De-Risking Opportunities in Emerging Markets

Panel Composition and Mandates

• Andrew Newington (Actis) manages $10–12 billion in long-term illiquid assets with a 5–15 year horizon.
• Gadir Cooper (Bearings) focuses on long-term public equity with a 3–5 year research and investment horizon.
• Charlie Robertson (Renaissance Capital) employs multi-timeframe strategies, utilizing quantitative models for FX and political risk dating back to 1950 (7,000 data points).

Core Risk Factors and Mitigation Strategies

• Newington identifies headline-driven sentiment as a primary macro risk that complicates capital raising and operational confidence.
• Cooper mitigates country-level risk through bottom-up stock selection, pricing governance risks into the cost of equity for individual companies.
• Robertson argues that risk is quantifiable, noting that emerging market (EM) FX (ex-China) is currently 5–10% undervalued relative to its 25-year average.
• Specific valuation signals cited by Robertson include Turkey (30% cheap to average) and South Africa (cheap in 2016 when 93% of prior 23-year data showed higher valuations).
• Newington disputes the efficacy of predictive models for rare political events, citing the inability to model "clones" or specific regime changes (e.g., Buhari).
• Robertson's political models assign a 4% probability of a coup in Nigeria and a 14% probability of significant disruption in Zimbabwe for any given year.
• Newington emphasizes "growth as a mitigant," specifically targeting strategic sectors like power that remain resilient regardless of political turnover.

Federal Reserve Policy and Capital Costs

• Newington notes that while Fed tightening increases the cost of capital, it currently affects the US consumer more than EM consumers in the medium term.
• Robertson observes that African eurobond yields have corrected to "sensible levels," rising from 6% to 9% for Nigeria bonds, reflecting appropriate risk pricing.
• Cooper states that EM investors require a premium return above the tightening US cost of capital to justify risk, driven by sustainable growth and purchasing power parity.

Education, Demographics, and Human Capital

• Robertson cites historical data indicating a 70% adult literacy threshold is required for industrialization; China achieved this in the 1990s, with India reaching it in 2015.
• Cooper highlights that emerging markets graduate more STEM professionals annually (China: 4.7 million; India: 2.5 million) compared to the US (0.47 million).
• Newington identifies private sector tertiary education (e.g., distance learning in South Africa at $1,000–$2,000/year) as critical due to public sector limitations.
• Survey data indicates that EM families prioritize children's education spending over mobile phone usage.

Market Liquidity and Structural Challenges

• Robertson notes that frontier markets (e.g., Ghana) often fail to attract liquidity with daily turnover under $1 million.
• Newington asserts that no market is "too small" for private equity if the sector is right, citing successful privatization of electricity distribution in Guatemala and Uganda (Umeme).
• Cooper differentiates between passive market exposure (beta) and active stock picking (alpha), attributing three-quarters of their returns to individual stock selection rather than country bets.

Sector Priorities and Investment Themes for 2019

• Energy and Power: Newington identifies renewable electricity as a primary growth sector due to the supply-demand imbalance and falling renewable costs.
• Financial Services & Fintech:
  • Robertson points to mobile money adoption (21% of Africa's population) and biometric identification in India (900 million people) as transformative.
  • Newington sees consolidation opportunities in the over-banked African banking sector and massive scale in fintech payment solutions.
• Disruptive Growth Drivers: The panel identifies millennials (35% of the global workforce, 95% under age 30) in EMs as the primary engine for growth in e-commerce, tourism, and insurance.

Country-Specific Insights

• Brazil: Newington expresses "fragile optimism" post-election, citing the $6 billion initial market cap of the fintech IPO Stone as evidence of resuming investor confidence.
• South Africa: Robertson suggests potential upside if President Ramaphosa implements reforms following the May elections.
• Africa: Robertson notes skepticism from investors due to 1–2% growth in Nigeria and South Africa (1/3 of Africa's GDP), contrasting with 7–8% growth in India.

Crisis Management and Market Correlation

• Robertson argues that while asset correlation spikes during crises (as in 2008), EMs are less reliant on external capital deficits than in the past, reducing the probability of a systemic collapse.
• Newington advises patience during bear markets, noting the absence of specialized "special situations" funds that rapidly replenish liquidity in EMs.
• Cooper notes that EMs often reprice quickly, but the liquidity recovery process is slower than in developed markets.
• The panel collectively dismisses the idea of exiting EMs during a downturn, viewing it instead as an opportunity to acquire high-quality assets at distressed valuations.

Operational Risk and Partnership

• Newington identifies partner misalignment and fraud as top "micro" risks, mitigated through long-standing operating relationships and rigorous counterparty risk assessments.
• Cooper emphasizes direct company visits and deep management due diligence to protect minority shareholder interests in public equities.