EM Markets Outlook Event Recap: Solid Recovery Underway

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By Andrew Carlson, a student at the University of Minnesota Carlson School of Management majoring in finance and history

Pronouncing the resumption of long-term growth in emerging markets (“EM”) bolstered by more structurally robust political economies, Jan Dehn, Global Head of Research at Ashmore, spoke to CFA Society Minnesota on October 31, 2017 over an investment climate he finds favorable to EM. Succinctly, his thesis leverages pro-growth dynamics in EM, from both economic and financial perspectives, in the midst of fading developed market QE trades to argue for allocation shift to the class.

Dehn has a wealth of experience in emerging markets, having served the Ashmore Group, a British fund manager, in research and strategic roles since 2005 and with previous EM background at Credit Suisse and the World Bank.

Core Thesis

Convergence, the principle of emerging market economies realizing their development potential after the Cold War, appeared fantastical as the Asian and Russian financial crises of the late ‘90s portended a volatile road to growth. The principle resided on a dearth of capital in emerging markets that, when mixed with the underfinancing of labor, would yield higher ROIC, but institutional investors instead took the EM trade as a proxy for risk-on/risk-off, selling the asset class wholesale even in unrelated crises.

Interestingly, the trade may be have returned. Since the ’98 Russia crisis, all +10bps VIX spikes came from developed market sources, while structural shifts in the EM economies made many less dependent on fickle commodity revenue with negative feedback loops involving currency depreciation and foreign divestment. Practically, as Dehn, notes, a roughly $100T fixed income market with only $20T being EM-issued does not match the 60% of global GDP yielded by emerging markets. Furthermore, the development of domestic pension funds smoothens potential fx crises and puts a floor to the risk-off trading behavior of the past.

Expectation

QE trades (longing USD, USD equities, German sovereigns) bet on the buying power of developed market central banks, distorting a global economy that now must slowly reallocate capital to the EM private sector where meaningful growth can be expected. Concurrently, fears of Chinese crises engulfing emerging market bonds may be overblown as the fundamental data demonstrates a greater importance of intra-EM trade for these sovereigns with China having a much more prosperous connection/tether to developed markets.

Summary

Ashmore lists a few key takeaways to understand the thesis and some possible iterations of the trade

  • “A longer-term EM recovery is now underway based on value, fundamental, and light positioning”
  • “Positioning in EM assets remains extremely light”
  • “Strong EM fixed income value proposition”
  • “EM equities – a structural growth play still priced as a cyclical story”
  • “EM currencies have significant upside after 5 years of decline”
  • “EM growth premium is back”
  • “EM is a safer bet as populism engulfs Developed Markets”

Rey Baribault – “Energy – Where Are We Headed?” Event Recap

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By Tung Nguyen, a student at the University of Saint Thomas and Level II candidate.

On Tuesday, September 12th, 2017, CFAMN hosted Rey Baribault. Mr. Baribault is the co-founder and Vice President / Engineering of North Plains Energy, LLC, a Denver-based exploration and production operator. He has served in several executive roles in oil and natural gas companies in different regions including Fort Worth Basin, Denver Basin, Bakken Basins, etc. He was elected to the Matador Resources Company (NYSE: MTDR) Board of Directors in June 2014 and currently serves as the chair of the Board’s Operations and Engineering Committee.

Five main topics

In his talk “Energy – Where Are We Headed?” Mr. Baribault shared his perspective regarding the current and future of US and global energy. The five topics he wanted investors to focus on are highlighted below:

  • US Energy independence
  • Is shale still a good investment?
  • Permian Basin’s dominance
  • Canada, Mexico and Unconventional Frontiers
  • OPEC Decision

US Energy Independence

Mr. Baribault spoke highly of US energy’s current stage. Ten years ago, it was unthinkable to believe that US energy could be independent in terms of demand and prices. After the end of export ban in late 2015 however, the US has become one of the biggest players producing 9 million barrels of oil per day, exporting 1.1 million barrels daily. The US has emerged as net gas exporter as well, reducing its dependence on Canada and Mexico imports.

Is shale still a good investment?

The answer depends on the level of involvement. Mr. Baribault believes that for operation business like himself, shale is still a good investment, but fiscal prudence, due diligence, and capital discipline are the keys to success. Mr. Baribault said his company was able outperform its peers during 2012, when oil price was $120/bbl by strictly following these criteria. He forecasted that the $45-$55 oil price window will not likely change substantially in the next few years.

