Category: insights

One book that gave me plenty of food for thought was My Journey at the Nuclear Brink by William Perry, a former Secretary of Defence of the U.S. Perry started his career advising on the Cuban Missile Crisis, he was involved in crafting a defence strategy in the Carter Administration to offset the Soviets’ numeric superiority in conventional forces, and presided over the dismantling of more than 8,000 nuclear weapons in the Clinton Administration.His book gives a tremendous insight into the dangers of nuclear war and the impact it could have on mankind. More importantly Perry, as a key figure in decision making, shows us how easily mistakes can be made and how one human error could bring the world to nuclear destruction.I recently visited Nagasaki and Hiroshima in Japan. A terrible reminder of the incredible power of nuclear bombs. Today the scale of nuclear weapons has increased dramatically and so has the need to keep aware of the dangers of nuclear warfare.The other book I recently read was The Wizard of Lies by Diana B. Henriques about Bernie Madoff and the scandal that erupted around his funds that resulted in billions or dollars of losses to investors.This book provides an excellent lesson for investors because it shows how easy it is for fraudulent actors in the financial world to operate freely for a long period of time without being detected.It shows how even financial regulators like the U.S. Security and Exchange Commission could be hoodwinked despite being warned by some whistle-blowers regarding the illogicality of Madoff’s operations.Henriques’ book teaches us never to be afraid to ask questions regarding our investments. And to keep asking. It also underlines the importance of minority opinions which go against all supposedly reasonable sentiments but might turn out to be correct in the end.

In 2016, China and India had 4.7m and 2.6m STEM (Science, Technology, Engineering and Mathematics) graduates. The United States and Japan had 568,000 and 195,000 respectively

From 2000 to 2017, the number of internet users in Africa has increased from 4.5 million to 453.3 million – an increase of 9,973%, or an increase of 31.2% a year for 17 years

Distance between London to Edinburgh: 534 km. Fastest route by train: 4 hours 14 minutes. Distance between Shanghai and Beijing: 1,318km. Fastest route by high speed rail: 4 hours 18 minutes

