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Jon Auerbach, '64 read earlier
article |
Want to pick up some shares of a mining company in Mongolia? How about
playing bonds in Bangladesh?
Available technology may let your average E-Trader play markets in
China, but there are still plenty of places where trading requires some
specialized assistance. Enter Jon Auerbach, cofounder of Auerbach
Grayson, a boutique brokerage in New York that links up institutional
clients with far-flung investments in more than 119 "frontier" markets
around the globe.
Fresh off a three-week jaunt through Africa, Auerbach spoke with U.S.
News about some overlooked opportunities, including why African
pariah Zimbabwe might be a buying opportunity. Excerpts:
Why focus on the frontiers? Seems like a lot of
work and uncertainty compared with running
mutual funds or something.
It goes back to my belief that the historians will say our century was
the beginning of the leveling of the global playing field. All of these
people have aspirations to whatever their version of a middle class
looks like.
Let's talk about some favorite markets.
Our most active are Bangladesh, Pakistan, and Sri Lanka. South Asia is
attracting a lot of new money right now. What's interesting in all three
is their valuations relative to India. That's what makes them cheap.
Remember, at one point these were all part of greater India when it was
part of the Raj and under the administration of colonial England. As a
result, there is a stock market tradition that came with the English.
There is a legacy of investment and a legacy of governance and rule of
law which underpins the legitimacy of any stock market.
With the tremendous growth in India and valuations in that market,
people neglected the others to the point where they were generally half
that of India, depending on your metric. There's certainly a political
overlay, but such low valuations led us to focus on local partners
there.
Who's on the cusp of being a new India (or a new
Brazil, Russia, or China, the other so-called BRICs)?
Well, the BRICs obviously have the size, but I would say Nigeria is an
extraordinarily important market. Within five years or so, it will
probably be the banking capital of Africa. It's a country of 160 million
people and has done some very important banking restructuring. Its
central bank really took charge, raised reserve requirements, and
reduced the number of banks so they're all very well capitalized. A
number are being actively invested in by major U.S. institutions now,
plus it has a very liquid stock exchange.
If Nigeria's doing well, Zimbabwe is an obvious
counterpoint. But you see opportunity there too ...
Like everybody else, I'm waiting to see how the election turns out. If
indeed we find out in the next day or two that the voters have rejected
[President Robert] Mugabe, I think it's going to be an extraordinary
event and an opportunity to make some remunerative investments. The
country has operated remarkably well through this hyperinflation, so
change would be surprisingly fast—maybe just two or three years.
Now is the time you have to make those investments. For example, now's
the time to buy Delta Corp., a brewer in Zimbabwe. It's operating at
about 30 to 40 percent of capacity and still making money. Its market
cap to a hectoliter of beer, which is the way brewers are valued in
emerging markets, is $50. East Africa Breweries, the Kenyan brewery, is
currently trading at $200 per hectoliter. That's four times the
valuation. That should improve with a new government.
Market cap per hectoliters of beer? Not exactly a
traditional valuation tool on Wall Street ...
I'm thinking of renaming the firm Auerbach Grayson: CSI. Take Econet
(Wireless), the major cellular phone company in Zimbabwe. Last month I
met with the [chief financial officer]. His revenue is cellular cards
that are sold all over the place and people buy them as they can afford
them. It's a cash business, but each day they're losing through
inflation 15 to 20 percent. [Editor's note: Zimbabwe's annual inflation
rate has topped 150,000 percent, according to some estimates, by far the
world's highest].
So I asked him what he does with the cash. He said, "I put it in the
stock market." And I asked if he was joking. So I asked the value of his
portfolio, and he said it's the equivalent of about $150 million. The
company only has a market cap of $125 million. He looked at me and said,
"That's why we're a good buy!"
How are these markets faring as the American
economy slows?
On a macro basis, we take a very positive view of the global economy
right now. Given the [fund] flows we see and the amount of business we
do in these markets, it's certainly where business is going. On a given
day, I'll trade in 30 to 40 different countries and have turnover of
$150 million to $200 million a day in order flow. Five years ago, 50
percent of our revenue came from G-20 markets and 50 from the rest of
the world. Today, close to 65 percent is from the emerging and frontier
world.
I also think global investing from people who are dollar-neutral, and
that includes American managers, will continue to focus outside the
United States, because the dollar will continue to be under more
pressure than other currencies. Investing in most foreign markets is a
natural hedge to short the dollar.
Is political leadership improving in Africa in a
way that will help draw investment?
The postcolonial kleptocrats who assumed power when the British, French,
and Portuguese took it on the lam in the '60s and early '70s are gone.
You've got some really remarkable leaders in Africa like [President
Yoweri] Museveni in Uganda, [Jakaya] Kikwete in Tanzania. In terms of
privatizations, citizens becoming shareholders, publicizing investments,
the improvements are there. They're politicians at the end of the day,
but they're cognizant that there's something to improving people's lot.
But the political element is obviously still a
concern in some of these spots. How do you invest in places where
political risks are high and stability isn't a given?
The concerns people have, whether it's political corruption or
governance, are generally overstated relative to the reality. Kenya had
an electoral political crisis in January. I went there immediately
afterwards because we have a lot of investments there for clients.
Within two days—and I know what the headlines said—downtown Nairobi was
busy.
We went around and picked up some fantastic, sizable, $10 million-range
blocks of stock in some Kenyan companies. Our clients are up 10 to 15
percent on it on the recognition that what you could see on the evening
news [was disruptive]—and I'm not minimizing what happened because there
were people killed—but they resolved it. And things like tribalism are
on the wane. I'm a great believer in Africa.
Any advice for average retail investors?
For the man on the street with a 401(k), realistic emerging market
exposure is an absolute must. That means about 15 to 20 percent of a
portfolio in emerging markets.