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Moon Jae-in was elected as South Korea’s president 18 months ago after the impeachment and imprisonment of his predecessor Park. His mandate was clear: drive out corruption and improve corporate governance, particularly at the nation’s Chaebols. It started well: he appointed Kim Sang-Jo as the Head of a Fair Trade Commission. The so-called “Chaebol Sniper” has been a long time governance crusader, and his role was to curb the excesses of the Chaebol. But the initial enthusiasm was followed by disillusionment. Kim Sang Moon’s domestic agenda has lost momentum as reconciliation with North Korea has seemingly become his priorty. And his voters are far from happy: workers repeatedly took to the streets in November to protest Moon’s lack of reform. With an domestic economy in jeopardy and governance reform on the ropes, the “Korea Discount” is back.

Source: Bloomberg

The Rise of the Chaebol Context is key. In the 1960s Park Chung Hee (killed by the head of the CIA in the Blue House, 1979) enrolled the help of leading businessmen to rebuild Korea. The “Miracle on the Han River” transformed Korea from a war ravaged country with per capita GDP below $100 to the economic powerhouse it is today, where per capita GDP stands at near $30,000. The achievement was astonishing – within barely two generations – and it was mainly down to a small group of entrepreneurs and their “chaebol”, the conglomerates they built in the process.[1]The Chaebol touched and continue to dominate all aspects of the economy. There are two dozen or so Chaebol remaining – of which Samsung, Hyundai and LG are the most famous. Their power is enormous – sprawling, interconnected webs of businesses in sectors as diverse as heavy industry and biotech. But with generational change, the Chaebol have fought to maintain their wealth and with that governance has suffered.Misaligned interestsBecause of an incentive structure skewed towards the preservation of control rather than the creation of value, Korean governance has been marginalised. The reasons are varied: 1) why disclose information which could jeopardise a competitive edge or anger customers; 2) why engage actively with financial markets when the focus is to build relationships with a few key clients; and 3) (in extreme cases) why increase your company’s valuation before a transitional period when the top rate of inheritance tax is almost 50%. Ironically, from the perspective of owner-managers and the wider shareholder value movement, there is no quicker way to weaken an owner’s control over a company than to attract external investors who increase its valuation. The result is webs of inter-related companies (despite improvements), excessive cash positions and limited focus on shareholder returns.Pressure to reformUntil recently, it was a given that what is good for the chaebol is good for South Korea. But this has changed after years of scandal and subterfuge. President Moon’s election in 2017 brought optimism around reforms to make Korean corporate governance more transparent, crystalising efforts made by previous administrations. Crucially the National Pension Service has adopted a formal stewardship code in July this year. The explicit aim is to push for better governance, transparency and accountably from its portfolio companies.[2]South Korea is at an economic cross-roads. The high growth days post-Asian crisis are long gone and Korea’s economy grew 2% year-on-year at the third quarter 2018, the slowest on-year growth since 2009. The export model that served them so well is faltering. China is doing to Korea what Korea did to Japan; and this is most evident in Korea’s biggest companies. Samsung Electronics’s market share in China has fallen from >20% in 2013 to less than 5% now; Hyundai Motor & Kia have lost 5% of market share to domestic auto manufacturers. The Korean economy is increasingly reliant on consumption – but consumption growth is tepid. The housing market is over-heating (despite the government’s efforts to dampen it), minimum wage regulation – designed to raise basic earnings – has just pushed jobs overseas, strained small and medium businesses, and reduced Korean competitiveness.