When I first started investing in emerging markets (“EM”) in the 1990s, the landscape looked very different.Back then, emerging markets had unsustainable levels of debt, unpredictable politics, inexperienced central bankers and were heavily reliant on the developed world. Companies focused on low-cost manufacturing and had very basic corporate governance, lagging far behind those in developed nations.Today, the landscape has changed entirely. Populations and living standards have ballooned, creating enormous middle classes with growing consumption levels. Governance has improved significantly, with shareholder engagement and activism not just supported but actively encouraged by companies and governments alike. Most crucially, emerging markets now offer a dramatically more attractive set of companies. These businesses and management teams no longer follow – they lead.Now is the time to revisit emerging marketsMany market participants have been holding off investing amid the recent volatility, particularly in view of falling emerging market currencies. While it can be argued that weakened currencies make it more difficult for EM firms to keep up with hard currency interest payments, we should also acknowledge that this offers more attractive prices for overseas investors.Valuations remain far too low across the board in my view with EM forward P/E multiples at just 11.4x – lower than in 2009 and 2007, and far lower than the >15x multiples we saw in the 90s. There is a real opportunity for investors to identify firms that are unfairly dragged down by concerns that are no longer relevant today.For example, both private and public debt levels in most emerging markets are far lower than the levels we saw in past debt-driven crises. This mitigates concerns about the rising cost of hard currency interest payments. Even in the case of companies with high levels of debt, active investors can carefully run through individual company balance sheets and talk to management to identify firms that are able to protect themselves.Second, although we are finally seeing an uptick in EM inflation after nearly 20 years of decline, this will not lead to the wild levels we saw in previous decades. Inflation will be kept in check by factors such as more prudent and proactive monetary policies. Furthermore, economies of scale, both from technological innovation and from population growth, enable producers to cope better with fluctuations in demand.Third, there has been a notable shift from traditionally export-driven industries such as textiles, towards sectors such as technology that tap much more strongly into the home market. When I go to trade shows today it is the EM companies that have started to dominate in areas such as robotics and high value component manufacturing. Cutting-edge innovation is particularly coming from Asia, rather than from developed markets. This has resulted in increased profitability as well as higher R&D levels among EM players.These developments combined with the enormous increase in population and internal demand, make EM companies today far less dependent on international trade. Intra-EM and especially intra-Asian trade is a common characteristic for a number of sectors such as technology, fashion, shipping and media.In China, technology ‘unicorns’ are being born with increasing frequency, without ever leaving the domestic market. In Indonesia, entire sectors (such as banking) remain undeveloped, offering numerous multi-billion-dollar markets to tap into for South East Asian companies that can combine cultural and domain expertise.These sorts of domestic and regional growth opportunities, regardless of what happens in developed markets, offer resilience at a time when many are concerned about fallout from the ongoing trade war.Fourth, and a point of interest from an asset allocation perspective, is that EM flows are no longer solely driven by broad-sweeping sentiment, but rather by specific themes, sectors, and specific exposure to macro events. We see investors evaluating each country individually on its potential to learn from previous lessons in their approach to policy and governance.Take Mexican equities, for example.With Carlos Urzua’s appointment as finance minister, equity markets greeted his intentions to slash excessive salaries and corruption enthusiastically. The S&P/BMV IPC Index has seen a 10% gain through June and July, despite emerging markets having fallen overall (the MSCI EM Index fell about 6%).Even the recent sharp currency swings have varied from country to country. South East Asian currencies such as the Singapore and Taiwanese dollar have held steady, compared to sharp declines for the Argentine Peso and Brazilian Real.Finally, and perhaps most importantly for Mobius Capital Partners, we are entering a period of improvement in ESG (environmental, social, and governance) standards. The appetite of emerging market companies for investment puts them under pressure to respect governance principles.From poor capital allocation and misaligned incentives to unsustainable supply chains, there is enormous potential to drive positive change across the board. As governments introduce progressive policy changes, companies are starting to listen. This is the time for investors to be as active as possible.It is our firm belief that these four trends present a unique opportunity for a concentrated and diligent approach, focusing deeply on the specific drivers and nuances of each individual company and country. Emerging market economics and companies are extremely well-positioned to generate significant and sustainable real earnings – if they make the right decisions.Now is the time to revisit emerging markets.Some further interesting facts about emerging and frontier markets:

In the last 9 years, the number of universities from emerging markets ranked in the top 100 has more than doubled, from 6 to 15

Since the fall of the Berlin Wall towards the end of 1989, the number of African countries that hold multi-party elections has increased by 2.6 times – from 19 before, to around 50 today

In 2017, it is estimated that the median age in the Philippines is 23.5. In Bangladesh it is 26.7, in Nigeria 18.5

According to Transparency International, 75 out of the 100 of emerging market multinational companies it assessed in 2016 scored less than 5 out of 10 in terms of transparency

In China, for 2017, the use of natural gas grew four times faster than oil, +15% to +3.9%

Sources: QS World University Rankings, CIA World Factbook, World Economic Forum, Internet World Stats, Transparency International, BP Statistical Energy Review, Travel China Guide

According to Sir Karl Popper, the central question in democracy is not “who should rule?”, but “how can we organize political institutions to ensure that bad, or incompetent rulers can be prevented from doing too much damage?”This distinction between the position of the ruler and the system of ruling, or “governance”, is as important for investors as it is for democracies. In both cases, the system of governance offers some protection to constituents that their interests will not be compromised by dishonest, incompetent, or self-serving leaders.Agency costs – the costs of hiring others to run your business – can cover a multitude of sins. This ranges from incompetence, negligence, recklessness, conflicts of interests, a lack of transparency, to unfair and unequal treatment of shareholders, insufficient separation of the powers of the executive committee and the board and insufficiently diverse boards.The pervasiveness of the misuse and abuse of power in business in both developed as well as emerging markets is exemplified by scandals such as Enron, Parmalat, Elf, Madoff, Volkswagen and Kobe Steel in the former and Petrobras, Asia Pulp and Paper, Polly Peck in the latter.At Mobius Capital Partners, we believe that strong governance is key when it comes to managing risk. Good governance standards could have prevented many if not all of those scandals mentioned. Without robust governance, and the good management that it fosters, environmentally and socially responsible policies are unlikely to be adopted and implemented.By “good” governance, we mean a particular set of corporate principles which we regard as universal in that they are logical and are common sense. Good corporate governance touches all interested parties: shareholders, staff, customers and the society as a whole. For shareholders in particular it is:

