me. If it’s the graph I think you’re talking about, it’s not a graph, it’s actually a map, which I pulled from Glencore, which, given Glencore’s footprint in this universe, shouldn’t be surprising that they should come up with something like this. And what it basically shows is a map of the world and how all of the key commodities are dominated in one form or another by underdeveloped markets. When I look at it, the first thing I see is that one of the big obstacles here is nothing more than logistics and infrastructure. And this is something that’s frequently lost on foreign investors trying to research this from afar because these are elements of an economy that you cannot fully understand without experiencing it. It’s one thing to be stuck in a traffic jam that takes you two hours to make a trip that normally takes one hour, but it’s entirely another thing for a truckload of raw materials to take three days to drive a couple hundred miles because of anything from bad roads, military checkpoints, bandits, local territorial disputes, on top of your basic traffic problems. This adds significantly to transport costs and who ultimately foots the bill for this added cost is often a point of dispute that can manifest in a lot of ways that North America and Europe haven’t really had to think about in decades, since before most of us were even alive.

AH:                             You talk a lot about Africa and I want to get into some of the specifics that are going on there. There’s a big media play that China is recolonizing Africa and so many of the resources plays, even the financial sector plays, let’s talk about Africa, because that’s one area to hone in on for these resources, it’s very resource rich, it’s fast growing, but it’s more than just China, let’s talk about who the players are in Africa and what’s going on there, give us the introductory sketch to Africa.

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Laos: Not the new Vietnam, Thailand, China or anything else

The Wall Street Journal is running an infograph (infographic? infographical?) that illustrates rather vividly the limits of investing in markets like Laos:

2013.01.29.Laos FDI

The most noteworthy point here is annual FDI to the country. Even with the “boom” in foreign money coming in, FDI still isn’t forecasted to reach even US$2 billion–in an economy whose total size is US$9 billion.

And yet, FDI is expanding something on the order of 40% a year.

If you start at the bottom, the only direction to go is up. And to give you an idea of just how low Laos’ starting point is, even Madagascar, even South Sudan, even Zimbabwe has a larger economy than Laos.

I’m obviously all for diversification and greater investment opportunities in underdeveloped markets. But it only works out if we keep our heads screwed on straight. Whenever the next broader market scare comes–and it will come–people will still need somewhere to go. Laos, as an answer to this question, will get filled up pretty fast.

I’m going to assume for the sake of argument that the phantom-froth-hype element of that $9 billion GDP figure cancels out the unreported informal economy element. So even with 100 more uncorrelated markets like Laos, it still wouldn’t come close to accommodating the sheer scale of capital that needs something besides US Treasuries during times of market duress.


Leopard Capital discusses Frontier Markets as a safe haven

This is a five minute segment, I can’t find a transcript of it anywhere, and since I have little faith in the permanence of this video’s availability, I thought I would take a few minutes to do a quick transcription. Leopard Capital’s Doug Clayton, whom we last heard from here, went on CNBC Asia last Thursday to discuss frontier markets. Much like CNN, CNBC’s level of sophistication I find to be nothing less than infantile within the US context, but fortunately its foreign bureaus seem to appreciate the importance of a quality conversation and this interview is no exception.

As for Clayton, he opens with the claim that frontier markets are “high growth, low risk”, which I personally find slightly misleading, but other than that minor point, he has some interesting things to say here:

Martin Soong: As China’s and India’s economies show signs of slowing, is it time to turn attention to other markets in Asia for opportunity? Doug Clayton is managing partner at Leopard Capital, he joins our guesthouse with Slim Feriani of Advanced Emerging Capital. Doug, good to see you, welcome back and we talked about a month or so ago, when you were up in Hong Kong. Have your views changed at all on frontier markets?
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Wasatch’s Laura Geritz likes Kenya, Nigeria, Sri Lanka

Maybe this is just my bias, but there’s something about the way Fox Business News discusses frontier markets funds and investing that makes me wonder why they even bother. But then, I suppose something is ultimately better than nothing. Anyway the real focus of this is Wasatch’s Laura Geritz out of Salt Lake City. Notice her counter to the awkwardly phrased BRIC question, as well as what draws Wasatch to frontier markets: low debt/GDP ratio and strong domestic consumer economies:

Original source link here.

Infograph: Updated investment profile for Myanmar

An updated profile of investors and foreign direct investment in Myanmar:

Sourced from here.