Source: Bloomberg

Opportunity for changeTax reform is rarely a subject to set pulses racing but in Korea it is essential: Korean individuals – particularly the third generation owners of Chaebols – are disincentivised to pay-out cash because they pay so much tax on their income.This goes some way to explain why the Korean market’s pay-out ratio is the lowest of major global markets at 20.8% (even Japan’s at 30% is higher); and why Korean company owners and managers are so pained to raise dividends. Ironically, tax code reform was taken off the agenda by a left-leaning president – partly because it is seen as a fillip to the oligarchs. President Park planned to address it.The corollary of higher pay-out ratios is focusing investment decisions on return on equity or return on invested capital: management deploying capital only when it makes economic sense, not because a client or the chairman says so. Employee stock option schemes – aligning interests between managers and owners – are rare. Adopting compensation structures which align the interests of owners, managers, employees and minority investors would be a marker to international investors that the old, misaligned ways are gone.Investment outlook The outlook is far from gloomy, however. After years of engaging with management teams, we are always impressed by the expertise and dedication they show. Korea is not the finished article, but change is afoot, and this brings the chance for re-ratings. Activist funds are springing up domestically, encouraged partly by the efforts of Elliot Advisors. In November Korean Airlines parent company was engaged by a local private equity house, the first high profile domestically driven activist case. This has sent shockwaves through boardrooms. A recent trip to Seoul confirmed how emboldened locals are feeling. Change is underway and corporations – feeling the pressure from investors – are taking notice.Our approach at Mobius is relatively straightforward: target companies offering earnings and cash flow growth trading at discount to their intrinsic valuations. Avoid businesses at risk from being disrupted by “China Inc.” and seek companies that have experienced generational change of ownership. There are several exciting opportunities in fast growth sectors (medical technology, ecommerce, gaming) but also less glamorous sectors (food products and turnarounds in heavy industry). South Korea is a source of world class intellectual property – from semiconductors to biotechnology and materials science. These companies are leaders in their fields and many trade at steep – and unjustified – discounts to international peers.We are excited about what the future holds. In the near term, it would help if Moon refocused on his agenda.[1] “jae” – wealth or property; and “beol” – faction or clan[2] NPS is itself not unfamiliar with corruption – the Chairman, Moon Hyung-Pyo was caught up in the scandal which ended President Park’s term.

If you find yourself inadvertently sat next to a stranger in India, there are three topics of conversation that will usually be met with a receptive ear. Whilst discussions of the latest Bollywood blockbuster and the fortunes of the Indian cricket team may quickly find consensus, it is Indian politics that can stimulate some of the most engrossingly diverse perspectives. Indeed the long march has now begun towards May 2019, when the world’s largest democratic exercise in history will crescendo in the form of India’s 17th General Election.But for those in need of a more immediate political fix, you need not look further than 11th December. Important state elections are underway in 5 states with a combined population greater than Brazil. Of those, the ruling BJP party oversee three states – Madhya Pradesh, Rajasthan and Chhattisgarh – and their success or failure may be viewed as a barometer of their wider popularity. Opinion polls paint a mixed picture. Whilst it’s clear from history that electorates vote differently in state and general elections, a dramatic loss in vote share for the BJP will re-shape the thrust of their public policy for the remaining six months. The bond and currency markets await nervously for how destructively populist this might be.For us at Mobius Capital Partners, the market volatility driven by sensationalist political newsflow is something to take advantage of. Certainly, the general election in 2014 was significantly more important that the election next year. This is because the India of 2014 was a different animal – bloated by twin deficits, hamstrung by low foreign exchange reserves and self-doubting after years of policy paralysis.Today, India’s productive capacity has been transformed by policy steps and measures that have now been institutionalised by the current government. A sturdier Bankruptcy Law, a well-functioning Goods and Services Tax, a flexible inflation targeting regime and success in financially including more than 300 million Indians through the country’s unique biometric identification system are just a few examples. GDP growth has accelerated from 4.9% in the second quarter of 2012 to 8.2% in the equivalent quarter this year.In the longer term, this will reduce India’s equity risk premium and cost of capital whilst pushing up valuations to higher justified multiples. At the same time, income inequality will narrow through more efficient welfare transfers whilst inflation will trend lower and with less volatility. Huge disruption will take place in the financials sector as the traditional barriers to entry of underwriting, distribution and collection capability are beginning to crumble through the powers of digital disruption. Meanwhile in the shorter term, external vulnerabilities have diminished whilst corporates have emerged from a painful period of balance sheet repair, now limbering up to kick start India’s next investment cycle.It would be trite to argue that everything has been rosy though. Indian equity markets struggled through the third quarter of 2018 due to the unhappy combination of higher US rates, a stronger US dollar, resurgent crude oil prices and a domestic liquidity scare that threatened to snowball into a solvency issue. Meanwhile the local press was whipped up into a frenzy as rumours of a rift between the government and the central bank emerged. Foreign investors pared back exposure and India’s historical valuation premium to global markets began to recede below its long-term average of 20%.Whilst the bears continue to dominate the narrative, an attractive entry point has emerged for the long-term investor. Credit growth has accelerated to a five-year high whilst inflation continues to remain benign below 4%. The policy response to the liquidity crunch has been speedy and coordinated whilst domestic equity flows (which increasingly matters more than foreign flow) have been resilient. Price to book multiples are now below their long-term averages of 2.5x and foreign ownership has shrunk sharply to healthier levels. Despite this, earnings growth estimates are amongst the fastest across the emerging world with more than 20% and 18% expected for 2018 / 2019 respectively.This is being driven by India’s position on its own capital cycle – where the combination of excess capacity, improving demand and continued balance sheet restraint lay the foundation for operating leverage and rising return on invested capital. Indeed it is India’s bottom up, micro story, that will now be the engine for strong equity market performance.As we approach the end of the year and we go through the annual process of making bold predictions for 2019, how about this for size? The BJP underperform in the election, scrabble together a minority government but Indian equity markets outperform for the year. Micro trumps macro.Wishful thinking perhaps, but it’ll sure keep the stranger by your side entertained.

