WHAT IS WRONG WITH THIS PICTURE?

Let’s start with a quote by Frances Hesselbein:

“Simple questions can be profound… 
…and answering them requires us to make stark, honest, and sometimes painful self-assessments”

As an investor, you always have the choice between following the herd (passive) or to ask the kind of questions that can lead you to opportunities that won’t be found along the beaten path (active). 

The latter requires an open mind and a willingness to challenge the status quo. It is the common trait that the greatest investors have in common. It allows them to see opportunities that are invisible to others.

We believe that we currently find ourselves in a moment where the way we most of us think about the global economy is being challenged to the core. We believe that investors need a new perspective, one that reflects a new economic order that already exists in the fundamentals but isn’t reflected in today’s global markets. 

At Silk Invest, we have a philosophy of focusing on measurable facts, both at a macro- and microeconomic level. We don’t pay much attention to politics, nor do we provide many insights or commentary about this global ‘Game of Thrones’. 

We are not saying that politics don’t matter. They are the symptoms that indicate that the fundamentals of the world’s economic order are changing. Politics are inherently difficult to measure because they are subjective by nature. The thing is that we have been observing many of these acute ‘symptoms’ during recent times. 

As a result, we are now dealing with a long menu of risk factors, many of which were hard to envision only a decade ago (Trump, Brexit, North Korea). And because most of these risk factors are of a political nature, it would be foolish to believe that they have already been adequately priced into today’s capital markets.

If you are reading this, we assume that you are sufficiently informed to understand where the flashlights are located on the above world map and what risk factor they represent. 

But as we already mentioned, political crises come and go. What truly matters are the fundamentals. That is the ball we need to keep our eyes on, especially as medium- to long-term investors.

Having said that, this might be a good time to clarify that what follows is formulated within a mindset of a 3-5 year investment horizon. So if you are a short-term investor, this may not be of much use to you.

A good way to try to understand what the fundamentals are telling us is by starting to ask simple questions about them. This forces us to look at things with a fresh perspective, free from the assumptions of the comfortable under-examined consensus. 

This is more difficult than it sounds, but as the quote says in the opening of this essay, it can provide powerful perspectives!

Furthermore, when a simple question needs a long and complicated answer, you know you may be on to something. 

With that being said, let’s ask ourselves a simple question: 

“Does this picture make sense?”

More precisely, how would you explain it to someone with little knowledge about global markets and economic fundamentals?
 

How would you answer the following questions:  

Why are most ‘Neutral Equity Portfolios’ 88% invested in developed markets when these only represent 41% of global GDP and only have 14% of its population?

and...

Why do Emerging Markets only represent 12% of a typical portfolio allocation when they account for 49% of the world’s economy and have the biggest share of the global population at 59%?

finally...

“Why is there no allocation to Frontier Markets, even though they already account for 10% of global GDP and have 28% -nearly one third - of the world’s population?

Simple chart, simple questions...

The thing is, the consensus already has a few answers handy for these questions. These will justify what we see with the need for liquidity and the way benchmarks and indices are composed. 

These reasons are perfectly valid if you are a large institutional investor or have an investment mandate that is measured against a benchmark or constrained by a set of regulations. But this doesn’t take away that it mostly implies that you are settling for an allocation that reflects a potentially distorted picture of today’s reality rather than positioning yourself for what lies ahead.

However, if you are a more nimble investor with the discretionary freedom to allocate your portfolio in line with medium-term opportunities that are under-researched and undervalued, these questions could lead to the discovery of compelling new investment opportunities in places that you may not have considered before.

The simple questions we ask about this chart reveal a set of interesting insights that build a credible investment case for a number of frontier markets that, despite much-improved fundamentals, have been almost entirely ignored by the consensus.

Is there a unique window of opportunity?

Why have frontier markets been so ignored despite their positive fundamentals?

What are the triggers be that could change this?