Permian Basin’s dominance

The Permian Basin (West TX and South NM) has been the highlight for US energy over the past few years. This basin accounts for nearly half of the US’s oil production. 40% of E&P M&A activities occurred in the Permian Basin. Mr. Baribault expects that the Permian Basin will be around for a long time (approximately 30 to 40 years). E&P capex is expected to increase by 400% over the next five years. However, in the end, production is still dependent on price.

Canada, Mexico and Unconventional Frontiers

Canadian heavy oil sands have the potential to be second to US shale as the biggest contributor to global supply growth. Oil sands’ weakness is high operating cost, but efficiency has been improving lately. Mexico is in a transition period: The government has been deregulating its E&P marketing, but it will take time. Mr. Baribault expects US exports to Mexico to continue to grow. Regarding unconventional production, Mr. Baribault mentioned Enhanced Oil Recovery (EOR), which is currently a high-cost technique, but he expects it to become a regular part in the future. He also noted Mexico, Argentina, Colombia as some countries that might see strong shale development 5 to 10 years from now.

OPEC Decision in 2018

Rey Baribault expects OPEC to continue to cut production. However, if US shale operators continue to struggle to break even, then OPEC should be less concerned. He suggested investors keep an eye out on Saudi and Kuwaiti plans to tap natural gas reserves to fuel domestic energy consumption displacing oil-fired burn. These plans will lower demand for oil consumption and increase supply for exports to the global market.

Conclusion

Mr. Baribault does not expect oil prices to change significantly from the $45-$55 range. The Permian Basin will continue to play a big role in US energy production in the next few decades. Investors should keep an eye out for Canada, Mexico and other emerging countries as they might see strong shale development in the near term.

A Letter from Our President

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Joshua M. Howard, CFA

Society members –

This is my final letter to you as President of CFA Society Minnesota – my two-year term as President comes to an end this month. At our annual meeting last week, the membership voted in the new slate of board members and executive officers, including your new President, Mark Peiler, CFA. I will be assuming the role of Immediate Past President for the next two years, then my service on the board will end (though not my participation in the Society).

Before I depart, I would like to thank a few people. First, I want to thank all of the past Presidents of CFA Society Minnesota that I served with during my time on the board: Tony Carrideo, CFA, Leyla Kassem, CFA, Robert Buss, CFA and Kim Brustuen, CFA. Your vision and commitment laid the groundwork for the transformation of the Society that has occurred over the past eight years. When I joined the board in 2009, the Society’s activities were restricted to a monthly lunch, a golf outing and an annual economic dinner. Thanks to the leadership and energy of Tony, Leyla, Robert and Kim we now offer a wide range of activities that meet the needs of almost any member. These range from half-day Insight series programs, a major investor conference, periodic distinguished speaker events, a well-attended annual new charterholder dinner, and plenty of free happy hours and networking events.

Second, I want to thank all the board members and committee volunteers I have served with during my time on the board. Their hard work and ideas led to many new initiatives, including the very successful compensation survey, which has grown from a local survey to one that now includes the entire Midwest and a few states outside our region. The Membership Committee runs a mentoring program that over the past few years has connected dozens of younger financial professionals with experienced industry veterans. Seven years ago, our Education Committee launched our own intensive review courses for all three levels of the CFA exam, which have served hundreds of candidates since their launch.

Besides these new programs, our Strategic Planning Committee spent a good portion of the last five years rewriting our mission and vision, as well creating a new, 3-5 year strategic plan. We also updated our bylaws, aligning these with best practices in governance and our relationship with the CFA Institute. Anyone who has ever tried to write a mission statement or attempted to craft a strategic plan knows how much work goes into these endeavors, and I want to thank everyone on the Board who helped with these documents.

I also want to sincerely thank our staff – Mark Salter, Amanda Sullivan and Diane Senjem, along with former staff members Kris Kautzman and Maren Amdal – for all their hard work over the years. None of the programs and activities mentioned above could have happened without their efforts. They took every idea we threw at them and somehow turned them into reality, no matter how far-fetched or challenging they seemed.

