Friday Thoughts

Emerging Markets: What’s going on….?? Emerging market currencies have fallen to their lowest level since 2009.

Argentina has hit the headlines, but Turkey, South Africa and Russia have also been hit hard. There has been violence on the streets of Kiew and Bangkok.
The scare has quickly dragged down the S&P, followed by the Asian stock markets.
How worried should we be?

Firstly, this is nothing new and certainly not out of the blue. It has been brewing for a while.
Emerging market countries have been walking on the wild side for some time, certainly since May, when the Fed made it’s first attempt to start winding down its bond purchases.
Since then, investors have been shifting out of EM, when long term interest rates began rising in the US.
This prospect of an end to ‘free money’ has caused funds to be pulled from emerging markets which have been benefiting from a decade of easy inflows, and so currencies and stock markets tanked. This seemed to have stabilised over recent months, but crises tend to come in fits and starts rather than one big bang.

A couple of things have not changed, and some argue have even got worse.
Firstly, there is still no clear indication from the rich world’s central banks on how they will tame the beast they have created through loose monetary policy. Secondly, the emerging world’s recovery in exports looks
decidedly average. The hope was that as the rich world recovered faster, it would demand more goods from emerging economies and become less dependent on foreign capital inflows. But stats are mixed as China’s exports have grown slower than expected, and Brazil and Turkey’s current account deficits have widened.
China is the one economy that serves as a proxy for western appetite for exports, and a source of demand for commodities. At each sign of a China slow down, investors run from emerging economies.

From looking at the worse hit countries, even as their currencies are coming under pressure, this latest panic seems to be as much about politics as anything else.
There are too many fires burning.
South Africa is facing a wave of unrest, Turkey’s currency has collapsed due to a corruption scandal, Ukraine is being racked by huge protests, and Venezuala is a political wreck. Perhaps more countries facing political instability or social unrest may cause a further spread from these troubled spots, and this is not impossible with India and Indonesia facing elections this year.
A second trigger could be the state of the financial system, and the banks in the emerging economies. All emerging countries have shared in the huge credit boom and loans have been growing by double-digit rates for many years.
Have a look at the share price of Standard Chartered, a bank largely exposed to the emerging world. It has collapsed.

So, two things to look out for signs that the recent wobble may turn into something more sinister.
First , the streets, and for more social unrest.
Second, the banks and rotten loans.
For now, these events are only going to drive more people towards safer, more politically stable economies, currencies and markets.
But for those with a long term view, and the stomach to ride out some volatility, this may eventually provide an opportunity.
The long term
What should we be looking for….?

Talking of the longer term, what exactly does that mean?
Most talk of long term investing as up to a 10 year horizon, a time-frame in which a hell of a lot can happen.
For that reason, a long term investment is going to have to meet several criteria.

1. unlikely to be disrupted by technology
2. meet a need somewhere towards the bottom of Maslow’s pyramid
3. produces a yield
4. expectation of capital gain

With this in mind, one of my favoured 5-10 year investments would be in agriculture/farmland.
For the following, fairly simple reasons.

1. the customer base is growing (population)
2. supply is limited (‘buy land, they’re not making it any more’ etc)
3. the customers have little choice about buying the product (food)
4. it produces a yield

Concerns about the ability to feed a population of 6 billion people, expected to rise to 9 billion by 2050, are of course well documented. According to the UN, food production will have to increse by 70% to feed the world’s larger, more affluent and more urbanised population by 2050.
Efforts to control food prices and the means to produce it are being viewed as the ‘new oil’ of the 21st century.

So how can you invest in the agriculture industry?
Of course you could get your hands dirty, buy a farm and become a farmer.
Not so easy, and maybe best left to the experts….
There are several funds which buy global agriculture land/assets. Look for those investing in political stable countries, and with growing populations.

Alternatively, you can invest in companies which provide inputs and equipment – such as fertiliser, seed and machinery – to the agriculture sector.
Or provide financing for farmers.
Or as Jim Rogers says ”open a chain of restaurants in the Midwest or in the Australian outback, or open a Lamborghini dealership there because the the farmers will be driving the Lamborghinis and the stock brokers driving the tractors”.

……here are a few more popular ‘long term’ investment themes worth thinking about….

– Chinese Consumer Sector – ”long term no brainer” Jim O’Neill

– International Healthcare – the thought being once emerging middle classes have satisfied their demand for leather counches and flat screen TV’s their demand will refocus on healthcare, this combined with the increase in health threats from internal pollution, environmental threats and ageing populations. It could be the next ‘perfect storm’. Exposure can be gained by the Worldwide Healthcare Investment Trust (WWH LN).

– Energy intensive US manufacturing – any company likely to benefit from the shale gas revolution, and able to lever off the emerging market consumer
Parkwalk Update

At a different end of the investment spectrum, is what we do at Parkwalk.
We look for disruptive technologies which will transform markets.
Xeros, an investment in our Portfolio is a classic example of this, and the company has recently announced an upcoming IPO (expected to be at between 6 – 12 x our investment price 3 years ago).
See: www.youtube.com/watch?v=Hr0Vei-cmXE&feature=youtu.be

On a wider scale, we have seen further indication of an increase in the interest in the assets of UK University Technology spin-outs, with IP Group (the FTSE 250 listed specialist) buying Fusion IP (a smaller version) at 82p a share which values Fusion at £87.8m. This is around 2x gross assets.
IP Group’s share price itself is also currently trading at 2.1x NAV.
Such is the excitement and potential in this sector, investors are prepared to pay twice what these companies are ‘worth’ in the expectation of future returns.
Parkwalk co-invest in several IP Group deals, and with the additional tax reliefs offered via the EIS, investors in Parkwalk funds are investing at a 30% discount to NAV rather than a multiple.
This offers a huge opportunity for individual investors.
We expect to find many more Xeros’s in the future.

Other bits of interest….

Facebook – the first $1bn Ad quarter…..
Apple – iPhone sales miss….