An Introductory Post

I was honoured to be mentioned by Leo Kolivakis in PensionPulse this week; you know you must be doing something right when he gives you a mention.

His article on Emerging Market investment was well timed. There has been a lot of comment across various media this year about the end of GEMs and an impending crisis.  At the same time I have had several enquiries from Pension and Fund managers here in Canada about what they should be doing about finally getting involved in this area. Why the dichotomy? I'll try and keep this simple.

GEMs are like any other market, which is to say they are completely different from anything else. The factors at play are no different to those in Germany or Greece; some countries may go as bankrupt as Greece, some may roar like the German export machine, whilst others may splutter like France.

Hans Rosling’s GapMinder is an entertaining yet informative way of looking at the world. He slices and dices it so many different ways, and yet the message remains the same – Living standards are converging across the world. It is that simple; Convergence is what drives Emerging Markets investing. Everything else is just noise.

Watch the clip he did for CNN in 2010, and you see that even 3 years ago he was reminding everyone that a slowdown in China was inevitable. I say reminded, because every long-term projection about China, India, or any of the other countries I have seen includes growth slowing at some point. When I was running the largest Emerging Markets fund in Canada at the Caisse de Depot, even whilst negotiating a QFII quota with the Chinese authorities, we included expectations of a slowdown in our formal proposal. 

Bringing that back to day, the OECD recently reduced expectations for 2013 growth in the Emerging World whilst raising expectations for the Developed World. For many, this was the final proof that the Emerging story is over. And yet, even under these revised expectations, Emerging Growth still outstrips Developed by more than 2X!

Some people will argue that I am being too optimistic and point to specific countries and their specific problems. India, for example, is running large twin deficits in its Current Account and Government budget, a combination that is invariably toxic. Despite these twin threats, the Government seems intent on passing legislation that only makes the deficits worse at a time when capital is increasingly scarce.

All this, and more, is very true. What is equally true is that the inevitable moments of crisis are also the points at which meaningful reforms are passed; it is a truism of both the Emerging and Developed Worlds that the reforms that should be passed during economic good times only happen when backs are to the wall.

I would go farther and say Emerging Countries often have a better track record of implementing worthwhile reforms outside of a crisis, such as those recently proposed in Mexico.

Even when there are set backs, such as Brazil in 2002, they are increasingly followed in short order by substantive recovery. There are many reasons for this, but simply put it is the difference between “fast” money and “slow” money.

Fast money comes mainly from the securities markets; the retail investor piling into the latest mutual fund craze, the Hedge Fund Manager chasing an arbitrage opportunity, or a pension fund changing its asset allocation from 50% overweight Emerging Markets to 50% underweight. 

Slow money may be a Canadian Pension fund buying a toll road in Brazil, an Australian fund buying an interest in a port in China, or GE setting up a new plant in Indonesia. They are buying for the very long haul. To slow money, short-term economic weakness is an opportunity.

When I made my first investment trip to Latin America in 1992, there was no slow money investing in the region, and fast money was pretty rare; Argentine Taxis were 25 year old Ford Falcons, whilst in Mexico they were the old style VW Beetles, running leaded gas.

They don't build them like this anymore - Thank God!

Back then; we were talked about the establishment of domestic capital markets, and domestic slow money, like AFPs and Afores. Today we have those, and more.

Read here  about how Ontario Teachers Pension Plan got involved in Brazil from 2005 onwards. Having travelled to Brazil with OTPP and CPPIB, I have nothing but respect for them. They plan ahead in decades not months.

My Canadian confreres were not particularly interested in quarterly production numbers from Petrobras, or whether CBD’s margin was meeting targets. They wanted to know where they could buy the malls where CBD stores were located, or a slice of the port Petrobras was unloading at.

When I first invested in Latin America, CPP was a simple pay-as-you-go plan, and CPPIB didn’t exist as a fund. Today it is recognized as being one of the world’s most sophisticated investors. As Leo reported, Japan’s PAL only started investing in Emerging Markets this April. One of the many reform proposals before Norway’s $750BN pension fund is to increase Emerging Market Investment beyond 10%, but it will be a year or so before they even decide let alone start to implement that decision.

And we haven’t even mention SAFE, ADIA, or Temasek.

None of these funds were there during the Mexican devaluation, the Asia crisis, or the Argentine default, but they are there now, and they are there for the long haul.

Finally, it should be evident from the Global Financial Crisis and its aftermath that Global linkages today are much deeper and stronger than they were during the Asian crisis. The kind of crisis many have predicted for the Emerging World would toss the Developed World back into the pits of depression. Going back to the example of India, by most metrics their “dangerous” debt situation is no worse than many European countries, and better than France or the UK.

Any withdrawal of QE that would plunge the Emerging World into a crisis would send the Developed World there too, and that is the last thing the Fed wants.