The most badass Brazil v Mexico economy chart you’ve ever seen

BBVA Research has just published the Mac Daddy of all Brazil-Mexico economic research charts. Go home, Poseurs:

I’m not sure what the general relationship is between length of time required to digest a graph versus usefulness of the graph, but at least in this case there’s a lot to think about. Here are some of the takeaways BBVA draws from this, not all of which I totally buy into:
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Latin America Political Risk: perception vs. reality

The Gold Report has an exclusive interview with Carlos Andres chief analyst and managing editor of the Frontier Research Report and the Global Resource Investor that goes into rather gritty detail on risk assessment in the mining sector. If this is your thing, I would recommend reading the entire interview, but following are the bits that grabbed me the most.

On Peru:

Carlos Andres: Now is one of those times where perceived risk is moving close to actual risk. It’s narrowed, even in some of my favorite jurisdictions, like Peru, which is a mining powerhouse and is No. 2 in the world in copper, No. 2 in silver and No. 6 in gold. Nevertheless, it’s experiencing some problems with local unrest to the point where it’s receiving international attention. It’s brought a cloud over Newmont Mining Corp.’s Minas Conga project, which has the green light from government but is moving very slowly in the face of local opposition.
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Renaissance Asset Managers’ Sven Richter likes Kenya, Nigeria, Zimbabwe

From ABN’s power lunch, July 27. Specifically, Richter likes Kenya for its banks, consumer goods and its status as a hub in the best integrated region in East Africa, Nigeria for its telecom potential and Zimbabwe for its progress with political sanctions from the EU. Also, direct investment in Africa makes more sense than proxy investment through companies headquartered in developed countries that claim activity in Africa. The full video is eight minutes and overall a pretty good summary of the general macro outlook in African markets. Original link here.

How political risk translates into Ghana’s foreign direct investment prospects

Renaissance Capital’s Yvonne Mhango breaks down possible paths for the future of Ghana’s political leadership and what each means for the country’s FDI prospects:

On the whole, the ruling NDC is considered to be a social democrat government that is more likely to retain subsidies (such as on fuel), refrain from privatisation and raise taxes, as it did earlier this year on the mining companies. There is a low risk of the legislation and tax regime for energy and mining being changed because the party more likely to do so, the NDC, has already done it; and the business-friendly NPP would be unlikely to do so. The NDC government has already increased the tax burden on mining companies by 10 percentage points to 35 per cent and imposed a 10 per cent windfall profit tax on all mining companies.
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Map of FDI in Africa

This is the sort of thing that we just have to accept we’ll never have a complete view on, but I like to keep track of the latest movements when they come up:

Additional retailers not shown above: Continue reading

Charts of the Day: China-Africa trade, EM debt default risk, ZH comment cycle

Some interesting graphics I happened to bump into over the past 24 hours:

1. Africa is exporting more volume to China, but as a percentage of the total, China’s take has remained constant for two years now. So you do that math. Other new players in town include Brazil, India, Turkey, South Korea. Check this out:

From the beyondbrics. Continue reading

The top 5 challenges to India’s economy

So says Indian Prime Minister Manmohan Singh:

  • Bring complete clarity on all tax matters. We want the world to know that India treats everyone fairly and reasonably and there will be no arbitrariness in tax matters.
  • Control the fiscal deficit through a series of measures which my officials are working on and on which we will build consensus in the government.
  • Revive the Mutual Fund and Insurance industries which have seen a downturn. Absence of investment avenues has pushed Indian savings into gold. We need to open new doors so that savings can be recycled into productive investments that create jobs and growth, not into gold.
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Olympics and World Cup effects on Brazil’s economy and FX

This is an impossible question to really ever answer definitively but I’ve been wanting to try for a while now. And it seems that Goldman Sachs has beaten me to the punch, at least partly—they’ve published a report detailing the relationship between hosting the Olympics and variety of economic performance indicators. After reading the report I appreciate how unrealistic it would have been to attempt something like this on my own and there’s a lot in there that makes for a good rainy day read. What I was most drawn to was the blurb on correlation between the Olympics and the local FX market as expressed through the host country’s real effective exchange rate.
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UNCTAD releases World FDI 2012 report

This report is always such a beast and while it’s impossible to zero in on one bigger-than-everything else newsworthy item, it’s always good for an overview on generally how global capital markets are engaging the world. Overall, global FDI is slowing down for 2012 but expected to pick up again in 2013, 2014. And FDI seems to be entering developing countries at a proportionally faster rate than in developed countries. Following are some of the highlights that drew my attention.

This graph gives a pretty good indicator of how relative FDI inflows have changed since the mid-1990s across the world:

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BRICs foreign direct investment in the Eurozone

Here’s a fun chart:

The basic takeaway? BRIC activity is not absent but their investment in the Eurozone is actually declining. Original link here.