Finally, I want to thank you, our members. Thank you for volunteering with the Society, for attending events, for paying your dues, for suggesting how we can improve and for occasionally reading these letters. Thank you for adhering to the highest standard of ethics, for your commitment to the industry and for mentoring the next generation of investment professionals. We have accomplished a lot in the past eight years with your input and help, and I look forward to attending events alongside you as a regular Society member in the future.

Josh Howard, CFA
President, CFA Society Minnesota

For the Financial Professional

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Fred Martin, CFA

The financial services profession is generally highly lucrative, ensuring that financial professionals do not need to worry about their own financial well-being.

But there is a catch to this prosperity.

From the very first day they join our industry to their last day of employment, a financial services professional will face a critical question: Will my actions today align with my client’s best interests?

There’s no middle ground. 

You see, our industry is lucrative so that we never have to put our own interests ahead our clients. So how does a financial services professional know whether their actions are aligned with their client’s best interests?

The answer is simple. 

If you are a professional and your actions do not CLEARLY line up with your client’s best interests, then you are not acting in their best interests. Notice that I have taken out the ambiguity here. You are either CLEARLY in the right zone or you are not.

If you are a financial services professional, you face two major roadblocks to protecting client’s interests.

The First Roadblock: You.

Are you acting properly? Can you take the simple test above and answer that you are clearly working in your clients’ best interests? If not, you should consider some serious soul-searching and a change in your business practices.

The Second Roadblock: Your Company.

What if your company has policies and procedures that you know are not in your clients’ best interests? In this case your choice is to fight or to leave. Neither choice is easy.

At the end of your career, you will be remembered as either one who tirelessly protected and nurtured your clients or one who protected yourself and your employer?

Our industry needs more professionals who will clearly look out for their clients…at any cost.

—

Fred Martin is the Chief Investment Officer at Disciplined Growth Investors and is a 32-year veteran of the money management business. He is the founder of Objective Measure, a conference based in Minneapolis that is bringing clarity and trust to the financial services industry and providing tools for effective financial leadership.

To find out more about Fred Martin or The Objective Measure Conference, click here.

It’s Time to Talk

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Fred Martin, CFA

Two things have defined my adulthood – marriage and managing investments. My first marriage of 33 years ended in divorce and I count it as the greatest failure of my life. Today, I believe my industry – financial services – teeters on the same edge of failure.

Everywhere I look I see signs that my industry’s relationship with our clients is headed for a breakup every bit as profound as a divorce. The vast majority of investment management relationships are not productive. Both advisors and clients can sense the dysfunction but just do not know how to make things better. Just as a failing marriage is a shared responsibility of spouses, the alarming state of the financial services industry is the responsibility of both advisors and clients.

I believe it’s time to talk.

It’s time to have a candid conversation about active financial leadership and what standards we should have in place…as advisors…as clients…as leaders of businesses and leaders of homes. It’s time to identify and talk about the core truths of investing and financial relationships. It’s time to make the financial services industry a source of trust and stability and a place where client problems are solved. It’s time to identify the fundamental truths and unlearn the bad habits that harm investing and lead to unproductive, frustrating relationships.

It’s time to learn what active financial leadership really means.

On October 5, 2017, we are joining together outside of Minneapolis, at the Ames Center, for the first ever Objective Measure Conference. This conference is the start of this movement that we so desperately need to have. It can mark the beginning of healing between advisor and client. It can signify the beginning of a new season for the industry, unlearning those bad habits and setting new and better expectations. It can be the beginning of a bright and hopeful future.

If you’re skeptical that one conference will be able to achieve these goals, you’re not alone. I don’t believe it either. What I do believe, though, is that one conference can be the seed that triggers a catalytic reaction far beyond the Ames Center on a day in October. And we will follow this conference with at least 10 more annual conferences.

It’s the start of a conversation. It’s the start of a movement.

The future is unknown. Yet there is much we can do today to prepare for the questions of tomorrow. So let’s start now with rebuilding trust in the financial services industry.

Please join me on October 5th. All CFA members are invited to attend at a reduced rate, simply enter “cfa17” into the username and password.

To find out more about Fred Martin or The Objective Measure Conference, click here.

Read the Minneapolis Star Tribune’s Conversation with Fred Martin

 

Fred Martin, Founder, Lead Portfolio Manager, Disciplined Growth Investors