James Montier on Emerging Markets: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is James Montier of GMO who talked about emerging markets.


James Montier's London Value Investor Conference Presentation

It is hard to be a contrarian investor. Human nature makes us feel safer and warmer in the middle of the herd. The Institutional imperative means it is better to fail conventionally than to succeed unconventionally. Asset managers tend to play it safe. As Jeremy Grantham has noted career risk produces conformity and anchoring among investment managers . Montier pointed out that value metrics can provide investors with a powerful alternative anchor that can be used as strong form of behavioural self-defence.


Investment idea: Emerging Markets  

Earlier in the year GMO were considering whether or not to put money to work in emerging markets. EM had been hated by investors in recent years and Graham and Dodd P/E ratios showed them as undervalued. It looked as though value stocks in emerging countries were particularly cheap which got them more excited. The value proposition in EM looked the best it had been for many years.

They stripped out financials and resources stocks from their analysis because both sectors are hard to value.  It is difficult to value resource companies as future returns are tied to the price of the underlying assets such oil or gold. Financials are opaque because of the difficulty of knowing what assets they hold. After they had stripped out financials and resource stocks they concluded that EM still looked cheap.

Montier’s team asked themselves how could they be wrong? A question Montier said investors do not ask enough. They thought perhaps that EM equities have not been equity like? Perhaps they were not like developed equities? Their results showed that EM equities were indeed like developed equities at least in terms of earnings yield – with a 6.5% average annual return. 

They asked whether the average future conditions for EM going forward were likely to be similar to the average past conditions? They had been looking at the last 15 years in particular and they wondered if that period was normal? They asked what sort of growth would be required over the next 10 years in EM to make them feel comfortable that today’s prices offered a good value?

They concluded earlier in the year that about 1.5% real growth would do it. That did not seem like a huge hurdle, however, when they went back and looked at the last 15 years they was surprised to find that the EM value subgroup had only grown at 1.5% per annum in real terms. That tempered their enthusiasm a bit. It made them conclude that EM valuations were fair but not cheap. Compared to the opportunity set faced by investors today, though, EM appeared to be preferable to other assets.

They also started to worry that looking back 15 years was not long enough especially as the Asian currency crisis of 1997 was excluded from the data. This gave them further pause for thought as earnings yields in that period were crushed. He pointed out that it is also important to balance this with the recognition that EM economies are in better health than they were back in the late 1990s. For example, today most EM countries run a current account surplus rather than deficit and there are less fixed exchange rates. They also worried about the high level of private sector debt at a macro level but were relieved to find that it did not show up in the balance sheets of individual companies that make up the MSCI emerging index.

Even if they were right about valuations in local terms could they still lose on the currencies? They found that the EM currencies had already fallen a lot from expensive to fair value. This meant that if they fell further they would have the reassurance of knowing that the currencies were cheap and should mean revert at some point - a temporary but not a permanent impairment of capital.

In the end they decided they would buy some emerging equities but they tempered their buying because of the negatives they had found around earnings.



Be sure to check out the rest of the presentations from the London Value Investor Conference.

David Winters' Wintegreen Fund Focused on the Emerging Market Consumer: Wealthtrack Interview

Consuelo Mack's show Wealthtrack had David Winters of the Wintergreen Fund on this past weekend.  Their interview touched on what stocks he's seeing value in these days.  Winters is a value-oriented investor and he runs a somewhat concentrated book with his top 5 holdings representing 30% of the portfolio.  


Winters' Focus on the Emerging Market Consumer  

One of the main themes in Winters' portfolio is the emerging market consumer.  This is by no means a new theme, but Winters argues you can buy stakes in some great companies with exposure to a rising consumer at good prices still.  

In particular, he's focused on luxury brands as he's seen these aspirational consumers crave these brands in his many trips to Asia (he's been 20 times).   Richemont (VTX:CFR) is the owner of Cartier and is one name he likes.  He says it's the most aspirational jewelry brand and he notes that the Wynn Macau has two stores there since they were selling so much.   

Winters also likes Wynn Macau (HK:1128) as a beneficiary in the Asian gambling hub since there's only 6 operators there.  He notes there's no social stigma in Asia associated with gambling.  He also likes Steve Wynn as an operator  They're the high-end provider of gaming in Macau.  He likes that you get paid 5% (dividend) to wait while the company builds out its property in Cotai.  Winters likes the conservative balance sheet and the fact that there's so much demand.  

