Both sides of this quote may well be applicable today. Looking at how markets have been behaving recently, they seem to be caught in a somewhat ‘schizophrenic’ state.

Before we get started, we wanted to make clear that it is not our intention to get too deep into the weeds with this article but it might prompt you to ask a few big-picture questions about these strange and often rather contradictory times we are living through as investors.

Be fearful when others are greedy...

The S&P 500 just keeps edging towards new highs as the US economy cruises at full speed. If the world were a simple place, this would make total sense. But what seems increasingly bizarre is that the rally just keeps on going despite the fact that most investors have been nodding along for some time now with an already popular debate about ‘when’ rather than ‘if’ the US economy will slip into a recession.

For what it is worth, when we look at the chart below, the FAANGs (Facebook-Amazon-Apple-Netflix-Google) may already be showing signs of topping out. As the old German proverb goes: “The trees don’t grow up to the sky.”

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And then we get to see charts like the one below:

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What you are seeing here is the Goldman Sachs Bull/Bear market indicator for US stocks. Here’s a footnote we found on the Bloomberg website:

A Goldman Sachs Group Inc. indicator designed to provide a “reasonable signal for future bear-market risk” has risen to the highest in almost 50 years. The firm’s Bull/Bear Index, which is based on measures of equity valuation, growth momentum, unemployment, inflation and the yield curve, is now at levels last seen in 1969. While the gauge is at levels that have historically preceded a bear market, Goldman strategists including Peter Oppenheimer wrote in a note last week that a long period of relatively low returns from stocks is a more likely alternative.

So, who keeps buying?

During the past few years, passive investing (index tracking), especially in the for of ETFs have been dominating the market. Their success is not surprise as they provide a low-cost, immediate and effective way to instantly position a portfolio to perform in line with a market (Beta) without the risk of selecting the wrong investment manager.

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As a consequence, ETFs have also accelerated and bloated the flow of capital into markets. Despite the systemic risk that may lie in these instruments as they enable vast amounts of capital to move instantly the question always lingers if there will be enough liquidity to facilitate a sudden exodus out of major markets.

So given the ‘schizophrenic’ state of ‘we all know a correction is just around the corner, but we will just keep investing anyway’ makes it all look a bit like a game of ‘musical chairs’.

So the main question is: How soon will all this greed turn into fear? And when the music stops, how many chairs will be left?

Be greedy when others are fearful


After a decade of lagging behind the both the developed and emerging markets, the frontier markets have recently been further sold off. These are dozens of different economies that have been ‘dumped’ indiscriminately, regardless of individual fundamentals.

Of course stories such as Argentina’s failed policy, Turkey’s ‘Presidential armchair monetary policy experiment’ and South Africa’s troubling ‘Mugabe meets Chavez’ strategy, amid other headlines haven’t exactly helped to inspire investor confidence in this space.

Then there is the trade war saga casting a dark shadow. The implications are complex and therefore considered as an overall negative (by default, we fear what we don’t understand).

Of course these developments may bring new risks and unknowns into the equation, but a new global trade order may actually be good news for a number of rising economies because it prompts them to find new trading partners and strategies.

Here’s an excerpt from a recent article on the subject. It is a great read that may give you a more understanding nuanced of the brighter side of a trade war.

“The decline in shipments among developed countries has been most pronounced. Emerging markets tell a more nuanced and optimistic story: They have increased their share considerably, to 20 percent of global goods trade in 2016, from 8 percent in 1995, based on a McKinsey Global Institute study.

Among countries of the so-called global north, that share tumbled to 33 percent from 55 percent. For the first time, developing nations participate in more than half the purchase and sale of goods, McKinsey said in the recently released report at the World Economic Forum on ASEAN in Hanoi.”

It may well be the final breakout of an economic emancipation that has been timidly going on for some time now. Simply put, as investors, we believe that this is a great environment to uncover new opportunities!

Stuck in a rut?

And, as we said before, there is a lot of passive capital sloshing around so even the ETFs that are investing in the emerging and frontier market space are naturally skewed to the obvious names that clear the liquidity hurdle while ignoring the smaller, and often more attractive investment opportunities.

What this means is that passive investments into this space only provides access to only a fraction of the opportunity set, leaving many of the best ideas untouched.

And it works both ways, because in a fearful environment, the same fast liquidity can overly punish the obvious names, dragging the rest of market along with them, regardless of fundamentals.

What all this leaves us with is the following picture

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What is immediately obvious from this chart is the over the past 10 years a compelling valuation differential has been created, especially between the frontier and the developed markets. We have added African frontier markets to the graph because we believe there is much more value to be found than in any other geographic region.

What does ‘risk’ mean anyway?

In our opinion, the previous chart commands a fundamental reassessment of what we perceive as ‘risk’. What seems to be the ‘safer’ option? A crowded singular market that might be topping out or an under researched and ignored market with a wide diversity of different opportunities that are arguably trading well below their true value?

For even more perspective here’s another argument that may help further calibrate the risk spectrum: How ‘safe’ is it to pay a ‘premium’ in the form of a Price-Earnings ratio of around 175x earnings for Amazon, more than 150x for Netflix?

And...why are so many profitable businesses, thriving on a rising demand within some of the world’s fastest growing economies regarded as risky? Especially when you consider that they are trading anywhere between 10x and 20x earnings and provide dividend yields that many pension funds would kill for?

A valid concern may be the currency risk of each individual frontier market. However, just as with these markets in general, their currencies have also been pushed to level where they are now trading below their 5 year rolling averages. This is especially true for Africa as can be seen on the chart below:

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So to continue with our previous metaphor, the main questions is: Which game do you prefer to play? Musical chairs or treasure hunt?

Will this fear turn into greed?

Will the treasure hunt eventually become more like a game of musical chairs?

Even though the frontier markets have been mostly ignored, there are a number of ETFs that provide investors with an easy access to the obvious, larger cap names in this space.

The good thing about ETFs is that, because they are listed securities, they serve as a gauge to monitor fast money flows. And from what we are seeing, the bottom-fishing may already have started to begin.

However, the smart and sophisticated money has already been moving into these markets since a while now.

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During the past decade foreign direct investment (FDI) has been rising notably in the frontier markets. FDI is the sum of strategic private equity investments in the key assets or businesses that make an economy tick. And since we started this article with Warren Buffett, it would be the equivalent of recognising the value of railways at a deep discount when nobody else couldn’t see their strategic long-term value. Many of these opportunities are hiding out in the open.

These investments are the remit of an elite, ranging from sovereign wealth funds to the most intrepid family fortunes. But obviously this space is not your everyday investment opportunity.

The next best thing - provided you are seeking great value for the medium to long term - is to select an active investment manager who knows his way around these markets.

To be a successful investment manager requires a specific focus, the ability to access the market, manage its risks and ideally, a local presence.

It matters because the opportunities in these markets are under researched. It requires a complete dedication and an ability to perform the required research and due diligence.

This also makes it a niche for boutiques because a frontier market team in a large asset management firm will struggle to justify the required resources for a relatively small total asset size when compared to the firm’s cash cows.

So, in other words, the right way to build an exposure to these less known investment destinations may be to first secure the directional part of the investment via an ETF and then find the right manager to get a more long-term exposure to select opportunities that have been ignored by the fast money.

So while these markets may seem like an adventure, the reality is that there are various, rather straightforward ways to invest in the world’s fastest growing markets before it becomes utterly obvious.

To get a more nuanced view on what the opportunities are all about in the frontier markets, you may want to listen in to a recording of our recent open conference call.

Baldwin Berges