News from our advisers

Our principal specialist emerging middle class advisers wrote at the end of June:

It is a constant source of amazement to us that any investor could be more wary than us about investing in emerging markets. Yet we continue to talk to and read about investors that prefer to watch the rising market rather than participate in it ,we have interviewed nearly 400 companies around the emerging markets and they are telling us broadly the same story.

1. Cost pressures are rising, both for labour and materials. Nevertheless, few companies expect substantial margin pressure as a result. Demand is too strong Companies prefer to buy competitors rather than add capacity. In short, profits may stay higher for much longer than investors are expecting.

2. The demand side of the equation is stunning buy and sell side analysts are simply going to have to accept that growth will continue to surprise on the upside for the foreseeable future.

3. There is no question that the investment risk is rising along with share prices the problem is that the markets appear to have fully discounted these risks, caution and risk aversion are widespread among sell side strategists.

Another of GTI’s emerging middle class advisers (a specialist Sub-Saharan African Adviser) wrote at the end of June about Africa:

Nigeria rose strongly but the gains were negated by a further devaluation of the Zim dollar. Botswana and Malawi steadily improved. In terms of stocks, OCI in Egypt performed well. We met with the Bank of Zambia and learned that Zambia could record a current account surplus for the first time and the government’s budget would be in surplus. Most (companies) are growing at a multiple of real GDP which for the past few years has been in the region of 6% per annum or so. 2007 will be another strong year. Almost all are in the process of capital investment projects. Zambian Breweries for example is spending USD 100mn over a 5 year period to install new plant and equipment. In Nigeria...we prefer the industrial sector which, to us, looks much better value than the banks. Zimbabwe’s officially recorded inflation rate for April was 3,700%, but 9,000% using the PriceWaterhouse survey. Delta, the brewery and soft drinks supplier, is now adjusting its prices twice a month, the last being a135% increase. 85% of management time is spent on day-to-day problem solving or political lobbying rather than on the normal business of brewing and selling beer and Coke!

GTI comment: we worked with GTI’s Emerging Middle Class adviser in the early ’90s. He can best be described as a Perma-Bull of emerging markets. But his version above is verified by our talks with his competitors. As long as the animal spirits of the emerging markets don’t translate into an investment-led boom (like Asia 1997, Japan 1989), the strong growth will not create a similar bust. GTI readers know we’re big bulls of Africa. There continue to be no signs of bubbles yet in the vast majority of these markets. Earnings growth is keeping pace with the fund price. If the situation in Zimbabwe resolves itself (it can’t last forever), we expect a big kicker from this part of the GTI portfolio. We advise Mr Mugabe – if he is reading this – to hedge out his own precarious political position with a fully invested position in his own undervalued stock market.