Last week I attended the Opal Group’s annual European Family Office & Private Wealth conference in Geneva and was one of the panellists on a panel discussion about the world’s emerging markets. The conference was very well attended and a huge success, I thought. There was an incredible spirit amongst all participants and the Opal Group really did a fantastic job in arranging this event.
My panel discussion was led by Karim Shariff of Majlis Investment Management in Dubai and my fellow panellists included Robert Strang of Investigative Management Group in New York and Emilio Soares of the Naopim Family Office in Rio de Janeiro. A number of good arguments were presented for investing in the emerging markets and a recurring theme during the panel discussion was the need to know and feel comfortable with the operators who would be managing the businesses you invest in and your partners in these far-away lands.
At one point during the discussion Karim asked all the panellists which single emerging market they would feel least comfortable investing in and we all responded ‘China’! From my point of view, China is a command economy and, because of this, it has been very easy for their government to grow their economy very aggressively but, without economic fundamentals in place to support their rapid expansion, I’m doubtful this growth is sustainable. You may argue that their expansion has been export driven and, therefore, there are economic fundamentals to support their growth. That is true but their economic expansion has been accompanied by upward price pressure on resources, while manufacturing methods have become more and more efficient in the developed world, leaving China’s manufacturing proposition less and less compelling. China will need to transform itself from a work horse into a consumer if it is to continue expanding and I haven’t read any research that would convince me that it’ll be able to do so and continue to generate the sort of GDP growth that it has in the past.
Karim also asked us which single economy we would invest in if we could only invest in one. My answer was Nigeria. Apart from Citi’s research, which points to it being the fastest growing economy in the next 40 years, there is so much to convince me that the Nigerian economy is about to enter a long period of sustained growth. I refer here to factors such as its large, and very young, population, its natural resources, including oil, minerals and agricultural resources, and the fact that oil proceeds, so much of which were externalised in the past, are being put to work in Nigeria now, infrastructural issues are being addressed and corruption is slowly being stamped out. Governance is slowly being implemented across government institutions and the private sector alike.
A point that I made as part of my opening remarks is that the spread between yields on emerging market assets and developed world assets is so wide that you could drive a bus through it and that they must start to converge at some time. As an example, Fresenius, a distressed German pharmaceutical manufacturer, recently raised EUR 500 million through a bond issue yielding 2.875% while the Nigerian government 20 year Naira denominated bond yields 12.799%. Distressed companies fail on a regular basis while the only instance of a government defaulting on its own debt issued in its local currency was the United States after the civil war when it refused to honour bonds that the Southern States had issued to fund the war!