Understanding Emerging Markets Training Course

Participants will enjoy an intense and practical few days covering:

• The basic characteristics of emerging equity markets and the “real” drivers of equity performance
• Core asset allocation techniques essential for success in today’s volatile markets
• Fundamental country analysis to help you to spotpositive or negative trends
• The specifics of emerging market stock analysis and proven techniques for valuing emerging market stocks
• The nuances of emerging market-specific execution

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The initial section of the course seeks to build a plinth for presenting asset allocation and stock selection concepts.

Defining Emerging Markets

Session Aim: Give an overall view of the emerging markets in order to provide a basis for concepts introduced later on.

• Identifying the emerging markets and the characteristics that define them
• Understanding benchmarks and the indices Brief overview of the largest companies
• Brief overview of the largest countries

History of the Last 30 Years

Session Aim: Put the emerging markets today in their recent historical context

• Analysis of the crises of the 1980s and 1990s
• Why the emerging markets moved towards relative peace in the 2000s and have in general successfully navigated the Great Recession

Example overviews:
China, as the biggest driver of transformation
1980s – Argentina; stagnation and the lost decade
1990s – Asia; from prosperity to crisis
2000s – Brazil; Lula 2.0
2008-09 – Poland; weathering the storm

Consensus vs Contrarian

Session Aim: Succinctly present the bull and bear cases for emerging markets

• The long term bull case as espoused by Goldman Sachs et al
• The current position in global emerging markets
• The contrarian (or at least nuanced) views held by certain leading commentators (e.g.George Magnus) and short sellers (e.g. James Chanos)

Investment Vehicles

Session Aim: An outline of the core investment vehicles available to equity investors.

• Description of common shares
  - local, ADR, GDR
  - mutual funds
  - ETFs
  - funds of funds

Asset Allocation

Top-down or Bottom-up?

Session Aim: Discuss the validity of each approach.

• Draw on evidence for contributions to performance
• Examples of practitioners of each style

Country Governance

Session Aim: Understand how some countries have the building blocks of long term success and some do not.

Examine the correlation of GDP per head on the one hand, and, on the other, the quality of institutions, corruption, demography, human capital, personal and economic freedom. Source this information for each country through, for instance, the World Economic Forum Competitiveness Index.

Examples: Comparison of the rise of Singapore vs the stagnation of Ghana. More recent example of Venezuela and India.

Sovereign Analysis

Session Aim: Define the basic parameters of country investment analysis; get comfortable with fundamental economic concepts; understand their relevance in asset allocation; build a dashboard for economic health. Understand the main indicators of economic strength/weakness, what drives them, how they interact with each other and why they are important:

• Current accounts, exchange rate under/overvaluation – measurement, historic parameters, comfort zones
• Fiscal accounts, government debt, financing –measurement, historic parameters, comfort zones
• Consumer habits – personal debt, excess consumption
• Financial system health – simple aggregate bank balance sheet analysis, key ratios
• Economic growth, components of GDP, productivity, interest rate cycles
• Bond market perceptions of sovereigns
  ... and their influence on equity asset allocation decisions.

Exercise: Compare various countries’ economic data to determine relative attractiveness/safety.

Exercise: Identify Indian banks that are least/most risky.

Bubbles

Session Aim: Examine common characteristics of emerging market bubbles, and illustrate sentiment and other markers to spot them.

• How the Kindleberger “model” can be applied to examine how bubbles form and expand
• Illustrate Soros’s reflexive processes at work in emerging markets
• Foreign influences (e.g. QE)
• Channels for excess liquidity (e.g. real estatemarket)
• Sentiment analysis, IPOs and other capital market activity as contrarian indicators
• Technical/chart characteristics, linked to sentiment

Examples: China: a share index 2007, Taiwan bubble (1987-1990).

Crises

Session Aim: Examine what defines crises and how to spot them ahead of time.

• Recognising the dynamic, self-reinforcing processes that drive crisis – debt, current account, currency valuation, contagion, hot money financing, confidence, the role of politics, interest rates, banking system
• Transmission mechanisms: How a liquidity squeeze extends into the broader economy
  How to look for opportunities once the crisis has passed
• Technical characteristics

Examples: Mexico 1994, Asia-Russia 1997-8, Argentina 2001.

Exercise: Compare the data of two (unnamed) countries, both on the eve of crisis; determine which survives relatively unscathed.

Earnings Forecasts and Funds Flows

Session Aim: Discover how analysts’ earnings forecasts can impact investment decisions. Appreciate the influence of international and domestic fund inflows to emerging markets.

• Examine the inherent flaws in how analysts generate forecasts
• Despite this, look at how they can be used in asset allocation
• How fund flows can alternately be generators of momentum and at their extremes, contrarian pointers
• External indicators that determine international flows (QE, foreign interest rate policy, reserve levels)
• The mechanics of the carry trade
• Reactions of governments to foreign flows (e.g. exchange controls)
• Domestic funds flows and the role of institutions in a range of countries (local pensions funds, sovereign wealth funds)

Valuation

Session Aim: Look at how valuation can be used as an asset allocation tool.

• The main top-down metrics, their advantages, their flaws and their historical explanatory role
• Arguments for valuation premiums (e.g. growth, quality etc) and discounts (corporate and country governance etc)

Exercise: Participants will be asked to use multiple data points to allocate assets to countries and sectors, justifying their decisions.

Stock Selection

First Steps

Session Aim: Set out the goals and modes of information sourcing.

