Issue No. 17: Revisiting Travelsky Technologies and the Frustrations of Emerging Markets
The siren's song of emerging markets
I’ll be referring to a portfolio position that I have in Travelsky Technologies - for background on the company please see my previous blog posts:
You’ll also find a couple of decent write ups on Value Investors Club - one very recently.
Every 5 years or so there will be a general discussion of how it’s finally time for emerging markets to outperform the general US market. Fund Managers advertising exotic investment vehicles aside - this is usually misguided at best, and complete ignorance at worst.
I say ‘usually’ because I believe the stock market is a market of stocks. I’m looking at individual companies to generate returns, not making general assumptions about a large number of firms that happen to be listed in the same geography. Just because certain business characteristics and managerial behaviours are uncommon in a certain country doesn’t mean they don’t exist at all.
To the extent that we can make observations about stock markets generally, a few things seem to be true across what we might call emerging markets:
Returns on Equity, Assets, and Capital are often hamstrung in State Capitalist or Authoritarian systems. It also happens in places like Japan where capital is used to achieve social ends. A pretty cursory comparison of the MSCI Emerging Markets Index and the S&P 500 sees a considerable delta in their respective ROEs,
No less than 13 emerging markets have been removed from the large emerging market index funds since 1997. Political risk is significant in countries and currencies that can only borrow in a reserve currency,
The lack of strong institutions and the rule of law means asset seizures (of varying descriptions), volatile operating conditions, and unpredictable tax regimes - all of which impairs predictability,
To the extent that any serious value gets created in individual companies, that value is often siphoned off by insiders, controlling families, and/or governments. This isn’t to say that these things don’t happen in the West - they do.
I’ll use an existing portfolio position to illustrate how things can pan out in unforgiving ways for minority shareholders.
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