1. Fair, in that all shareholders are treated equally

2. Open, in that all relevant information is disclosed to all shareholders at the same time

3. Aligned, in that the interests of the company’s management are the same as those of shareholders

4. Rules based.

Increasingly the need for emerging market companies and countries to attract investment is putting them under pressure to respect good governance principles. If they do not, they’ll be denied access to the mobile pool of global capital.While passive investors have surrendered their power to influence poor corporate governance active investors can have a major impact on a company. They gather knowledge, work with management on reform, and help to ensure compliance with appropriate standards.As active investors, we see Governance as the primus inter pares (first among equals) in the world of Environmental Social and Governance factors. Active investors, however small must exert their power, as owners, basing their activity on the rules and regulations governing corporate behavior.There are some recurring themes in our efforts to bring about governance reform. We see the composition of boards as important evidence of the seriousness with which companies take their responsibilities to minority shareholders. Such factors as dividend policies, reporting transparency, executive remuneration linked to performance are some of the variables of fundamental interest.There are many examples that demonstrate the value of shareholder engagement and advocacy at a time when the general trend is towards passive investment. Actively engaging with companies on governance issues should benefit the company and its employees as much as it will benefit the investors.

“A brave world, Sir, full of religion, knavery, and change: we shall shortly see better days.” Aphra Behn ‘The Roundheads’ act 1, sc. 1In a homogenised world, asset class definitions are seemingly less relevant. Tencent is more an equal to Facebook and Google than heir; per capita GDP is higher in Korea than Spain1; and developed and emerging market demographics have begun to look increasingly similar (the birth rate in Switzerland is higher than Thailand2). Development curves have plateaued. Investors looking for unchartered territories need to look further: to frontier markets.MSCI first put together an index of frontier markets in 2007. Comprising of twenty-six markets across Asia, Eastern Europe, Africa, Latin America and the Middle East (which accounts for approximately 60% of the universe), these countries generally have little in common: more a set of individual opportunities experiencing either positive or negative economic cycles. Wealthy Middle Eastern countries suffering from an oil shock, restructured Latin American countries aspiring to former glories and burgeoning African states. In some ways they offer what Emerging Markets did in the 1980s: 21 of the 25 fastest growing countries are frontier markets3. Whilst this does not necessarily translate directly to stock market returns, it creates an environment for sustained earnings and cash flow growth. These are key tenets of Mobius Capital Partners’ investment philosophy and these markets have already thrown up a host of exciting stock specific opportunities.Frontier markets also offer immensely positive demographics. This ‘card’ is frequently played but at Mobius, we believe there are two central benefits of a growing population. One is direct: a large, productive workforce. More workers mean more income, more taxes and more consumption by their families. The other is indirect (and perhaps more powerful): more income means more saving. More saving means more investing and – in theory, although not always in practice – more stable, self-funding capital markets. This stable base of domestic capital creates a fertile ground for credit creation, lowers the cost of capital and encourages domestic investment. Chile is a fantastic example of the benefits a concerted government effort to support the pension system can have on the local capital market. Frontier markets would be wise to follow.There are some severe drawbacks to rapidly changing demographics. Large populations and low productivity can burden governments, driving fiscal and monetary policy mistakes. Large numbers of low or unskilled citizens out of work is a social or economic problem that can rapidly become a political one.Indeed, like their emerging market forebears, frontiers face a host of challenges – both economic and political. Central bank policies are frequently interfered with, exchange rates volatile and many of these nations face the poisoned chalice of natural resource wealth, a frequent excuse to under-invest in other sectors or avoid difficult supply-side reforms. An obvious example is Nigeria, which has felt the full force of an exogenous shock (lower oil price) against an ill-prepared and poorly diversified economy. Nigeria’s currency collapse and capital controls have been a feature of the space, but this is slowly being addressed. Saudi Arabia suffered similarly but their efforts to reform are encouraging, if nascent. Democracies – if and where they exist in frontier markets – are often young. In Africa, for example, the rapid democratization process (“second liberation”) began only in the first half of the 1990s: after the 1950s and 1960s heralded freedom from European colonisers, escaping the clutches of despots came later to many African countries.There are some powerful differences between now and the 1980s, which strongly support the case for frontier markets. Most obvious are the shifts in technology. High-speed communications and the widespread availability of cheap hard- and software means every teenager who can save $30 is walking around with a computer in his pocket multiples times more powerful than those in at the Federal Reserve in 19804.Added to this are cloud computing and devolved processing power. The opportunities are huge for citizens in frontier markets to learn, do business and innovate. Indeed, the technology businesses we have seen from Argentina to Kenya are exciting prospects both commercially and socially. Standing on the shoulders of (FAN)Giants5 in 2018 is no bad place to be for the entrepreneurially minded citizens of frontier nations. The feedback loops are immensely powerful too: lower capital intensity and higher GDP contribution from services. For a frontier government, creating an environment-friendly to technology investment enjoys potentially high returns. So the eclectic mix of the frontier market presents the risks and opportunities of their emerging forebears, but with an entrepreneurial technology angle which can create idiosyncratic opportunities. Our job is to identify them.References $29.7k in Korea vs. $28.1k in Spain, World Bank 2017 1.54 births/woman in Switzerland vs. 1.48 births/woman in Thailand, World Bank 2016 IMF World Economic Outlook (April 2018) Real GDP Growth IBM PC in 1981 had an Intel 8088 processor at 4.77MHz. A 2010 dual-core third generation Snapdragon chip from Qualcomm has 1.2GHz – more than 250 times as powerful. Facebook, Amazon, Netflix and Google.

