I like the rationale behind this but I'm surprised you're willing to allocate such large portions of your portfolio to EM stocks but I like your conviction!
Also, i'm curious, are you on the lookout for other companies in EM outside or e-commerce/financial? To me it feels like a little to much concentration on the same themes across these EMs? I know that's where the tailwinds are but wondering if youre looking at other themes as well?
Yep, my conviction is high in EM markets and wouldn’t make sense for me to be spending most of my time talking about EM and studying the region without allocating at least half of my portfolio to it.
On concentration within themes, it’s very much intentional. The businesses I’m invested in, I believe, are operating across a variety of segments that are incredibly important and wide-ranging in their impact.
For instance, Sea Limited benefits from S curves happening across ecommerce, payments, logistics, ads, gaming all at once. While it is “one company”, it is very much an amalgamation of several businesses in one.
I’m trying to own the best operators at different points of the value stack and not optimising for low volatility but rather asymmetric outcomes.
I believe the areas i’m invested are where the vast majority of value capture is and will continue to happen.
That said, I am definitely looking at other themes within emerging markets, but as an investor in US-listed equities only, opportunities are hard to come by.
Outside of the technical breakout, haven't the emerging market trends or what makes them appealing been true for the past decade? I.e nothing necessarily new?
For the political risks, how would you address those? I.e does it make sense that these stocks should be valued lower because of these particular risks, specially vs the U.S? Do you forsee any of these countries potentially shifting towards a China type of strategy/economy in the future?
Hey Muhammad, really thoughtful questions and I appreciate it.
You’re right that most of the structural drivers in EM have been in place for a long time. What’s new, in my view, is the profit cycle and capital cycle turning point.
For most of the 2010s and even up till 2022/2023, EM businesses were largely in land and expand mode, especially in e-commerce, mobility, deliveries. There was high GMV growth but weak unit economics.
Over the past 2-3 years, we’ve finally seen the shift to a profit-first discipline and a stabilisation of the competitive landscape. OCF/FCF have inflected across the major players like Sea, Grab, Inter, Nubank etc.
These are typically major turning points that lead to multiple expansion and a re-rating in how markets view them (from no moat money-losing startups to profitable high-growth, and potential monopolies)
On political risk / valuation gap vs the US.
Yes, EM stocks trade at structurally lower multiples because of political/regulatory risk and I think that’s fair. The point of my piece wasn’t that EM should trade at DM multiples, but that the discount today looks extreme relative to profitability and balance-sheet strength, especially when we compare FCF generation vs valuation.
On these countries potentially shifting towards a China strategy/economy in future, I think this is a very common misunderstanding that happens. Despite China being the closest superpower (for all SEA nations) and a major trading partner for all of them, there is very little similarity between the way the countries are set up.
Most EM regions are moving towards capital attraction and FDI-friendly frameworks, not away from them. I would look at Saudi’s 2030 project, Brazil’s open banking / PIX integration, India’s UPI and growing startup ecosystem being fostered by the govt, as examples that they are moving towards a highly capitalistic economy.
The reason for this I believe stems from the break up of the USSR in 1991, that was a clear sign that communism wouldn’t work. Many countries pivoted towards the US model, and have maintained their path to it. (China and a few other countries are exceptions as they are run by autocrats who determine policy, regardless of public opinion).
I like the rationale behind this but I'm surprised you're willing to allocate such large portions of your portfolio to EM stocks but I like your conviction!
Also, i'm curious, are you on the lookout for other companies in EM outside or e-commerce/financial? To me it feels like a little to much concentration on the same themes across these EMs? I know that's where the tailwinds are but wondering if youre looking at other themes as well?
Yep, my conviction is high in EM markets and wouldn’t make sense for me to be spending most of my time talking about EM and studying the region without allocating at least half of my portfolio to it.
On concentration within themes, it’s very much intentional. The businesses I’m invested in, I believe, are operating across a variety of segments that are incredibly important and wide-ranging in their impact.
For instance, Sea Limited benefits from S curves happening across ecommerce, payments, logistics, ads, gaming all at once. While it is “one company”, it is very much an amalgamation of several businesses in one.
I’m trying to own the best operators at different points of the value stack and not optimising for low volatility but rather asymmetric outcomes.
I believe the areas i’m invested are where the vast majority of value capture is and will continue to happen.
That said, I am definitely looking at other themes within emerging markets, but as an investor in US-listed equities only, opportunities are hard to come by.
Great article, a few questions:
Outside of the technical breakout, haven't the emerging market trends or what makes them appealing been true for the past decade? I.e nothing necessarily new?
For the political risks, how would you address those? I.e does it make sense that these stocks should be valued lower because of these particular risks, specially vs the U.S? Do you forsee any of these countries potentially shifting towards a China type of strategy/economy in the future?
Hey Muhammad, really thoughtful questions and I appreciate it.
You’re right that most of the structural drivers in EM have been in place for a long time. What’s new, in my view, is the profit cycle and capital cycle turning point.
For most of the 2010s and even up till 2022/2023, EM businesses were largely in land and expand mode, especially in e-commerce, mobility, deliveries. There was high GMV growth but weak unit economics.
Over the past 2-3 years, we’ve finally seen the shift to a profit-first discipline and a stabilisation of the competitive landscape. OCF/FCF have inflected across the major players like Sea, Grab, Inter, Nubank etc.
These are typically major turning points that lead to multiple expansion and a re-rating in how markets view them (from no moat money-losing startups to profitable high-growth, and potential monopolies)
On political risk / valuation gap vs the US.
Yes, EM stocks trade at structurally lower multiples because of political/regulatory risk and I think that’s fair. The point of my piece wasn’t that EM should trade at DM multiples, but that the discount today looks extreme relative to profitability and balance-sheet strength, especially when we compare FCF generation vs valuation.
On these countries potentially shifting towards a China strategy/economy in future, I think this is a very common misunderstanding that happens. Despite China being the closest superpower (for all SEA nations) and a major trading partner for all of them, there is very little similarity between the way the countries are set up.
Most EM regions are moving towards capital attraction and FDI-friendly frameworks, not away from them. I would look at Saudi’s 2030 project, Brazil’s open banking / PIX integration, India’s UPI and growing startup ecosystem being fostered by the govt, as examples that they are moving towards a highly capitalistic economy.
The reason for this I believe stems from the break up of the USSR in 1991, that was a clear sign that communism wouldn’t work. Many countries pivoted towards the US model, and have maintained their path to it. (China and a few other countries are exceptions as they are run by autocrats who determine policy, regardless of public opinion).