• Why specific stock factors cannot be seen in isolation; other elements are at work as well (country, sector)
• Managing information flow
• Getting the most out of managements and brokers

Company Analysis

Session Aim: Give participants the tools to analyse emerging markets companies holistically and comprehensively. Examine the key metrics for cross country and cross sector comparisons as a basis for valuation.

• The role and historical performance of stocks of high and low quality in emerging markets
• How to measure quality

Using one company as a “guinea pig” to illustrate core analytical disciplines:

• Ability to withstand crisis - balance sheet structure and cash flow durability
• With reference to the vicious liquidity cycle mentioned above, analyse key pressure points, employing, ahead of a crisis, a rigorous checklist of ratios to follow and questions to ask management and analysts (debt, liquidity, cash, net forex vulnerability, derivative exposure, accounting issues, etc)

Examples: Multiple examples of corporate failures.

Exercise: Comparison of two companies on the eve of a crisis and an evaluation of subsequent equity price performance.

Pricing Power and Market Growth

• The Porter Model, and the specificity of its factors in certain emerging market sectors
• The BCG matrix (market growth vs marketshare), identifying “pioneers, cash cows, dogs and stars”

Analysing Profitability

• Understanding sources of value creation using the Dupont model
• Appreciating why ROE, for instance, can be flawed in emerging markets if linked to alegacy of asset under-depreciation (as in Russia)
• Comparison and adjustment of core ratios in cross-border analysis


Exercise: Comparison of developed and emerging market oil majors, debating sources of differences in profitability.

Bank Balance Sheet Analysis

A short overview of bank profitability and risk analysis, revisiting concepts outlined in the asset allocation section in more detail. Analysing balance sheet vulnerabilities, reference to CAMELS analysis.

Exercise: Comparison of two (unnamed) banks ahead of a crisis.

Corporate Governance and Management Quality

Session Aim: Understanding crucial differences in corporate governance standards in emerging markets

• Shareholding structures across emerging markets
• Understanding potential conflicts of interests relating to minority investor positioning vis à vis the government, families, individual shareholders, private equity funds, strategic investors
• Particular focus on government interference in emerging market companies
• Accounting fraud and other issues

Example: Multiple examples of minority shareholder mistreatment.

Summary Analytical Matrix

Reviewing these factors in a holistic company analysis employing the PESTLE framework (political setting, economic conditions, social factors (demography, ethics etc), technological challenges, legal framework, environmental factors), above all as a means of comparing emerging markets companies to their developed peers.

Exercise: Create PESTLE analyses of companies; draw conclusions.

Valuation

Session Aim: Outline the key methodologies used in valuing emerging markets companies, delineating their advantages and limitations.

• Risk analysis as an ingredient for all types of valuation, through a comprehensive checklist (country risk, start-up vs mature, small or large, corporate governance, privateor public, share class, stock market liquidity, sustainability of growth). Compare the risks to those of developed market companies
• Choices of multiples and their applicability to different types of emerging market companies
  Intrinsic valuation, with a focus on
  - DCF construction
  - discount rate calculation and the validity of the efficient markets hypothesis in emerging markets
  - sources of DCF sensitivity and hence, pointers for analytical focus
• Valuation vs peers, noting differentiating factors to be taken into account in setting a target multiple (product/service offering, customer type and size, balance sheet structure, value creation, accounting differences)
• Valuation vs history, understanding dislocations on both the upside and downside. Mitigating factors such as structural change. Limitations to the approach.
• Sum of the parts

Examples: Multiple examples for all the above concepts

Implementation

Session Aim: Aid investors in considering market access and timing factors when executing trades

• Liquidity and ease of market access
  - different classes of shares and validity of their use
  - how to access a stock’s performance through other means than direct stock ownership
  - role of external events and other factors
• Assessing sentiment surrounding a stock, linking it to technical analysis

Position Management and Exit

Session Aim: Help investors performmaintenance analysis of their companies. Outline disciplines for exiting a position.

• Digesting company earnings announcements, focusing on key balance sheet and cash flow metrics, as opposed to company-presented information
• Understanding analysts’ motivations and reactions
• Monitoring ongoing company performance
• Warning signs (deterioration in corporate governance, balance sheet, profitability and cash flow factors)
• Importance of adopting a strict selling discipline whilst allowing for overshooting

Exercise: Analysing a company’s quarterly yearnings report.

Ideas Generation

Session Aim: Drawing on many of the above-mentioned concepts, spot fundamental and technical factors that might indicate a point of inflection

• Changes in the status quo, perhaps driven by fundamental or managerial factors; trend changes
• Valuation dislocations
• Technical analysis indicating change
• Adopting ideas from investors with proven track records – sourcing and filtering information, examples of “gurus” to follow

Examples: Multiple examples for all the above concepts

This intensive training course has been designed to equip you with a proven array of practical skills and knowledge enabling you to spot and grasp the opportunities that arise in the emerging markets in the future. The course will use real-life examples of emerging market equities to illustrate each subject. Participants will be given frequent exercises and asked regularly to interact with each other.

You will benefit from a knowledge of the world’s fastest growing economies, their rising power and their place in the world is an invaluable commodity for any current or future investor or business leader giving you a greater understanding of the size and the implications of the changes underway, as well as their potential long term trajectory.

By examining the economic and financial characteristics of the Emerging Markets, along with relevant asset allocation and stock selection techniques, this course will help you capitalise on the clear opportunities while fully appreciating and avoiding the many potential pitfalls.