Brief Answers to the Big Questions – by Stephen HawkingWhen reading Stephen Hawking’s final book, which was published posthumously, I was pleased to discover that not only does it give a comprehensive insight into some of the key questions he devoted his life to understanding, but it is also thoroughly entertaining and a truly spell binding read.Despite the rather high expectations raised by the title, what fascinated me more than the “answers”, were in fact the questions posed by Hawking. He attempts to cover some colossal themes from God’s existence, to global warming and the survival of humanity.Throughout, Hawking manages to convey his unsaturable passion for science whilst warning loud and clear that our planet is on the verge of collapse: polluted, overpopulated, and exhausted. Whilst he elaborates on how humanity has consistently destroyed its own natural habitat, interestingly he appears more concerned about the risk of a nuclear disaster by human error, terrorist action or machine failure. He concludes that “the best time to stop the autonomous weapons arms race is now”.On this subject, he provides brilliant clarity on artificial intelligence, touching on both its benefits and its dangers. Hawking warns of the potential damage should humanity fail to tread carefully. However, he believes that successfully creating true AI “would be the biggest event in human history”.I particularly like how he demystifies advanced robotics by focusing on the facts. Often references to AI are misused and emotionalised, especially in conjunction with topics such as machine learning or block chain.The book repeatedly returns to the underlying theme of recognising the longer term consequences of our actions today. Hawking reiterates that the use of our knowledge is crucial in limiting negative impact. He argues that “our future is a race between the growing power of our technology and the wisdom with which we use it”.There are some learnings for investors here: The question of the longer term implications of todays actions is very important when making investment decisions; some products and services may initially look attractive, but future risks need to be factored in. Excessive growth could meet strong regulatory headwinds or end up in existential trouble or have adverse effects on consumers. Take, for example, online gaming and the many unintended effects this has on society in general, and particularly children.Hawking also makes some brief, yet incredibly relevant comments on contemporary politics. While he refers to the election of Mr. Trump a few times in a humorous way, he comments on Brexit and Trump as “witnessing a global revolt against experts, which includes scientists”. He elaborates beautifully on the importance of teaching and learning, “behind every exceptional person there is an exceptional teacher”. This is a great reminder of the vital importance of our educational institutions. Interestingly, it is a subject that we encounter frequently at Mobius Capital Partners. As Asian universities slowly conquer the list of the top schools in the world, a domain previously occupied by the US and the UK, the implications are far reaching for local businesses and the wider societies they serve.Hawking’s death coincided with Einstein’s birthday and his famous predecessor features often in his last book. “Where did his ingenious ideas come from?” asks Hawking. He concludes “a blend of qualities, perhaps: intuition, originality, brilliance. Einstein had the ability to look beyond the surface to reveal the underlying structure”.I believe any good investor should aspire to these character traits. Originality is especially crucial when looking for unique investment opportunities, i.e. the importance of developing one’s own convictions and ideas independently from what others have suggested before.Significantly, Brief Answers to the Big Questions leaves the reader with a positive assessment of technology and how its undeniable power can be harnessed by humanity. Technology helped Hawking communicate, as well as lengthening his life by 30 years longer than doctors originally predicted. As a result, he is of the firm belief that there is much more to come, when facilitating human development.He ends the book with this very encouraging and optimistic note. Motivating readers to look up at the stars and not down at their feet, to be curious and to be persistent.Certainly this must have been his motto in life, and we all can learn so much from this great visionary.

