Emerging markets
I am a newbie in the emerging markets scene and particularly interested in the last frontier, Africa.
Where can I get African data?
What books should I read to get a good picture of what's going on in the continent?
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I don't cover Africa but another very frontier part of the world where data is a nightmare.
Macro level data is usually somewhat available, with local central banks being the first port of call (no guarantee anything will be in English though). Failing that, look for research publications by multilaterals - the African Development Bank would be a good place to start, then the World Bank and the IMF (the IMF WEO has general macro estimates for basically every country in the world, but it's always better to get it from as close to the horse's mouth as possible). IMF Article IV reports give a good overview of the macro developments of individual countries.
If you're looking for company level data you're gonna have a bad time, outside of maybe South Africa. Capital markets in these countries are generally non-existent, so there are very few public companies with any reporting obligations. Outside of mining, which is where pretty much all FDI goes, anything "major" will be either an SOE or a privately owned company.
And therein lies the problem with the sector. I have a personal fetish for these extreme frontier markets too, but they present very few investment opportunities and even fewer investment related jobs. If you look up the holdings of so called "frontier markets" funds you'll find they're invested in countries like Vietnam, Egypt and Peru, not the hardcore places we're talking about. You'd be better off setting up a vanilla plantation in Madagascar than playing with Africa's secondary markets.
Sovereign debt is best bet for this. By my rough count ~40 percent of the EM issuers would qualify as “true frontier.” Think Papua New Guinea, Tajikistan, Benin, Suriname...
I am, in fact, in sovereign debt. As interesting as it is though I don't know if I'd recommend it to anyone as its niche as hell and I'm seeing very few opps for career growth
Interesting. No doubt it is niche but hiring is quite robust for it on the buyside currently. Much more resilient IMO to automation/passive than almost any other public asset class save maybe structured credit.
Would be interested to hear why you think it's resilient.
I'm slightly worried that the whole field is becoming redundant because the macro has been turned on its head. At one extreme you have reserve currency countries that can seemingly borrow as much as they want now without scaring investors. On the other you have these solidly junk frontier issuers (a couple that you mentioned spring to mind) that can always seemingly get a few hundred million from an MDB at concessional rates when shit hits the fan. And for those countries in between that do rely on market issuances, demand is such that it's never been a better time to issue regardless of the pandemic and overall macro fundamentals.
Is there any area in public FI that you believe is more resilient?
I think his answer below makes a good case for sovereign bonds, I can't really refute it anyway. I'm not on the buyside though so I don't really know what I'm talking about. In any case I hope he's right.
Beyond FI I would've thought that small cap and growth equities would be fairly resilient to automation etc on the basis that a lot of the analysis surrounds the quality of management and I don't see how AI can evaluate that.
A few final thoughts:
- for any potential asset management folks I’d caution against choosing solely on resilience bc ultimately it is hard to predict. Ones best best is some intersection of passion/aptitude, some visibility to asset classes trajectory, and portable skills if one needs to rebrand. If you knew you were in the print journalism industry 10 years ago then sure take a view, but things are rarely that clear cut. I guess my point is if one really loves sovereign debt then I don’t see a strong enough case to abandon it just based on potential pure irrelevance.
- the best hedge imo is to develop hard data analytics skills over “macro opinions.” Unfortunately at early career level no one really cares about your views but the skills can always be put to work in another industry.
- if one is purely choosing on resilience then it has to be in private markets asset classes. @brotherbear had a great post on this elsewhere.
- finally on sovereign credit I really think of 3 buckets- g 10 (which is really “rates”), non g 10 hard currency (which is really emerging markets credit), and non g 10 local currency (which is really EM local). I have differentiated views on the resilience/attractiveness of the 3 and one could argue even require somewhat different skill sets (though many bucket 1+3 or 2+3). Readers should be able to deduce this based on the level of data availability, relevant liquidity, and sharpe ratios.
How does one get into sovereign debt? What kind of skills do you need?
What you say is true, but I’d argue is only half the story as it focuses on the issuers, but not investors side. Currently EMD along with US High Yield and some structured stuff are the only public fixed income asset classes with any kind of yield. Hard currency EMD has a very attractive historical sharpe ratio while the others have their own challenges (US HY is lower quality and structured get more unfavorable capital treatment for many global investors). Just look at the flows numbers for hard currency EMD recently.
Right now there is a lot of sloppy pricing i.e. “this is a B+ but in this region or an oil exporter so let’s say B+ with an additional 50 bps” regardless of whether the underlying is a resilient or basket case B+. You allude to this in the easy market access reference, but that does not mean these should all price the same or will end up the same (see the 4 major defaults from 2020). I’d argue the sovereign debt market (really the EM portion) is ripe for “stock picking,” which is main argument against passive.
Lastly data challenges you mention and the relative illiquidity makes me more comfortable on the automation vs. equities (generally 1 “equity” vs. many different bond cusips).
My best friend worked for a company that invested in Nigeria (the HQ was on US West Coast). Actually I didn’t really think of him as being entrepreneurial but dang that was. Anyways it didn’t work out. Forgot why. He had a cool picture with his Nigerian body guard.
In business school, I took a social impact investing class and spoke with a NGO in Tanzania that helped girls raise chickens so they can get a secondary education. Tanzania seems interesting to me: Serengeti, Mt Kilimanjaro and Zanzibar. And from the NGO, relative stability.
I owned the ETF iShares EZA for the longest time. Maybe research the companies in that index as they probably have regional exposure and listen to Quarterlies and read their reports.
I had some employees from Africa. I was really nice to them and one of them said come to Nairobi.
For those of you with EM experience whats your take on Nigeria and the investment market there.
Looking at the numbers I was actually surprised how much portfolio investment they get (a few $bn. each year), but of course we're talking about a $500bn. economy of 200 million people.
From a purely macro perspective I'd say it's a pretty bleak outlook. Capital controls make importing inputs and repatriating profits difficult. Poor infrastructure forces reliance on generator electricity. Government sets rules on an ad-hoc basis (including closing entire borders to curtail smuggling). Oil is the only real source of foreign exchange, and because of the security situation can only be tapped offshore, therefore relatively high capex. You run a material risk to your life if you enter 25-50% of the country.
It looks like domestic savings have actually grown really fast in recent years but are predominantly (60-70%) invested in government paper, suggesting a real lack of investment opportunities.
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