Throughout their careers Mark Mobius, Carlos Hardenberg and Greg Konieczny have managed some of the largest emerging markets fund in the world. In this video the founders of Mobius Capital Partners talk about their newest venture, the Mobius Investment Trust.The trust focuses on a very concentrated portfolio of 20 to 30 companies in emerging and frontier markets. It follows a specialized, single strategy built around partnering and working closely together with companies to improve corporate governance. With currencies down and companies tending to be undervalued the time seems right for this innovative and focused approach to investing in emerging and frontier markets.

Mark Mobius: Please tell me about your career to date.Usman Ali: It’s been fun. After graduating from university, rather than following my peers into investment banking, accounting or management consultancy, I wanted to focus on something that tied together my studies, interests, and personal philosophy: ESG investing.I joined Royal London Asset Management’s (RLAM) sustainable investment team and have been focused on the space ever since. I moved from RLAM to New York’s Caravel Management (now Greentech Capital Advisors), where I built a sustainable investment framework for one of the world’s first ESG integrated emerging and frontier market equity funds. Most recently, I’ve acted as a consultant for firms looking to expand their ESG capabilities, including a single-family office in London, East Capital in Stockholm, and Degroof Petercam Asset Management in Brussels.It’s been incredibly valuable to sit on both sides of the table: as a client at a sophisticated family office, and on the direct equity investing side itself. Above all, I’ve loved witnessing the seismic shift within the industry as investors start to take ESG seriously and understand its material impact on valuations. Clients, funds, governments, countries, and individuals are all increasingly interested in ESG, and it’s been great to work alongside them to be a part of that change.Mark Mobius: What attracted you to Mobius Capital Partners?Usman Ali: There are a lot of reasons! Firstly, I am a strong believer in independent partnerships. As a small, highly entrepreneurial firm, our ownership structure frees us from institutional bureaucracy. We can focus solely on investment performance. Furthermore, the reputation of the founding partners is unrivalled within emerging and frontier markets investing. It is an enormous privilege to work alongside and learn from such a seasoned team, who bring with them decades of field experience.However, what makes Mobius Capital Partners truly unique is the hands-on approach, rigorous due diligence and engagement processes, evidenced in our highly concentrated portfolio. In addition to us partnering with companies, there is a tremendous opportunity to engage with regulators and capital markets authorities to improve ESG standards in emerging and frontier markets, contributing to a real and lasting difference.I’m very excited about our boots-on-the-ground approach and meeting companies throughout the world!Mark Mobius: What is your interest in emerging and frontier markets?Usman Ali: The scope for development in emerging markets presents an unprecedented opportunity for ‘leapfrogging’ developed markets. The lack of legacy infrastructure and sunk costs, combined with a wealth of technological innovation and labour, allows entire industries to not just catch up but improve on how we have done things in developed markets. Whether that’s in the context of tangible development (high-speed internet, public transport) or intangibles (corporate culture, governance, etc.), it’s such an exciting time to be investing in emerging and frontier markets. I also find that EM investing is always much more closely tied to macroeconomic and political affairs, which really broadens the scope and keeps things fresh and interesting.I’m particularly looking forward to heading back to my family roots and generating investment ideas in Pakistan. I’ve been following the country’s development very closely, including its upgrade from a frontier market to an emerging market, and so it’ll be really fulfilling to be able to play a part in the country’s continuing development.Mark Mobius: Where do you see the greatest opportunities when engaging with emerging and frontier market companies on ESG issues? Usman Ali: Where do I start? There are so many opportunities for emerging and frontier market companies to flourish by tackling everything from governance standards to social sustainability. Improving capital allocation, aligning incentives of management and shareholders, or adjusting board composition – these are just a few examples of areas where many companies fall short of the standards expected in developed markets.On the social