We are living in a world where increasingly, assessing corporate governance factors is becoming a checklist exercise. From a plethora of rating agencies scoring on governance factors, to ESG funds who screen out the worst offenders. In this interview, I speak to Mark Mobius on the limitations of utilising such an approach and what the ingredients are for a great board.Usman: Mark, you have sat on numerous boards. What do you believe investors overlook when they assess the competence of a board?Mark: As active investors, the composition of boards is one of the first things we look at when considering investing in a company. A balanced board has a crucial role to play in maintaining corporate governance standards which we consider an important lever for social, environmental and operational improvements.However, this is not always straightforward. For example, if one looks at Enron, the board seemed to tick all the governance boxes. The board members turned up for meetings, they were aligned as they had personal money invested in the company and they had all the necessary committees. There were independent directors on the board and the board itself was not too big or small nor was it too old or young.Investors tend to focus on procedural issues when assessing if a board is competent and assume these factors produce a well-functioning and attentive board. What is so scary about corporate scandals over the years is that in spite of these companies ticking the conventional boxes of good governance, they failed. In reality, boards are complex social systems which cannot be reduced to statistics.Usman: What are your thoughts on the optimal skillset of a board?Mark: It is important for at least some board members to have strong expertise with the underlying business. Moreover, there must be a genuine interest in the company. A breadth of skills is helpful but a willingness to ask difficult questions is particularly important. These issues cannot easily be assessed by equity investors sitting behind a computer.My experience on boards has been very educational in the sense that I realised, that to do a great job, you have to spend a lot of time and effort studying the underlying business. Whilst serving on the board of an oil company, I quickly realised my knowledge of the oil market was limited and it was necessary for me to learn fast. I therefore asked the President to arrange a tour of the firm’s major facilities, so I could talk to people on the ground and observe what they were doing. This experience was invaluable and enabled me to understand the challenges and opportunities the company was dealing with in a more granular way.Usman: What is difficult for public equity investors to assess?Mark: Whilst many investors and rating agencies are quantitatively scoring companies on board independence, board size, compensation practices, separated Chairman and CEO positions etc, one cannot quantitatively assess ethics and board dynamics.We once invested in a large Mexican retailer partly because of its high corporate governance standards; they were transparent and the executives played by the rules. Then one day, a pair of investment bankers flew in from Wall Street and dazzled the company’s finance director with visions of the profits the retailer could make from the “super Peso”, as Mexico’s currency was being characterised in the press in 2008. The CFO was persuaded, and exposed the company to a huge, off-balance-sheet currency risk by taking a speculative position in currency derivatives with escalating payoff structures that allowed losses to accumulate rapidly.The company, which was very profitable, filed for bankruptcy a few months later with losses approaching $2 billion. There was a lesson here. The company’s governance system was good by Mexican standards, but the CFO didn’t feel it obliged him to be prudent.Usman: So what would the ideal board look like?Mark: In my opinion a well-functioning board consists of members who respect each other. Vice-versa, a management team and the CEO in particular, must trust the board and share complete information in a timely fashion. I have experienced boards where the CEO has hidden information from the board or has failed to deliver complete information in a timely manner. This must not be underestimated. Sending a board pack on a Monday for a Tuesday board meeting is poor practice. These issues are extremely difficult to assess behind a desk. In addition to requiring an understanding of the local culture, they require close interaction with board members and the management team. Even then, board members may not always be honest to investors.Usman: How concerned are you about groupthink in the boardroom?Mark: Whilst mutual respect for fellow board members is incredibly important, this must coincide with the capacity to challenge one another’s assumptions and beliefs. Group think is unfortunately very common in boardrooms. Chuck Prince, the former CEO of Citigroup, illustrated the dangerous power of group think, when he explained Citi’s ill-fated enthusiasm for subprime mortgages and consumer loans in July 2007 in the Financial Times: “..as long as the music is playing, you’ve got to get up and dance.” Four months later Prince resigned, after Citigroup announced a fourth quarter loss of almost $10 billion.Over the years, I’ve observed board members who feel under pressure to fit in, so they’ll be renominated. When executive search firms and nomination committees search for new board members, they often search for compliant people. No one likes a trouble maker. However, in my experience, it just takes one dissenter on a board who can make a valuable difference. Great boards are not afraid of dissent, nor do they discredit dissenters.Usman: What would be your advice to boards and investors?Mark: Boards of public companies must think about all stakeholders, which includes minority investors. There must be a sufficient number of independent directors as a minimum, but this alone is not adequate.Board members ought to be open to scrutiny and should be subject to external board evaluations. In emerging and frontier markets, this is still uncommon. At the same time, boards should make an effort to engage with their investor base: after all, the independent directors are there to represent shareholders. A lack of feedback is one of the biggest self-inflicted problems a board may possess.Investors should also bear in mind that assessing great boards is an art, not a science. Even when a board looks perfect when numerically scored, one must dig deeper into the issues mentioned above. Board dynamics cannot be quantitatively scored: they require human judgement and face-to-face interaction. At a time when flows to passive funds are increasing, it is even more important for active managers to partner with their portfolio companies and provide constructive feedback to boards.

