I recently had a conference call with our investors around the world. Depending on where they were from, some of them were concerned about inflation while others were worried about sovereign debt problems. Here are a few topics that we discussed.
What are the factors that might impact global growth?
Inflation: Inflation is a problem faced by countries around the world, not just emerging markets. But it is an important and acute question for emerging markets because it hits lower-income groups especially hard, which represent a larger proportion of the total population in emerging markets. Some emerging countries are raising interest rates, but that presents a problem in itself because it draws in more speculators for their currencies. Emerging market currencies have already appreciated substantially during the last two years, and I think many of them are over-valued on a price-parity basis. These countries are in a dilemma, because they want to export but their currencies are appreciating. Thus, some countries have introduced various capital controls to prevent their currencies from rising further. For instance, Brazil has put a tax on incoming money for fixed income instruments while China actively controls its currency. Inflation is a big challenge, and I believe it will probably be very important going forward.
Sovereign Debt: Another factor is the possibility of sovereign debt defaults in Europe, and what that may imply for other countries around the world. Greece, Spain, Portugal and Ireland continue to have problems managing their debt. While they obviously do not want to default, in looking at the numbers, I think it may be quite difficult for them to avoid it. The question now is how they can instill confidence back into the markets and how they might restructure their debt or raise more debt to repay the old debt. That said, I believe the governments in these countries continue to be very focused on coming up with a constructive approach to restructuring their debt obligations and in working with the European Union to try and avoid large scale problems.
Since my passion is to look for the best bargains I can find, I’d like to talk about where I think the bargains are right now: emerging market small-cap companies.
For our investing purposes, we define emerging market small-cap companies as those having a market capitalization at the time of purchase of less than US$2 billion. I believe many small-cap companies have the potential to grow into large-cap companies. Thus, the prospect for gains can be very exciting.
Small-cap companies in emerging markets are generally under-researched and not as established as their large-cap counterparts. Some have very short track records, not much background and little publicly accessible information, therefore presenting a higher level of perceived risk and deterring many investors. But for these very reasons, share prices of small–cap companies are less likely to reflect their true value with fewer analysts covering them, thus creating attractive investment opportunities. We try to work these “shortcomings” in our favor, essentially trying to capitalize on the challenges. Proper research and due diligence goes a long way to unearth deep and highly valuable treasures in the hidden chest of small-cap investing.
Happy New Year, readers! I’d like to start off this year telling you about another adventure in my quest to find investment opportunities: going down a mine shaft in the middle of the Kazakhstan steppes.
Kazakhstan is becoming increasingly important to us as an investment destination. It has vast natural resources such as oil, gas, copper, uranium and a host of other minerals. As a result of the billions of dollars pouring into the country to develop those resources, we believe Kazakhstan has become the economic engine for Central Asia. We have been investing in both the petroleum and mining sectors in Kazakhstan, and the purpose of this visit was to take a closer look at the mining sector. Prices for several commodities, including metals such as palladium, platinum, copper, gold and silver, rose dramatically in 2010, and that has significantly benefited Kazakh metals and mining companies.
Although the word “Kazakh” is derived from an ancient Turkic word meaning “independent” or “a free spirit”, the country has had a turbulent history. The Mongols invaded in the early 13th century, followed by the Russians in the 1730s, in the so-called “Great Game” with the British Empire. After the 1917 Russian Revolution, the country became the Kazakh Soviet Socialist Republic and part of the USSR. Later, under Khrushchev, the area saw significant Russian immigration during the Virgin Lands Campaign. Finally in 1991 it declared independence, the last of the Soviet republics to do so. Currently the government is led by 70-year old Nursultan Nazarbayev, who has been leader since independence and has been granted lifetime powers and privileges.