Where does the process start, of researching new investment opportunities in ‘untapped’ markets?
The first step in entering a new untapped market is to take care of the technical, legal and custodial matters. When we purchase shares in a market, we and our custodian bank need to be assured that our assets – shares – in that country will be safe and protected from theft, natural calamities, et cetera. So this involves intense negotiations and studies. Then we need to understand how the trading system works.
For example, is there DvP [delivery versus payment] where the delivery of money is accompanied immediately by delivery of shares and where delivery of shares is immediately accompanied by transfer of money?
If there is a delay in such operations then risk is heightened and we would not want
to enter that market. There are usually other legal restrictions we need to be aware of. For example, some countries prohibit foreigners from buying certain shares such as, for example, bank shares.
You mention risk. Untapped markets present risks, as do the companies within them. How do you address those risks?
No matter where we invest, there’s always some sort of risk. This includes not only geopolitical or macroeconomic factors in a given country, but also issues that are unique to a specific sector or individual security.
As bottom-up stock pickers, my team and I must assess the potential risks and returns related to each and every company we invest in. As part of our research process, the Templeton Emerging Markets Group evaluates a company’s market opportunity, competitive position, management strength, financial profitability and valuation.
No doubt you spend a lot of time visiting companies?
Time spent on due diligence to assess the quality of company management teams, including more frequent on-site visits to evaluate the business effectively, can uncover great opportunities. A meeting with the company’s managers or a tour of the company’s
factories can provide a wealth of knowledge that may otherwise remain undiscovered.
I imagine the experience of just being in a country can be informative as well?
Along with visiting individual companies, it’s also important to keep your eyes open as soon as you land in a city and form a complete picture of the market, company, and people. Even small things like how modern the airport is, the efficiency of public transportation, how crowded a restaurant or hotel might be, and the number
of tourists, can tell you a lot about the city.
When you’re making an investment decision, which has to come first: the mechanisms to go into a market, or the mechanisms to come out?
Both come first. Before we enter a market we need to ensure that we can also exit.
You blogged recently about the difference between emerging and frontier markets. Do
you see any real distinction or is it a continuum?
Yes, it is a continuum, since the variables defining an emerging or frontier market come
in a range, with some variables in frontier coming very close to those of the emerging markets. There are a number of factors that go into qualifying a particular market as “developed,” “emerging,” or “frontier,” and different organisations or index providers may have slightly different criteria. Emerging-market countries include those considered to be developing or emerging by the World Bank, the International Finance Corporation, the United Nations, or the countries’ authorities, or defined as countries with a stock market capitalisation of less than 3% of the Morgan Stanley Capital International (MSCI) World Index.
Frontier markets can be considered a subset of emerging markets, and they are typically economies at the lower end of the development spectrum. They are the generally smaller, less developed and less liquid emerging-market countries that are considered to be in the nascent stages of development. In essence, they represent what some emerging-market countries such as Brazil, Russia, India and China were 20 to 25 years ago.
Frontier markets are the riskiest, presumably?Frontier markets are not only growing rapidly, but also display a number of characteristics that make investing in them less risky than imagined compared to traditional emerging markets. For example, they generally have lower debt and higher foreign exchange reserves in relation to their gross domestic product. Frontier markets also tend to be more exposed to their domestic economies – many of which are developing rapidly – as opposed to the global economy, which is growing at a much slower pace.
What opportunities do you see in the future?
There’s so much to be done. Great swathes of the globe have not yet been hit by the idea that development can come from having a market economy rather than a planned economy. We believe the process of change will continue.