NAFTA as a name, the North American Free Trade Agreement, is dead. It now comes under a new guise, the “United States-Mexico-Canada Agreement” (USMCA). If everything goes as planned, U.S. officials will join their Canadian and Mexican counterparts in Buenos Aires on tomorrow (30 November) for a ceremonial signing.**What’s in it?**While the name is new, the fundamental relationship between the three parties remains effectively the same. Not much has changed that would lead me to believe that trade between the three countries will be dramatically altered. One significant addition is the requirement that Mexico gives a better deal to its workers. In order for automobiles to be exported to the U.S., 40% of value must now be produced in factories that pay workers more than $16 per hour.With better productivity and automation, this places U.S. factories in a stronger position. However by introducing more automation themselves, Mexican firms can still compete. On the Canadian side, US dairy and wine producers get better access to the Canada market.The new requirement that tariff-free products have 75% of parts from the country, rather than the previous 62.5%, may not benefit anyone if manufacturers find that it is too costly for them to change their current supply chain. Instead it might be better to surrender the tariff benefit and continue to import parts from outside the zone.From an ESG perspective, it is pleasing to see an increased emphasis on labour and environmental rights. The USMCA makes a number of significant upgrades, which should have a positive impact especially on Mexico.One dangerous component of the agreement is that it has a sunset clause with the agreement expiring in 16 years, unless the countries agree to an extension after 6 years.What’s not includedCanada and Mexico have been pushing for the removal of President Trump’s 25% steel and 10% aluminium tariffs ahead of the signing. So far the tariffs have remained in place. The solution might be a quota system, however this is unlikely to be agreed upon before tomorrow.What are the next stepsThe U.S. president’s next challenge is to get the deal through a new Congress. Earlier this month, 12 U.S. Republican Senators urged President Trump to submit the deal to update NAFTA to Congress by year-end, before Democrats assume control of the House of Representatives. But this is unlikely to happen. A Democratic Congress might ask for a number of alterations prolonging the ratification process next year.**Will USMCA bring opportunities for investors?**It is too early to say if the new NAFTA will bring opportunities for investors. It seems likely that with the new agreement in place, trade between the three partners will continue to flow. This is in contrast to the trade relationship between the US and China that is yet to thaw.This situation could benefit Mexico. A lot of the goods that are currently supplied by China could be shifted to closer to home.Take the automobile sector. Mexico is the primary exporter of automobiles and automobile parts to the U.S. With no tariffs on Mexican cars, and additional duties imposed on Chinese automotive parts, there will be less competition. Additionally, China used to buy large quantities of automobile parts from the US, but now with retaliatory tariffs imposed by the Chinese government these will also become costlier. Again there could be an opportunity for Mexico to step in.Finally, a new NAFTA agreement might help to bring an end to the uncertainty that has affected the Mexican currency in the last few years.Mexico remains a focus for usGiven all the above, Mexico will remain a focus for Mobius Capital Partners. There are several interesting companies with strong business models that have been unfairly dragged down by the recent uncertainty. We believe these firms not only offer value, but also have great potential for ESG and operational improvements.We will be keeping a close eye on the wider macro environment, as Andrés Manuel López Obrador is sworn in as President the day after the signing of USMCA.

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

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.

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.

“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.