Losses in Emerging markets and Safety Rules

I will present some past losses and errors in Emerging markets and will establish my ground safety rules in Emerging markets.

1-I had a large loss in a Ecommerce company called Koovs. It was owned and managed by ex directors at a hugely successful company called Asos. Both were listed in the UK.

Koovs was growing 100% a year and raising funds in the process. It was a UK listed company but selling fast fashion in India. I knew it was a bet, I lost.

So it was doing fine, until the Indian government did something called demonetization, which made many people loose savings, made ecommerce more difficult because a lot of it was cash on delivery. It was a failure.

This broke the revenue growth, which broke the stock, which broke the funding a bit. Then the company also got a large company Indian investor, raised funds again and it was doing better in terms of sales.

Then the Indian government said to the Indian investor "You cannot invest in this oversea company that is also an investor in India (more or less).

The company started running out of funding, and instead of raising more through UK shareholders (exhausted from that story), the company entered a prepackaged bankruptcy and was bought back on the cheap by the founder, leaving 0 for shareholders.

Lessons:

• India is dodgy as a place to invest and protectionist

• UK shareholder base does not have the patience to support a foreign business stock

• Successful CEO did not help in protecting the investment.

2-I lost on Atlas Mara. It was sort of a SPAC in the UK, buying stakes in African banks. Long story short, the banks were well managed and profitable, the management was also reputable.

But it raised too much USD debt to acquire banks and had allegedly problems with refinancing the debt after covid devaluated the currency of their African banks. Now they are delisting to save money. I could have kept it, but after redoing the analysis I had low confidence in the ability to get paid full book value (It assumed valorisation methods not shared by the markets for the Subs).

Lessons:

• Successful CEO did not help in protecting the investment.

• UK shareholder base does not have the patience to support a foreign business stock

• UK/US Spac managers like Africa when its in fashion then get tired of it when its out of fashion: they do not have the patience required to grow EM companies over the cycle

• Financial holdings are complex in terms of analysing leverage.

3-I am losing on Pax Global, the stock is down 43% on suspicion of hacking of their payments terminals. I am mildly optimistic that it will recover. Pax sells payments terminals to process credit card payments.

We do not know yet if the accusation is really based on Fraud, or just suspicion. We know the reaction was immediate and strong from the authorities because it is a Chinese company.

I was going to keep it despite the risk, as I view the company favorably, but once I spotted an ex stock of mine trading at the same multiple in Hong Kong, I took the tax loss and swapped.

Lessons:

• Maybe avoid a Chinese company doing sensitive things in the USA

• Maybe avoid a USA company doing sensitive things in China.

• Certain industries are very sensitive.

Safety rules for Emerging markets.

1. Diversify companies: if you get hit with a bad development it will not be detrimental to your performance too much nor quick you out of the investing game.

2. Diversify countries. You must be careful to make a macro bet or a macro risk bet by concentrating the portfolio in one or a few EM countries

3. To concentrate heavily in EM stocks you need perfect understanding of the risks, and this is difficult.

4. No SPACS: spacs investors and management do not have the patience to hold businesses during the cycle and will screw you over when it is out of favor. while the manager at the Spac who "loves Africa/Asia" will be back into Developed market stocks after 2 years if he does not make it big.

5. Especially UK spacs and some UK companies, very dodgy and pro cyclical.

6. Favour companies listed inside emerging markets, skin in the game is key, as well as time in the game, These companies are dedicated to these countries forever,

7. India is risky. I love the potencial but its not for foreigners. You can still invest there but if the business is not strong and well connected, if its foreign, they will probably shake it up or block it,

Challenges of diversification rules:

Diversification in percentage numbers, going to 1.5%, 2% like I do for some stocks in my portfolio helped be to weather the Pax Global stock drop very well.

It comes with many challenges:

• As the portfolio grows, absolute numbers could represent months of salary and still be at 1-2% of the portfolio, and losing these have a bad effect mentally.

• Even with relative numbers low for emerging and frontier, it is required to keep a huge watchlist of ideas and maintain it.

• Therefore these is a certain lack of scalability for the EM investor if the portfolio grows, and there is a psychological gap to overcome with the high absolute amount, low relative amount positions.

Conclusion:

I have to remind myself why I have to follow these rules. It is because EM stocks at the moment can offer Better growth in many industries, Cheaper, and larger margin of safety. EM value may not be as scalable as other strategies.