Being a member of the CAIA New York Chapter affords me access to their events. This week I went to a panel presentation called "Perspectives on Emerging and Frontier Market Opportunities in 2011". The three portfolio managers that spoke were Caglar Somek of the Caravel Fund International, Eric Fine of Van Eck G-175 Strategies and Xiao Song of Contrarian Emerging Markets Fund. The event was moderated by Michael Weinberg, CFA and Global Head of Equities at FRM Americas.
Caglar is your classic fundamental equity manager with a concentrated portfolio of 40 to 50 stocks in the emerging and frontier markets. Emerging markets is defined as the BRIC countries (Brazil, Russia, India and China), Emerging Europe, Turkey, Israel, East Asia and Latin America. Frontier markets would be Africa, with the exception of South Africa, the Middle East and parts of Asia such as Vietnam, Laos and Bangladesh. He seeks countries with a lower market capitalization to GDP ratio. In these markets, Caglar wants to have liquidity and equity investments have that characteristic. He also knows that the political risk is higher.
Eric runs a macro fund with a longer term investing horizon. Like Caglar, he wants the more liquid securities. Other factors that he looks at are the country's solvency and foreign exchange rates. The latter is the key to reading inflation. These fundamentals lead him to attractive securities. One interesting fact that he shared with the audience is a country's economy is stable if the Central Bank can raise interest rates during a recession. His main themes for the present are liquidity, emerging market foreign exchange and short the Euro.
Xiao runs emerging market and distressed debt funds. He searches for good assets that have a bad capital structure. These debt assets should be liquid with a limited downside. The upside has to be greater than investing in the distressed debt of US companies. Otherwise, why take the added risk of going into an emerging market. He is seeing more investors coming into the emerging markets and competing with him for investments.
There were two countries that the PM's were questioned about - Russia and China. Caglar stated that there was too much political risk in Russia for him to invest in any companies. Eric mentioned specifically the Mikhail Khodorkovsky case where he was found guilty of oil theft and money laundering. For more details about the trial, two articles can be found the Huffington Post and the Economist. His fund was staying away from Russia. If he had to invest, he would trade foreign exchange and invest in a government sponsored company such as Gazprom or Sberbank.
They had divergent views on China and the now famous bubble view by Jim Chanos. The article can be found here. Caglar and Xiao believe there are bubbles in the Chinese economy. Xiao thinks that there is a real estate bubble in cities like Shanghai and Beijing. The price of real estate is comparable to New York and Chicago. Who can afford those apartments? Only 1% of the population make enough money. Also, all mortgages are floating rate. Since the Central Bank has raised rates to tamp down inflation, the mortgage payments will increase - just like in the US. Eric is more sanguine about China's real estate. The house is a savings vehicle and not used for speculation. Real estate is bought with a sizable down payment. He has confidence in the policy makers of the Chinese government. Even if real estate is a bubble, the banks can be re-capitalized by a government that has $2 trillion in reserves. Caglar sees 10% real inflation in China and a bubble in hard assets. He would be short equity and bonds.
One of the panelists spoke about the Chinese Reverse Merger Fraud. A Chinese company takes over a US shell company. This allows the Chinese company to be traded on the NYSE or NASDAQ. Investors, believing that the company is subject to the SEC regulations, buy the stock based on false financial statements. The sources for this development can be accessed the Business Insider and China Briefing.
Thanks to CAIA for hosting a great panel.
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