Want to pick up some shares of a mining company in Mongolia? How about playing bonds in Bangladesh?
Available technology may let your average E-Trader play markets in China, but there are still plenty of places where trading requires some specialized assistance. Enter Jon Auerbach, cofounder of Auerbach Grayson, a boutique brokerage in New York that links up institutional clients with far-flung investments in more than 119 "frontier" markets around the globe.
Fresh off a three-week jaunt through Africa, Auerbach spoke with U.S. News about some overlooked opportunities, including why African pariah Zimbabwe might be a buying opportunity. Excerpts:
Why focus on the frontiers? Seems like a lot of work and uncertainty compared with running mutual funds or something.
It goes back to my belief that the historians will say our century was the beginning of the leveling of the global playing field. All of these people have aspirations to whatever their version of a middle class looks like.
Let's talk about some favorite markets.
Our most active are Bangladesh, Pakistan, and Sri Lanka. South Asia is attracting a lot of new money right now. What's interesting in all three is their valuations relative to India. That's what makes them cheap. Remember, at one point these were all part of greater India when it was part of the Raj and under the administration of colonial England. As a result, there is a stock market tradition that came with the English. There is a legacy of investment and a legacy of governance and rule of law which underpins the legitimacy of any stock market.
With the tremendous growth in India and valuations in that market, people neglected the others to the point where they were generally half that of India, depending on your metric. There's certainly a political overlay, but such low valuations led us to focus on local partners there.
Who's on the cusp of being a new India (or a new Brazil, Russia, or China, the other so-called BRICs)?
Well, the BRICs obviously have the size, but I would say Nigeria is an extraordinarily important market. Within five years or so, it will probably be the banking capital of Africa. It's a country of 160 million people and has done some very important banking restructuring. Its central bank really took charge, raised reserve requirements, and reduced the number of banks so they're all very well capitalized. A number are being actively invested in by major U.S. institutions now, plus it has a very liquid stock exchange.
If Nigeria's doing well, Zimbabwe is an obvious counterpoint. But you see opportunity there too ...
Like everybody else, I'm waiting to see how the election turns out. If indeed we find out in the next day or two that the voters have rejected [President Robert] Mugabe, I think it's going to be an extraordinary event and an opportunity to make some remunerative investments. The country has operated remarkably well through this hyperinflation, so change would be surprisingly fast—maybe just two or three years.
Now is the time you have to make those investments. For example, now's the time to buy Delta Corp., a brewer in Zimbabwe. It's operating at about 30 to 40 percent of capacity and still making money. Its market cap to a hectoliter of beer, which is the way brewers are valued in emerging markets, is $50. East Africa Breweries, the Kenyan brewery, is currently trading at $200 per hectoliter. That's four times the valuation. That should improve with a new government.
Market cap per hectoliters of beer? Not exactly a traditional valuation tool on Wall Street ...
I'm thinking of renaming the firm Auerbach Grayson: CSI. Take Econet (Wireless), the major cellular phone company in Zimbabwe. Last month I met with the [chief financial officer]. His revenue is cellular cards that are sold all over the place and people buy them as they can afford them. It's a cash business, but each day they're losing through inflation 15 to 20 percent. [Editor's note: Zimbabwe's annual inflation rate has topped 150,000 percent, according to some estimates, by far the world's highest].