Value Opportunities in Emerging Markets | The Acquirer's Multiple®

During their recent episode, Taylor, Carlisle, and Juan Torres Rodriguez discussed Value Opportunities in Emerging Markets. Here’s an excerpt from the episode:

Tobias: So, how do you characterize what you’re looking for? You’re looking for undervaluation, but you’ve maybe got the advantage that you can look– because you’re already looking in an emerging market, you can find things that are really undiscovered gems that have the potential to grow over an extended period of time. Is that the sort of thing that you look for?

Juan: So, I think one of the misconceptions around doing value investing in the context of emerging markets is that people tend to think about value in EM as your state-owned enterprise, cyclical driven company. And yes, you do find those emerging markets and yes, if you buy them at the right price, you should do well over time. But the value opportunity is much broader than that, because the markets are so inefficient that it creates a lot of opportunities.

So, you will have your typical fallen angels. The best example of that is a company like Alibaba, which was one of the best companies in the world four years ago. And today, it’s hated by pretty much everyone. You have your cyclical companies. You have a lot of special situations, corporate action-driven type investments which are being screamed by either the company or the sell side, as in the corporate action that’s going to take place, and the market, for whatever reason, doesn’t act on it. There’s a lot of hidden growth, because EM tends to be thought of as a monolithic block. There are 25 plus markets and those markets are very, very different.

I ran this exercise the other day with a group of clients on Friday, where I was presenting EM investing, and I was doing this trivia quiz and I asked them, “Is there in common between a Chinese and a Colombian?” And there was silence. And then I said, “I will give you a clue.” Nothing. There’s nothing in [Jake laughs] common between Colombians and Chinese. There’s nothing. And so, there’s a lot of opportunities, but markets, we know that they always like to build stories and narratives, and there’s always a market that is part of that narrative.

So, four years ago, it was Chinese tech and China, and it was booming and no one could see any stop to the amount of growth that these companies could deliver. And today, it’s all about India, and TSMC, and Nvidia going into the supply chain and that kind of stuff. That means that many other markets tend to be ignored. There are very good companies with very good balance sheets, almost no debt, with a decent amount of growth happening that tend to be ignored by the market.

And then, the last bucket is a lot of businesses which are in structural challenge where you have a very clean balance sheet. A good example of that is Taiwanese old tech, where the profit stream is still very healthy, it’s creating a lot of cash flows, but it’s not growing anymore. They are reinvesting a lot on R&D. In many cases, doing a lot of buybacks, but they tend to be ignored by the market because they’re not growing anymore and they are not in the hype of the moment. And so, those can potentially be very lucrative. And then, what we try to or the aim is to build a portfolio that is catering to all of these different pockets. And those with different pockets will be playing a different role at different points in time.

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