| John Burbank, Passport Capital (Bloomberg) |
John Burbank, the CEO of $4 billion Passport Capital in San Francisco, has been looking pretty smart about how to play emerging markets, although the global downturn this week is cutting into almost everyone’s long positions. About two years ago Burbank decided that some of the biggest future earnings were in Chinese Internet companies — then in September the Chinese Internet commerce site Alibaba came out with the biggest initial public offering of the year, at $22 billion. In 2009 Passport started investing in Saudi Arabian stocks, and now the National Commercial Bank of Saudi Arabia is scheduled to launch the year’s second largest IPO, at about $6 billion, in November.
Retail investors in Saudi Arabia began selling in droves after this week’s downturn, bringing the country’s stock market, the Tadawul, down 5 percent on Thursday; this is a market that has been vulnerable in the past to local panic selling, which is one the reasons that finance ministry plans to open the market more fully to foreign investors in the first half of 2015. But for Burbank, who sees the Tadawul as an inefficient stock market that is likely to get a lot more foreign capital attention from investors after it opens up, a 5 percent dip presents an opportunity to load up on stocks cheaply.
Marko Dimitrijevic, CIO of the $2.9 billion emerging markets fund Everest Capital in Miami, also has been investing in Saudi Arabian stocks for six years and Asian Internet companies over the last several years. “Saudi Arabia is a wealthy country and not on most investors’ radar screens,” says Dimitrijevic. More to the point, he sees it as a market in which some 60 percent of the population is under 30 and provides a rapidly growing consumer base. Both Dimitrijevic and Burbank weight their portfolios toward companies that tap into that local consumer market, such as healthcare, mobile technology, retail and travel services.
Despite slower growth in emerging markets all over the world, fund managers are finding plenty of earning potential in specific sectors where there is a product or service likely to benefit from the consumer spending that comes with a growing middle class. Indeed, new middle class consumers are something of a mantra to emerging market investors. But there’s another bonus to investing in such sectors in China and the Gulf countries of the Middle East: the currencies are pegged to the U.S. dollar, so in a time of rampant emerging market currency sliding, a U.S. based investor won’t lose money through local currency devaluation.
Currently big institutions can invest in Saudi Arabia’s stock market, which has a market cap of more than $530 billion, through swaps and promissory notes from locally licensed brokers. But unlike the Alibaba IPO, hedge fund managers will not be able to mob the NCB offering. The stock will be available only to local retail investors at the launch, although foreigners will be able to buy it on the secondary market. “We’d consider it,” says Dimitrijevic. But he notes that the exchange, the Tadawul, already trades over $2 billion a day, making the market more liquid than Russia or even Mexico.
The stock markets of the Gulf Cooperation Council, of which Saudi Arabia is the largest, have fared well for most of this year despite weak oil prices largely because their currencies are tied to the U.S. dollar, notes Peter Marber, a strategist who is head of emerging markets investments at Loomis Sayles in Boston. He cites some comparisons to show the difference that exchange rates can make. Saudi Arabia’s stock market is up about 23 percent over the past year in spite of the dip. Dubai’s is up about 54 percent and Qatar about 38 percent, all in local currency as well as U.S. dollars. The Tunisian index, on the other hand, barely moved this week, but its 4 percent gain over the last 12 months is in local currency only; in dollars it is down by about 5 percent. “Last year South Africa was up 15 percent in local terms but a U.S. investor would have lost 8 percent because the rand got smoked against the U.S. dollar,” says Marber.
China’s yuan also moves in close alignment with the U.S. dollar. Though the Chinese stock markets haven’t been great performers in recent years, “there is a great divide between behemoth state-owned enterprises that are sluggish performers but unfortunately dwarf the indexes and water down the good returns of many up-and-coming companies,” says Marber. Alibaba is listed on the New York Stock Exchange, but Everest’s portfolio managers, speaking at the firm’s investor summit in New York last week, talked about opportunities in Asian Internet companies in general, including such Chinese Internet companies as VIPshop, an online discount retailer also traded on the New York Stock Exchange, and Dianping, a restaurant and entertainment review site planning an IPO in the U.S.
“Alibaba highlighted the scale of the opportunity in Asian Internet companies,” says Dimitrijevic. These companies, he says, are benefitting from rapid growth in penetration rates and income growth in the local markets. He also sees opportunities in such areas as renewable energy in China and luxury car companies that manufacture and sell in China, notably Range Rover. There has been an anti-corruption movement under the Xi Jinping regime that has cut into the sale of Range Rover for Chinese government officials who in the past received them as gifts or bought them to show off. But Dimitrijevic figures that as business sectors like technology grow, other members of the population will buy luxury cars. “A lot of newly minted millionaires from Alibaba are probably going to drive Range Rovers,” he says.
Everest’s flagship Everest Capital Global fund was down 1.5 percent for September and up 12.4 percent year-to-date through September. The Everest Capital Emerging Markets strategy was down 1.4 percent in September but up 17.9 percent year to date, while the Everest Capital Frontier Markets fund gained 2.1 percent in September and 14.8 percent year to date.
Burbank declined to comment about his investments, citing compliance issues, but Saudi Arabia has been a very high conviction investment for him over the past few years and continues to be so. More than 20 percent of Passport’s global portfolios are in Saudi Arabian stocks, up from around 10 percent a year ago, according to people familiar with the firm. The flagship Passport Global strategy is having a slow year, down .70 percent in September and up just 1.19 percent year-to-date through September. But Passport’s Special Opportunities Strategy, which holds more concentrated positions in high conviction investments, including those in Saudi Arabia and Chinese Internet stocks, is doing better: up 12.39 percent year-to-date through September and 1.20 percent for the month of September.
