With the crisis in the Middle East and the disaster in Japan dominating headlines in recent weeks, taking stock of the world economy has taken on a new urgency. Experts met last week at the FINforums Global Macro and Geopolitical Risk Conference in New York City, identifying pockets of opportunity in emerging markets that ranged from Brazil’s growing middle class to Iraq’s burgeoning stock exchange.
Crisis In The Middle East
Gary SickMiddle East scholar Gary Sick sought to lower expectations that democracies will replace the region’s “gerontocracies” in the near future. While Tunisia provided the spark for the protests, he said the spotlight is on Egypt as the country with the largest population, oldest political history and a capable military.
“What happens in Egypt will have a transformative effect for the region as a whole,” Sick said in his keynote address, adding that the protests are noteworthy for their focus on internal concerns, rather than Israel, the U.S. or oil exports.
“Freedom of expression is what it is all about,” Sick said.
With regard to oil, Sick isn’t too worried that we will see large price jumps at the pump as a result of the unrest. He pointed to the last decade in which we have seen wars and upheaval in the region, but the whole time oil kept flowing and the price changes were negligible.
Kenneth Kuhn, managing director of hedge fund Global Capital Investments, outlined the case for investing in Iraq, a country whose opportunities have been overshadowed by years of war, insurgency, counterinsurgency and terrorism. In a roundtable discussion on opportunities in emerging markets, Kuhn explained that Iraq has the world’s second largest oil reserves, it has brought inflation down from 80% to 5% percent in five years and seen interest rates drop precipitously. The Iraq Stock Exchange, still small with only 100 listed companies and a $3.5 billion market cap, has soared 27% year to date, while stock markets in the surrounding region are down an average 15%.
“[Iraq’s] stock market cap is about 3.5% of their total GDP,” said Kuhn, “So if you compare stock market cap of the surrounding Gulf nations to GDP, those stock markets trade at 80%-100% of GDP, that puts the Iraqi stock market in the position to grow 20 to 30 times just to get on par with them.”
All Eyes On Brazil; Asia Still Attractive
Caroline BentzIn terms of emerging markets, Brazil remains high on the list of investment opportunities.
“Right now we are most bullish on Latin America, specifically Brazil,” said Caroline Bentz, managing director at Parker Global Strategies. The New York-based fund of hedge funds firm opened a Brazilian office three years ago and has since done extensive research on the region’s economy and also on the local hedge fund community.
“We have been very impressed on both fronts,” said Bentz, citing Brazil’s successful navigation of the global economic crisis and its large and talented the pool of traders—Bentz puts the number of fund managers in Brazil at 100. She also noted that the hedge fund community is more heavily regulated in Brazil than in the U.S., citing daily postings of net asset values by independent third parties.
Beyond Brazil, “we also like some of the surrounding nations in the Andean region, Peru being one of them,” she said. “We like to think of Peru as what Brazil was five years ago.”
Bertrand Delgado, senior research analyst at Roubini Global Economics, also sees strong growth potential in both Brazil and Peru, bundling those two countries and Chile into what he calls his “first tier” of emerging markets.
“[The first tier] is well-rounded macro economically with strong dynamics in terms of demographics and capital market development and strong investment opportunities,” Delgado said.
His second tier includes Mexico and Colombia. “These are countries that have disappointed following the global financial crisis but still present a lot of potential in terms of domestic demand drivers,” he said.
Finally, Delgado puts Argentina and Venezuela in the third tier. “We think the overall political risk in these countries has declined compared to previous periods.”
Turning to Asia, Delgado said, “we like China, we like Indonesia and we like India. Perhaps India and Indonesia as the main drivers going forward, because of domestic demand.”
Bentz agreed, saying that Parker Global Strategies is becoming more bullish on China, and that she doesn’t think it is overheating. “The measures that have been taken have contained [inflation],” she said.
As for Japan in the days following the tragic earthquake and tsunami earlier this month, “It was a buying opportunity. Interestingly enough, we did not see anyone going short. We saw managers who were net short Japan before the quake cover their shorts and go net long,” she said, adding that she also saw pan-Asia managers who weren’t in Japan before the quake enter the market for the first time since 2005. In fact, Barton Biggs, managing partner of Traxis Partners and a speaker at the forum, put 10% of his assets into Japan immediately following the earthquake.
“What will be interesting to watch,” said Bentz, is whether “this is a highly-opportunistic, short-term trade or if this is the beginning of a more structural, long-term trade. I’m more inclined to think that it is the former,” she said, citing uncertainly about the nuclear situation and how that will play out. She added that once the situation becomes clearer and more data is available, we may see hedge fund managers enter the Japanese market selectively where they see opportunities for growth as the country rebuilds.