Could you briefly introduce yourself?
My name is Hans Betlem, I have worked for 27 years at Merrill Lynch in Amsterdam. I was responsible for managing client portfolios. Since 2012 I am the CIO of IBS Capital Management that me and my partners bought three years ago. At IBS, we provide corporate advice such as M&A, fund management services, and discretionary asset management for private individuals and institutions. We allow individuals to directly invest in small and mid-cap companies in Netherlands, as well as to participate in private equity. We believe that the future of active fund management will be concentrated in smaller mutual funds that have a limited amount of holdings so that there is the maximum possibility of outperforming a chosen benchmark. This is contrary to most mutual funds that tend to stay very close to the benchmark due to career risk considerations.
At IBS we call it (BRIC) a Bloody Ridiculous Investment Concept
What is your experience with investing in emerging markets up until now? Is it living up to its potential and outperforming benchmarks, or has the recent financial crisis also had its affect on emerging markets as well?
The emerging markets have been performing well, especially since someone coined the term BRIC (Brazil, Russia, India, China), however at IBS we call it a Bloody Ridiculous Investment Concept. Emerging markets have outperformed in the past, however since the crisis in 2008 they have underperformed and at IBS we believe they will continue to underperform for some time to come.
What is your reason for calling it a Bloody Ridiculous Investment Concept?
BRIC used to be a nice term with the four countries gaining influence and growing rapidly and were then pulled together to be made the face of the emerging markets for investors. However with Russia and Brazil being mainly commodity and energy exporters while India and China are mainly commodity and energy importers, very different dynamics govern those countries. Therefore I find it to be very difficult to have them all realized as one asset class. This makes them not ideal for differentiation purposes and thus not an investment class to us. We do invest in China and India, but for the rest we ignore emerging markets outside of Asia altogether. By the way, we borrowed the term(Bloody Ridiculous Investment Concept) from James Montier.
Can you please give us your insight about the main issues facing emerging markets today?
Well, there are actually three dynamics that influence emerging markets these days. First is the price of oil which tends to be very beneficial for Asian markets when the price drops. Most Asian markets are oil importers and their oil bill is going down. This increases purchasing power of consumers and specifically helps China obtain its goal to switch from a low value-added exporter to a consumer demand focused economy. Meanwhile in India and Indonesia where governments subsidize energy for consumers, low oil prices lower the amount of subsidies making for better government finances. However Latin America, Africa, and Russia who are heavy oil exporters will be hurt by recent oil movements. The second dynamic is the declining Japanese Yen as a result of massive Japanese quantitative easing (QE). This allows Japan to be more competitive versus Korea and Taiwan. Korea has already seen the effects of this in competition in car sales abroad. Thirdly, a trend which is very important for emerging markets is the appreciating US dollar. Dollar interest rates are much lower than say Russian, Turkish, of Brazilian interest rates. This allows such emerging market companies and governments to borrow US dollars cheaply. The appreciating dollar is now making it harder to service those dollar debts.
Mentioning the US, has termination of QE hurt the emerging markets?
Most international trade is done in US dollars. The US has a trade deficit and thereby sends dollars to the rest of the world. During the massive QE from 2008 till last October, the US money printing made for even more dollars being sent to the rest of the world. Now that they have quit QE, this lowers the supply of dollars. Likewise, the recent oil and shale boom in the US has allowed them to domestically produce more of their local energy needs. This lowers the US trade deficit. These two factors combined make for a large squeeze on governments of emerging markets who have debt in dollars. A rising dollar is typically coupled with decreasing commodity prices, which negatively affects emerging markets like Russia, Brazil, Colombia, and Venezuela.
In the next 5 to 10 years you have to be very selective about what you deem economically viable.
Having discussed the energy market, we have seen that developed economies like Germany have really strong renewable energy markets. Do you think renewable energy markets will soon replace our current main energy sources?
Yes, you can see this in China. Beijing has nearly become impossible to live in due to air pollution, which is mainly caused by coal fired plants. This is difficult for China, because it is struggling to attract corporate executives due to the health risks. China will try to decrease dependence on coal and expand its capacity to create sustainable energy. This is apparent everywhere, even in the Middle East where solar power is becoming increasingly popular. A Minister of Energy in Saudi Arabia during the 70’s said that “the Stone Age didn’t end because cavemen ran out of stones.” That was in the 70’s and the Middle East is very aware that their prevalence as energy producers will wear off due to technological advancement in sustainable energy.
African countries are a lot less developed. We see developed countries trying to sell their gas and coal fired plants to African countries. Do you think African markets can benefit from this, or will weak government structures and financial regulations prevent Africa from following the economic growth path that Asia and the Middle East have experienced?
Africa is a problem because the political climate in many of the countries has been poor. There are many risks such as Boko Haram. On the other hand parts of Africa are advancing and doing very well and can be deemed fit to experience sustainable economic growth. Because they don’t have the legacy of old infrastructure that the rest of the world has, they pretty much have a blank slate. Telecom and electronic payment systems are some of the first sectors that are actually more advanced in Africa than in Europe. Africa is an ideal continent to have a sustainable energy structure because of this advantageous fresh start. However, in the next 5 to 10 years you have to be very selective about what you deem economically viable. It is best to leave investment in Africa to very specialized asset managers who know Africa really well.