side, there is a real opportunity to improve the quality of supply chains and products themselves. It is important companies are on the right side of forward-thinking regulation. Above all, however, disclosure is what needs to improve the most – transparency is critical!Mark Mobius: What are your thoughts on the new government in Pakistan?Usman Ali: I think the local population, as well as Pakistanis living abroad, are excited to see Imran Khan, a childhood hero for many, take up the highest office. However, the immediate challenges require speedy solutions. Negotiating with the IMF will be key. For many years, companies in Pakistan have been able to thrive without the support of the government. With the right policies, this could be a game changer. With a forward PE of 8x and earnings growth of 16%, Pakistan’s equity market continues to be very attractive. Mark Mobius: In another life, what would be your dream job? Usman Ali: The diplomatic service. I suppose there are many similarities to what we are doing. The core tenet of our active ownership approach is commercial diplomacy. It’s tremendously rewarding to develop awareness and sensitivity to different cultures, learn how to persuade key stakeholders, partner with a range of companies, and to have the opportunity to gain real international experience. Otherwise… maybe a food critic – I’m a fan of Giles Coren!

If you stopped someone in the street and asked “What does it mean to be a shareholder” what do you think they would say? Would their response change if you asked: “What does it mean to be a shareowner”? Do many people differentiate between the two?To my mind, there has always been a fundamental difference. They sound similar but in reality are like night and day. A shareowner invests in a company and acts as a co-owner. A shareholder passively holds the asset without getting involved. Being an active owner of a company requires you to effectively engage with management and stakeholders on a range of strategic issues. It can add significant value to a business if you can provide assistance in addressing risks, reducing inefficiencies and improving operational and ESG (environmental, social and governance) standards. In many circumstances, this type of engagement and support can eventually lead to a higher valuation of the business. A recent study shows that companies implementing changes to environmental, social or governance standards following engagement from investors, generated more than 7% of excess returns after 18 months.When I started my career as an emerging and frontier markets investor in the late 90s (at that time frontier markets did not even exist as an asset class) it was much more difficult and even uncommon to behave as a real shareowner. Exercising voting rights was perceived as the highest possible level of corporate engagement. Attempting to partner with portfolio companies on strategic business issues was simply not done. For many investors, meeting with a listed company was seen as an exception rather than a rule.Thankfully today the situation looks different. Institutional investors exercise their rights in most (if not all) of their portfolio companies. As a result, parties with controlling stakes are increasingly aware that all meaningful decisions (taken at or outside of a shareholder meeting) will be scrutinized, assessed and voted on by minority shareholders. This has changed the dynamic between majority/minority investors and has led to a significant improvement in corporate governance standards. This can only be a positive development for all investors, but particularly shareowners.Unfortunately, some investors have not capitalised on the opportunity to have more involvement and as a result, continue to keep companies at arm’s length. It is common practice for many investors to vote blindly in accordance with recommendations from a small group of influential proxy advisors. Therefore, the votes of a significant proportion of investors are decided by the views of a few analysts. This can be ineffective as specialists often apply the same principles across all markets without factoring in local market standard practices, regulations, differing level of capital market development and local cultures. One size does not fit all. In other instances, institutional investors are engaged but still allow the proxy to exercise their votes i.e. in their absence delegate their voting power to a representative. While this form of shareholding is often easy, as it saves time and money, it also significantly reduces the pressure and scrutiny on executives and boards during meetings. There is no better way to mark yourself out as a true shareowner than to take up your right to look executives straight in the eye and ask them the difficult questions.Opportunity for constructive engagement in EM and FM

