Following the geopolitical situation between Russia and Ukraine, do you see any enduring impacts on investment flows into other markets?
Definitely. Russia was around 7% of the emerging markets index, and anyone present in Russia had to reallocate their money to other markets. Initially of course, a lot went to the US, but now many are looking more at other countries, specifically at emerging market countries, so in that sense there’s been a redistribution of money into the emerging market space.
Do emerging technologies have any impact on the way you analyse particular market opportunities?
Definitely, technology is moving so fast and it’s having such an incredible impact. You just look at the top companies now and what they were say 10, 15, 20 years ago, you’ll see there’s been a key change in these companies, mainly because of the new technology. This is continuing and accelerating in many ways, especially with AI coming into the picture where you’re going to see a lot of impact across the market.
No matter what industry you’re in, you have to pay attention to these technological changes because it’s going to have a big impact on what happens to firms.
In terms of AI’s influence on trading processes, it already is having a big impact because you can now better anticipate what is coming as it speeds up the ability to analyse the different signals in the market. If you follow some of the most successful hedge funds, for example, you will notice that they have been using AI in order to improve their performance for some time, and that’s mainly because they can better anticipate what’s happening in the market.
Some are not embracing technology however because they’re stuck in the past and it’s very difficult to change people’s behaviour, especially when they’re surviving. If they’re surviving in the market, the thought tends to be, ‘well, why should I change, there’s no sense in it because I’m making money,’ but that, of course, is rather short sighted. You’ve got to be able to move with the times and wake up to what’s happening in the market right now.
In terms of traders managing risk, what are the main considerations to bear in mind in EM? Do traders pay enough attention to the post-trade environment?
The key is being able to get money out. When you invest in any country, you must make sure you get the money out – people who were in Russia learnt that lesson the hard way and got stuck. Aside from geopolitics, in other instances in the past it has been impossible to get money out because of currency restrictions. In that situation, you need to look at the strength of the trade within the country. If you have a country with very little foreign exchange and a very bad trade balance then you’ve got to watch out, that would be a very big risk.
In terms of traders paying enough attention to the post-trade environment, I would say possibly not. Traders are very short term in the way they look at things and probably are not looking towards the post-trade environment unless something is happening, unless there’s a crisis of some kind. An unfortunate side effect of not paying much attention to that aspect is that they may miss what’s coming down the road.
Which emerging jurisdictions are next on the list for traders to move into? How does one pinpoint the global contenders?
Well, the big boy on the block is going to be India for of a range of reasons, they’re developing at an incredible pace, for example their technology which is getting better and better every day. India is definitely number one on the list.
From our perspective at Mobius Capital Partners, we have a little bit of investment in China, but not much. However, we are currently present in: Taiwan, South Korea, Turkey, South Africa, Brazil – those are the countries that we’ve been looking at. This has mainly been driven by the companies in those jurisdictions. We’re finding companies that are most profitable and have great growth opportunities – of course depending on the sector.
We are finding a number of good opportunities. In those particular countries a lot of people worry about the currency risk, and it definitely is something you have to consider, but sometimes weak currency can work out well.
Following the recent agreement between India and the UAE to trade in local currencies, is that a development you welcome? Would you like to see others following their lead?
Frankly I don’t know whether it’s a good thing or a bad thing. Generally speaking, we invest in US dollars and when there is a move to another currency is when it becomes more complicated for us as investors.
One of the positive aspects of this however is that both countries will have to be more careful about their currencies and try to make sure that their currency remains stable. If you look at the UAE Dirham it’s pretty steady against the dollar and recently the Indian rupee has also become very steady against the dollar, so in that sense it’s probably a good thing that these countries will then need to lend more attention to the strength of their currencies.
In terms of currency affecting trading, there are examples like BRICs currency, with the countries meeting [this week] in South Africa to discuss. That would be denominated in gold and of course that gives a big challenge, but again, investors will probably convert that currency into dollars. In terms of trading, to the fact that a common currency, a new currency like that, forces more trade to a degree means it’s probably a good thing.
What are the main things traders should bear in mind when looking at emerging markets?
The principal thing that you must bear in mind is do the very best for their clients. In other words, really keep their clients in mind when executing the trades and trying to get the best deal. At the end of the day, keeping clients informed is the most important thing and by communicating what is happening in the market you’ll win the confidence of the clients, they’ll appreciate it and that is beneficial for the traders. Once you get the trust of the client then you can do a lot of business, they are the key ingredient – without clients, there is no business.
The TRADE once called you the “Indiana Jones” of emerging market investing. Is Mobius Capital Partners imbued with the same spirit?
Definitely, we keep up with the idea that you’ve got to try new things, go into new markets. In fact, in our funds we have put in a rule where we will focus on companies that are not in the index, in other words medium-sized companies. Usually, we focus on companies that a lot of people probably don’t know about, and we continue to follow an Indiana Jones-style of moving into new territories. It is somewhat risky perhaps, but so far it’s really paid off for us if you look at our performance.
In terms of how we trade, it’s a very important question because our actual trading turnover is very low and any trading we do is done by our custodial bank.
We place orders and they put the orders in and of course try to do the best trade possible and therefore we’re not very affected by what’s happening on the trading floor day by day. In terms of electing these custodial banks, for us, the first criteria is safety. We want a custodial bank that’s big and has a strong financial position because they’re holding our assets of course. But second most important is that we need a custodial bank that is willing to go into new areas.
When I was looking at emerging markets back in 1987, many banks refuse to hold any assets in places like Brazil, South Africa, Malaysia, Singapore etc. because they were simply not set up for that. So that’s a very important point for us. We need banks that are willing and have a network of partner banks to hold the assets on their behalf.
Back then it was very difficult and luckily for us we had the backing of a big organisation at Templeton – Franklin Resources, which came in with billions of assets, so we could sort of twist the arm of these banks we were already using, to go into these countries, but it’s not easy. You have to really do a lot of arm twisting to get them to do it, but in the end it paid off for both sides. What’s important to say is that it helped industry generally because a lot of other people came into emerging markets and they were able to benefit from the fact that these banks already had a custodial relationship.
[This interview was conducted on 24 August 2023].