Is it time to deploy cash into emerging markets?

Hans Lee

Livewire Markets

Ken Thompson, one of the earliest pioneers of computer science in the US, had a philosophy that now rings true across many industries.

Make each program do one thing well.

In our universe, we use that philosophy to describe tenacious and persistent investors who work on mastering one specific approach. Be it a macro-agnostic approach or a style-specific system (i.e. all value or all growth), there are certainly only a few professionals who can claim to have mastered their area of expertise.

One of those is Dr Joseph Lai of Ox Capital Management. His approach could only be described as high-conviction and - I don't think he would mind me saying this - extremely picky. As he told me, the team only has three core principles:

  1. Find underappreciated but secular industry trends
  2. Look hard for companies that lead those trends
  3. Never pay up

In this edition of Expert Insights, we'll take a close look at all three of those principles. In particular, we'll prosecute the last of these principles - why he will never pay up and why he's willing to remain patient (for years even) to buy the companies on his shortlist.

As a bonus, he tells about two emerging economies in our own backyard that he believes could present multi-decade opportunities for investors if they just know where to look.

For his complete thesis, take a look at our video or read our edited transcript below.


LW: What companies and sectors are looking too expensive?
The fact is, in most emerging market equities - they've come down quite a lot in the last few years. Even before that, they weren't really great performers. So, the valuations for the most part in emerging countries are very, very cheap.

If we look at the valuations of stocks, for example, in developed countries or in the US, we all know that the market has been volatile over the last six, or nine months. Even despite the decline, the valuation of the developed market equities is still at a significant premium to that of emerging markets. So they have come off but when we look at the valuations, they're still expensive if we look at the history of the valuations. I think they're still expensive. 

They're cheaper than before, not as a group, but some of them are. Some of the high-flying, non-income-producing SaaS stocks and stuff like that, they've come down but they're still expensive. They're still at many multiples of sales.

LW: What regions and companies are looking attractive?
Lai: In Indonesia, Vietnam, and I guess to a lesser extent, India because the valuation there is a little bit higher, we can identify companies that are benefiting from the rising consumption trend. The economy is taking off because of better commodity prices. 

In the case of Indonesia, it is benefiting from a rising commodity price. A young population is taking up the mobile smartphone, so the internet revolution's going through the economy. That economy's literally booming as we speak when the rest of the world is concerned about the global slowdown. 

But when we look at the stock market, we can actually find companies, which are top consumer plays in that country - growing earnings at 30 to 40% for the next year and the year after. And they would be on 15 times earnings. So, there is a company called MAPI (JK: MAPI). It's a retailer in Indonesia that is an example of tremendous value to be had in looking for these good growth stocks. Actually, very strong companies in markets that are out of favour, which is not pure. In doing that, we can find great industry, and great companies, and don't pay up.

LW: Why the specific interest in Indonesian and Vietnamese equities?
Lai: There are some commonalities between Vietnam and Indonesia and also India as well. And the commonality that sets them apart is decent population size. Vietnam has 100 million people. Indonesia [has] more than 200. And India, we know has 1.3, 1.4 billion people. 

Wages are still low - around US$2,000/3,000 per capita. GDP per capita is growing quickly. and they've got good governments in there. All these countries have undergone significant reforms in at least the last eight years, if not longer. That basically means it makes it easier to do business in that country. Basically, what China did 20 years ago. And guess what? When there's good infrastructure, educated people, low wages, and investment from outside and within, the economy just takes off. There are not many economies in the world that actually have this combination and we are fortunate to be able to witness another - I think - a secular boom in some of these countries. So, that's one.

In the case of Indonesia, it's even more nuanced than that. They have all the above, but also it's a commodities exporter. The terms of trade have improved out of sight for Indonesia with the rising energy prices and the like, and so we are seeing the economy booming. As a result of the investment going into the resource sector, they are making more money in exports [sic].

On top of that, they are key in the supply of nickel for the world. Most of us believe in climate change and the move to climate neutrality. One of the key metals is nickel. For the next three to five years, almost a hundred percent of incremental battery-grade nickel is going to come from Indonesia. 

That's because there are actually not many nickel mines getting opened up. But Indonesia is doing something different. They're converting the less-good nickel into refined high-grade nickel. And that's going to fuel a lot of the nickel demand in the world in the next three to five years. So, they're going to benefit a lot in the transformation as well to carbon neutral.

LW: How much cash are you holding onto in portfolios?
Cash levels sort of were a bit high when the market was volatile, so we have actually been able to use that to reduce the downside a bit. At the moment, we're actually quite prospective. I mean, there are actually just lots of good ideas out there. And we actually, it's just trying to find the best ones to buy. At the moment, the cash level is close to like 10%, which is not high for us. And yeah, it's like a kid in the candy store. What do you buy? What do you own? We're really being careful to find the best opportunities. We can see a lot of them, like in India which is booming, Indonesia which is also booming, and Vietnam. I mean, those are the key markets. China, we are being selective.

Take advantage of the rapid growth in Asia and emerging markets

Ox Capital's investment approach is to identify the immense changes taking place in Asia and other key emerging markets to find investment opportunities. To learn more, visit our website, or see the Fund Profile below.

Managed Fund
Ox Capital Dynamic Emerging Markets Fund
Global Shares
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Hans Lee
Senior Editor
Livewire Markets

Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.

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