Category: insights

Investing in emerging and frontier markets allows me to travel around the world and experience a wide range of cultures and traditions. However, across all seven continents some things remain a constant, and one of these is a love of football.With a global audience of over 1 billion, it often seems the whole planet is glued to the World Cup. It brings together communities, villages and countries. This is particularly true in Africa. Once again, the countries representing the vast continent have played well and been unlucky not to advance further in the competition. While an African nation will not triumph on the 15 July, in a series of blogs over the coming weeks, I would like to shed some light on a more significant achievement. An economic victory.I will start by focusing on Senegal, given one of my personal highlights of the group stages was Senegal’s 2-0 win against Poland, evoking memories of their result against France in 2002.Historically, in both football and economic terms, things in Senegal have not always been easy. The country ranks number nine in the world for illiteracy, with 58% of the Senegalese population not being able to read, while 46.7% live in poverty. Both issues are largely linked to Senegal’s agriculture focused workforce, which is heavily affected by extreme weather conditions like droughts.However recently Senegal has certainly made people take note – and not only by scoring goals. In 2017 the country was able to grow by 7.2% – which is more than China or India. Since their victory against France 16 years ago, Senegal has had the second highest GDP growth among all Africa’s 2018 World Cup entrants. This should be taken in context however, as the country’s GDP was $16.5bn in 2017, which is only slightly above the cost of hosting the World Cup in Russia ($14.2bn). Senegal’s currency is also performing well, with an average inflation of just 1.5% per year since 2002, making it one of the most stable in Africa.While Senegal does have some challenges, there also is much promise. After winning independence from France in 1960, the country has only had 4 presidents, but notably every transition has been peaceful. It is frequently seen as one of the most politically and economically stable countries in the region. This solid political foundation and recent economic growth provides the perfect conditions for Senegal to develop into a prosperous nation. The future looks bright both on and off the pitch.

I was recently asked a series of questions on Brazil. Here are the questions and my answers:Q1. What’s your current perspective on Brazil? A: My view on Brazil might best be described as “concerned”. This is because the current desire for complete reform of the government could slow as a result of the continued popularity of Lula and his supporters. This could lead to a slackening of the reform movement or even its complete demise.Q2. One year ago, you mentioned structural reforms were still expected to be implemented in Brazil. Recent public opinion polls show that most centrist, reformist candidates are having trouble gaining traction. How do you see the political risk in Brazil? Has the risk of turning away from the path of structural reforms increased? A: Yes this is a real problem and heightens the political risk. The “lavo jato” scandal was a watershed moment and ushered in a tremendous shift in public consciousness, with calls for a change in how the country is governed. However now a weakened reformist candidate points to problems going forward.Q3. Regarding the stock market, do you think Brazilian shares are trading at attractive levels, compared to other emerging market peers? What are your favourite sectors/stocks at this moment? A: Brazilian shares generally are not trading at bargain levels but there are some well managed firms that look attractive. Our favourites are companies with good corporate governance who have resisted the temptation to engage in corrupt practices and respect shareholder rights. In regards to industry sectors, consumer products and distribution groups are the most attractive to us. However, there are also some manufacturing firms who have a strong international positions and are able to earn substantial foreign exchange, which also makes them of interest.Q4. The Brazilian Real recently weakened to close to 4.00 per dollar and economic activity data points to a weaker-than-expected recovery. Do you think these two factors may reinforce the downside risks to company earnings? A: Actually the weak Real could be a blessing in disguise since export oriented firms will do much better in overseas markets. Generally the weak currency, if combined with continued increases in productivity, could make the market more attractive.Q5. What strategy should Brazil’s central bank look to adopt in the current market conditions? A: The central bank in Brazil should focus on working towards a liquid foreign exchange market so that the currency can find its market level. It should not try to control the exchange rate since such expenditures are a waste of precious foreign exchange and stimulate further exits. The Brazilian central bank should do all it can to persuade the government to streamline investment procedures, which will encourage both domestic and foreign investment.

In recent years the importance of non-financial indicators in the corporate valuation process has become undeniable.Investors are becoming increasingly aware of the link between financial returns and environmental, social and governance factors (known as “ESG”). Disclosures linked to issues such as resource scarcity, labour rights and minority investor safeguards are being heralded as key metrics to evaluate performance.Failures at Petrobras in Brazil, Satyam in India, scandals in China and South-East Asia, but also Volkswagen in Germany, have drawn attention to the significance of this data as a proxy for risk management and ethical standards. On a more macro scale, the wider implications of climate change have become undeniable when assessing an asset’s long-term sustainability. Given global agriculture consumes 70% of the world’s fresh water and generates 20% of greenhouse gas emission, investors must evaluate whether existing resource-intensive business models are at risk from regulation or disruption.ESG and related strategies are well understood in developed markets (over 95% of sustainability-oriented investments are focused on the US or Europe). This is facilitated by the availability and transparency of data. However emerging and frontier markets continue to lag. Investors are still regularly confronted with challenging conditions exacerbated by ESG shortcomings; particularly in corporate governance. These issues cause disengagement among the investor base, which leads to a lack of pressure on management. Many investment strategies that attempt to apply an ESG approach rely on passive screening techniques that only engage with corporates that are already compliant; therefore, upside is limited. Large asset management firms often appear to use ESG as a marketing tool.According to a recent report published by Transparency International, when analysing 100 emerging markets multinationals for anti-corruption disclosure, 75% scored below 5 out 10[i]. The average score was a lowly 3.4. Frustratingly, many of the companies that had been surveyed four years earlier had barely improved their standards when re-reviewed.We launched Mobius Capital Partners to tackle this predicament by challenging the status quo through a new type of investment in emerging and frontier markets. Our goal is to reach beyond simple exclusion screens and adopt an active approach that is governance orientated. We want to be a catalyst for corporate improvement. This can be best achieved through collaboration and partnership with portfolio companies. We believe that it will have a substantial impact on non-financial indicators while also boosting companies’ operational performance over the long term. Shareholders can and must facilitate the development of an ESG pathway with companies.According to a recently published study by HSBC, since 2008, companies with improving ESG practices outperformed those who lagged behind by over 25%. This is supported by research (Dimson, Karakas and Li, Aug 2015) that found working with companies on ESG issues can have positive financial benefits. Academics noted that following successful engagement on environmental and social themes, operational performance improved by 7.1%[ii]. This increased by as much as 8.6% when the focus was concentrated solely on corporate governance. Overall the firm’s financial performance improved, it attracted a wider investor base and had lower stock volatility.Our investment strategy is founded on the principal that a deep understanding of ESG factors is one of the best ways to identify, understand and manage investment risks. We understand that improving a company’s corporate governance is central to long-term commercial success, which in turn leads to sustainable investment returns. Through our funds we aim to leverage decades of experience in emerging and frontier markets to generate sustainable returns by actively partnering with companies to improve corporate governance and enhance broader ESG standards.[i] Source: Transparency International, Transparency in Corporate Reporting: Assessing Emerging Markets Multinational (2016)[ii] Cumulative abnormal return- (Dimson, Karakas and Li, Aug 2015)