Last week I blogged about my fascinating trip to Istanbul during the Turkish Presidential election.The people of Malaysia also recently went to the polls and produced an electoral earthquake. For the first time since the country won its independence from Britain in 1957, the ruling coalition Barisan Nasional (BN) was defeated.At the age of 92, Tun Dr. Mahathir Mohamad returned to office as head of a new party and as the world oldest Prime Minister (he had previously served from 1981 to 2003). Following his swearing in, Mahathir called for an inquiry into the massive trillion dollar corruption scandal which engulfed the previous government and led to the arrest of former Prime Minister Najib Razak on corruption charges.After returning from Istanbul, I decided to get an insight into the local mood by visiting the city of Malacca about 90 miles south east of Malaysia’s capital Kuala Lumpur.Normally when I travel to Malaysia from Singapore I would either drive to Johor or fly to Kuala Lumpur. This time I decided to take the bus to Malacca which I was told would take about three hours. It actually turned out to be much longer due to the heavy traffic and immigration procedures on both sides of the border.I found my visit to Malacca revealing, in light of the tremendous changes compared to my first trip to the city 30 years ago. At that time you could not even call it a city. Rather it was a small, sleepy town that seemed untouched by the wider world. Although the old town is still in existence and as quaint as ever, there has been an incredible expansion of the city limits as a result of land reclamation. There have even been a number of high-rises sprouting up. This pattern is similar to what I have witnessed in other Asian cities. There is a growing trend for the construction of mixed-use developments with apartment buildings, hotels, and shopping centres in one big complex. I stayed at the Doubletree Hilton, which was part of such a complex built on reclaimed land overlooking the Straits of Malacca. It is a beautiful hotel and I was surprised to find that the room rate was only the equivalent of US$90 including breakfast.Talking to people about the election I sensed some concerns around vote-rigging by the powerful ruling coalition. As a result many citizens kept an eye on the polling stations and used Facebook and Twitter to inform others of any possible tampering. Whenever news spread about potential wrong doing, crowds of people gathered around the polling stations to ensure no corruption was taking place. In some cases, the crowd stopped policemen from bringing in boxes of false ballots. Malacca’s district had been supportive of the opposition for quite some time so it was not surprising that the ruling party was defeated here.Besides being tempted by the very low prices in Malacca’s shops, which were half the price of Singapore, I decided to visit some of the tourist attractions. First I took a river cruise on the Malacca River through the old town. The city government has beautifully restored the river, which was once heavily polluted. They have lined the banks with walkways, elaborately decorated bridges and painted murals on the walls of houses. Close to my disembarking point lay the Malacca Maritime Museum, a full-size reproduction of the Portuguese ship Flor de la Mar (Flower of the Sea), which under the leadership of Afonso de Albuquerque supported the conquest of Malacca by the Portuguese in 1511.At the time of the Portuguese conquest, Malacca was a very rich city due to the spice trade traversing the straits between the Malaysian Peninsula and Indonesia. It was thus a key centre for commerce between Malay, Gujarati, Chinese, Japanese, Javanese, Bengali, Persian, Arabic traders. To this day the city maintains influences from those different cultures. Malacca was ruled by a Malay Sultanate until 1511 when the Portuguese took control, followed by the Dutch in 1753, and the British in 1824. In 1942 it came under Japanese occupation. Finally it became part of the independent Federation of Malaya in 1948. As a result of its history, the city centre was listed as a UNESCO World Heritage Site in 2008.Walking around the town I came across a major property developer’s exhibition. The Singaporean firm had been heavily investing in apartments, hotels and shopping centres in Malacca. They have built apartments designed to cater to medical tourists. The accommodation had been dubbed “a holistic haven that fuses physical, mental and spiritual elements”. Traveling around the city I had noticed a high number of hospitals and learned that medical tourism is an important industry. Apparently a large number of Indonesian people from Sumatra come to Malacca for treatment. The latest count indicated that over a half million tourists came to the city for medical purposes.I also noticed a brochure advertising the number of residential buildings that are specifically designed to cater for the 152% growth in Airbnb guests since 2016 and the expected surge of 28 million tourists in 2018. Another project was selling 1,350 square feet luxury apartments for M$1,809,000 or about USD$452,250.After a long bus journey back to Singapore, I dreamed of the proposed high speed rail that would connect Singapore and Malaysia. This would allow passengers to travel to Malacca in an hour and then up to Kuala Lumpur and Penang (another interesting and beautiful spot). The proposed 350km (220 mile) line would have an operating speed of 320 km/h (200 mph). This high speed train was announced in 2013 by the now ousted Malaysian Prime Minister Najib Razak together with Singapore’s prime minister, Lee Hsien Loong. Completion was scheduled for 2020.The new Prime Minister, Mahathir Mohamad, first threatened to scrap the project but later said that it would only be postponed due to the high cost. Japanese, South Korean, Chinese and French firms have expressed interest in participating in the project. It is important to note that the excellent but now crowded four lane North-South Highway from Johor to Kuala Lumpur was built at the time when Mahatier was previously Prime Minister of Malaysia. It now extends 772 km (480 mi) from the southern tip of Malaysia to the Thai border in the north. The project was launched in 1991 and completed in 1994 becoming the main backbone route for Peninsular Malaysia.During my bus trip to Malacca I noticed that the highway was busy with cars racing down the expressway in almost a continuous line. At the immigration and customs points on both sides of the strait separating Malaysia and Singapore, the cars and buses were lined up bumper to bumper. Clearly there is a demand for more and more transport infrastructure not only in Malaysia but throughout Southeast Asia.

