Investing outside of the West brings a host of challenges for value investors. There are different politico- economic systems, rapidly changing economies, unfamiliar cultures, different consumer habits, different languages, limited information, weak governance, and so. These types of uncertainties can be challenging for traditional security analysis – especially when the analyst is located halfway around the world.
This month we spoke with David Riedel of Riedel Research Group about investing in such environments. Riedel Research group is an independent emerging markets-focused research firm. We asked him about where he sees opportunities today and how he deals with the unique aspects of analyzing developing economy companies.
Jeff: First question. For your group, how would you describe your focus?
David: We are a global emerging markets independent equity research firm. We are independent, in that we don’t do banking and brokerage. We operate in Asia, Japan, Latin America, and emerging Europe, which gives us broad coverage of emerging markets.
It’s always been our view that the most compelling investment opportunities in emerging markets are those that capitalize on the demographic and economic advantages of that specific emerging market. We believe investors should be looking for companies that capitalize on the attractive demographics and the domestic economies that are developing in these emerging economies. If you find a situation in an emerging market where you’re able to take an existing developed market business model – whether that’s life insurance, advertising, bundling of internet and phone services, or whatever – and apply it to a rapidly growing domestic economy with attractive demographics, that is when you get extremely high growth as a result.
We tend to focus on domestically-oriented plays in financial services, real estate, technology, telecom, consumer products, and retail. Any opportunity where the drivers of earnings are contained within the borders of that country rather than commodity-based plays. We’ve always said that if you want to buy oil, you might as well buy it in Canada or Australia or the U.S., rather than trying to find it somewhere where you’re layering on management, political, and currency concerns on top of the exposure you’re getting to the commodity.
For example, there might be a mine in Brazil or a gold mine in South Africa where that product is being shipped internationally but happens to reside in an emerging market. We don’t focus on those. We feel that doesn’t actually provide investors with the exposure to the advantages of emerging market investing.
Jeff: What types of situations catch your eye?