Jardine Matheson (SGX:J36) is another name he likes and has been involved with for a long time.  It has 3 principal businesses: small convenience stores, a dairy farm, and it controls Astra, the biggest company in Indonesia, and they also own Hong Kong land, some of the most valuable assets in the world. 

One of the companies Winters has been newly buying is Cielo (CIOXY), Like his thesis on Mastercard (MA), his play on Cielo is the secular shift from cash to plastic.  Cielo is a payment processor that has 50% market share and trades at 13x earnings.  While short-term Brazil might face headwinds, he likes the opportunity long-term as 190 million people can start paying via credit/debit cards. 

Given Winters' emerging market consumer focus, Consuelo Mack prudently highlighted a term from a Bain & Co report: HENRYS: High Earnings, Not Rich Yet consumers.    This is a sweet spot Winters is targeting.  


Winters Loves Companies With Pricing Power  

The Wintergreen Fund manager says, "In my life and in everybody's life I know, everything costs more."  For this reason, he loves businesses with pricing power. 

For instance, he loves the watch and jewelry business.  For men, he notes, the only jewelry they wear (aside from a wedding ring), is a watch.  Swatch (VTX:UHR) has low, medium, and high-end watches and it's one of his major holdings.  He likes the management team and says the company is shareholder friendly. 

He also likes Nestle (NSRGY), especially for their pet food business as humans will spend a lot of money on their pets.  

Pricing power is a valuable asset for any business and we've outlined Warren Buffett's focus on pricing power in the past.


Interest Rates Rising = Inevitable

He thinks interest rates will go a lot higher over the years, saying "it's inevitable." 

In a rising rate environment, he likes companies with the trifecta: good management, a cheap price, and improving economics.  As long as the company can grow earnings and cashflows, they can outpace.  Winters says this is a stockpicker's market and notes the economy in the US is rebounding and some companies trade at the wrong prices. 

He also made sure to point out the asset allocation of many investors these days: safety.  "Most of the public is in cash and bonds, and they'll get annihilated."  

Winters ended with this bit of investing wisdom: "Headlines are often an opportunity, because people today focus on the negative, and we're very focused on where can we make money out of this?"


Embedded below is the video of Consuelo Mack's Wealthtrack interview with David Winters of the Wintergreen Fund:



For more Wealthtrack interviews, we've also posted up Consuelo Mack's talk with Bruce Berkowitz.

Maverick Capital Focusing on China & Emerging Markets (Investor Letter)

Lee Ainslie's hedge fund firm Maverick Capital finished the first quarter up 3.6% and has seen 14% annualized returns since 1995. Many of their recent gains are attributable to their short positions in emerging markets. As we've detailed before, some hedge funds believe inflation is the biggest threat to the emerging world.

The hedge fund is now paying more attention to global macro issues as they affect markets more than ever. Maverick is not the first equity-centric hedge fund to include macro observations in their research as David Einhorn's Greenlight Capital has done this for a few years as well.

China's Importance

In Maverick's first quarter letter, Steve Galbraith talks about the importance of emerging markets. He writes, "From a top down perspective, what we see in China is a wonderful investment cocktail characterized first and foremost by tremendous growth potential, likely laced with enormous winners and losers but with still meaningful reliance on the state for capital allocation."

Interestingly, Maverick had $2 billion in gross capital (both long and short) exposed to China. They are long consumer and technology companies, financial firms with double digit return on equity, Chinese social media companies, as well as industrial companies with wide moats. On the short side, they are focusing on bad balance sheets and bad governance. In the past we've highlighted some of the Chinese reverse merger frauds as well.

Maverick believes the biggest risk in China is the misallocation of capital. Galbraith writes that, "Ironically, I suspect the true test of the Chinese economic model will come not with hardship, but with prosperity." Many investors are watching cautiously to see how the Eastern nation handles such growth.

Embedded below is Maverick Capital's first quarter letter (email readers need to come to the site to read it):



In recent portfolio activity from this hedge fund, we detailed how they reduced their position in Rightmove recently (LON: RMV). For more commentary from Ainslie, be sure to read his 2010 year-end letter focusing on the impact of fund size on returns.