Day 1

I was recently invited to speak at a conference in Istanbul and my visit came at a rather opportune time, with the result of the Turkish election imminent. The key talking point was whether or not a runoff election would be necessary if the leading candidate and incumbent Erdogan did not achieve over 50% of the vote (he received 52% and a runoff was not required).Whenever I am on the ground to observe elections, rather than analysing the result I prefer to focus on the actual mood in the country. On landing at Istanbul airport my initial takeaway was the large crowds. This was the second time in a month that I had been to this airport and on both occasions it was notable that there were not enough bridges to connect all the arriving flights to the terminal building. Once I eventually got to immigration there were long queues. Clearly a significant number of the local population are keen to travel.My second takeaway was that Istanbul needs a new airport! However luckily one is due to open later this year to mark 95th anniversary of the Turkish Republic. Istanbul’s new airport is expected to handle 200 million passengers a year in addition to air cargo.

In the last 15 years trade between African nations and Turkey has increased over 600%.

Turkish Airlines has been expanding rapidly in recent years with routes travelling to all parts of the world. In addition to over 40 destinations within Turkey it now has scheduled services to 302 destinations in Europe, Asia, Africa, and the Americas. This makes it the world’s largest carrier by number of destinations. The airline has also started to fly new routes, particularly as Turkey turns to Africa for business. In the last 15 years trade between African nations and Turkey has increased over 600%.I should declare that I have previously been an investor in Turkish Airlines. I recall recommending that the business consider hiring more independent directors on its board. The President at that time was quite amenable when we mentioned it to him. However, since the airline was controlled by the Ministry of Transport, he suggested that we fly to Ankara and ask the minister directly. While in some instances government involvement can act as a roadblock, we were surprised by the minister’s response “instead of hiring one independent director, why not two?”This reflects an increasing trend in emerging and frontier markets as large corporations become willing to engage with investors to improve their corporate governance.

Day 2

The conference I spoke at was sponsored by Sabancı University and focused on global investment. Once again, I was surprised by the tremendous interest and large numbers of attendees. The sessions were packed full of businessmen and woman, with the organisers turning people away! One of the most interesting sessions was a panel by blockchain experts. The moderator asked the audience if they were investing in cyber currencies and I was interested to see hands shoot up from about 20% of those present.

Day 3

Over the weekend I took a boat tour on the Bosporus to look at the historic homes that hug the shoreline. It is one of the most busy and crowded waterways in the world. In 2017 the narrow channel accommodated over 53,000 ships. By comparison the Suez and Panama Canals each year accommodate 31,000 combined.The Turkish government has now announced a plan to build a new canal, which would bypass the Bosporus and provide a safer and faster route. This would reduce the congestion and risk of accidents. The new canal will be 45 kilometers in length and the land alongside will be used for building upscale apartments and commercial properties. It will also be linked to the new airport.Commentators might say these are trying times for the Turkish economy. The lira is tumbling against the dollar and inflation at 15% is a 14-year high. However, on my recent travels I saw little sign of a recession. Istanbul was bustling with both tourists and locals. The government is planning some major infrastructure projects such as the canal, the airport and the construction of homes. If anything I expect this to further accelerate economic activity and feel Turkey is a market to watch in the coming years.

Investors are always concerned about risk particularly in times of market uncertainty or volatility. The “Value at Risk” (VaR) calculations that banks and other institutions developed in order to determine how much could be lost in the bank’s trading positions on any given day is based on historical volatility of markets. However, once financial crises hit it becomes evident that losses can be much greater than the what the models predicted.Although the theory of a bell-shaped curve distribution sounds good, the reality is that markets often do not obey those theories. Investors can be lulled into feeling secure when markets are moving up steadily and volatility is decreasing. At such times it is tempting to pile more money into the markets, thus causing them to continuously climb and exhibit low volatility. However once the trend is broken and a “black swan” event takes place volatility can skyrocket as the market gyrates up and down violently.A brief history of risk reductionDerivatives are not a new phenomenon. In fact they have been around since the beginning of trading, originally created to reduce uncertainty or risk. When a buyer of, say, grapes agreed to buy from a farmer in the future when that farmer had his harvest a derivative was created.A buyer wanted to fix the price he would pay for a certain product at a future date so he could adequately plan, while the seller also wanted to fix the price so he could expect a given income in the future. But as the market grew, gaming entered the picture so investors not necessarily interested in the actual transaction wanted to bet instead on the outcome of certain transactions.The growth in derivatives popularity and complexity has been dramatic. Securities that derive their value from something else amount to over $500 trillion according to the Bank for International Settlements.As the creativity of gamers and investors know no bounds, there are now any number of derivatives covering a wide range of operations and not necessarily products.There even exists an index on volatility itself and a number of derivatives opportunities around it. The Chicago Board Options Exchange’s VIX index measures the expected volatility of the US stock market over the next 30 days as indicated by option prices. The theory is with the index you are measuring the level of investor anxiety since the theories of the “Efficient Market” define risk as volatility.Measuring riskHarry Markowitz, who developed so-called “modern portfolio theory”, published an article in 1952 that argued investment returns should be judged against the amount of risk taken. Of course the concept of risk was too vague and difficult to measure so he used volatility, or variance, as a proxy for risk. So if one particular stock or index was more volatile than others, investors should expect better returns in order to justify the increased “risk”. He won the Nobel Prize in 1994 for his theories.Following on this, William Sharpe, another Nobel prize-winning economist and a disciple of Markowitz, developed the Sharpe Ratio. This ratio compares the returns of the fund manager to the volatility of his performance subtracting the returns of a risk-free asset such as cash.Risk enduranceThe application of these theories has not resulted in a magic formula for consistent, excellent returns for investors but at least they give us some theoretical measures we can use in the never-ending battle for investment survival.