Does investing in emerging markets still make sense? The bear and bull cases; How a Global Trash Glut Hurt a $25 Billion Industry; Speeding up videos

By Whitney Tilson

Tuesday, August 13, 2019

1) I’ve never invested in emerging markets (“EM”) for circle of competence reasons, but have always felt like they would be fertile grounds for investors who spoke the language and knew the countries well (due to their higher growth and less efficient markets). But not everyone agrees – there’s quite a bull-bear debate.

This in-depth article in the Financial Times makes the bear case: Does investing in emerging markets still make sense? Excerpt:

Apart from China and India, there is little sign that developing economies are converging with the developed world…

The basic calculations are changing for emerging markets as that growth potential dims – and with it, part of the core rationale for investing in the asset class.

Starting in the early 1990s, globalisation, in the form of increased cross-border trade, the commodities supercycle and the rise of global supply chains, drove the emerging world inexorably – or so it seemed – along a path of convergence with the developed world.

For many investors, emerging markets became a core part of their portfolios because they offered strong returns and faster growth as the emerging world caught up.

Hundreds of millions of people were being lifted out of poverty and into the consuming classes, offering new opportunities to local and foreign companies. Investment in factories, roads, ports and other infrastructure promised to keep the momentum going.

But convergence is no longer assured. Today, high commodity prices are a fading memory. Trade is stuttering and global supply chains are being disrupted. Far from catching up with the developed world, many supposedly emerging markets are growing more slowly. As globalisation risks going into reverse, many investors are asking what, if anything, will drive the asset class in future, raising questions over the role of emerging markets in a diversified portfolio.

“The entire rationale [for investing in emerging markets] has been exports and consumption,” says Bhanu Baweja, chief strategist at UBS and an emerging markets specialist. “People came into our industry at a time of hyperglobalisation. But now globalisation is flattening, not just because of [President Donald] Trump, but for deeper, organic reasons.”

For two decades after the creation of the benchmark MSCI Emerging Markets equities index, EM stocks tended to outperform the S&P 500 index of leading US stocks by a wide margin. For most of the past decade, however, EM stocks have stagnated, while U.S. stocks have more than doubled in value.

2) In response, my friend Kim Iskyan, who lives in Singapore and specializes in emerging and frontier markets, writes:

Whenever I see something about a particular asset class/sector coming to an end, it feels like the perfect contrarian signal – and the Financial Times running a piece saying “it’s the end of emerging markets” is pretty much that. The arguments here are compelling, but the effort to label what’s likely cyclical as structural is in my view a classic bottom-of-the-market blunder. In particular…

1) EM growth is predicated (increasingly) more on domestic growth, than export-driven (i.e., globalization) growth (which is so 1990s);

2) Productivity doesn’t rise in a straight line. Never has, never will. A plateau is inevitable. Then policies fall into place… innovation powers ahead… technology evolves… and then poof, productivity growth picks up again; and

3) “China is slowing” has been the boogeyman for (no exaggeration) 15+ years. Of course China’s economic growth is slowing… what else can it do? A stopped watch is right twice a day, and this is both always right, and always wrong.

And the comment at the top of the article about how EM is so diverse – well, precisely. So to then say, “EM is no longer an asset class” is kind of silly. Stock picking (market picking) has always been important in EM. And these changes highlight that.

3) Speaking of emerging markets, here’s a fascinating look at the global trash industry:
‘We Are Swamped’: How a Global Trash Glut Hurt a $25 Billion Industry. Excerpt:

Across India, from poor villages to expensive residential areas of cities, millions of trash pickers are at work to collect what other people dispose. They are called raddiwalas, ragpickers, scavengers and waste managers. Some go door-to-door, others gather iron rebar and used bricks on construction sites, still others clean parks and city streets. There are even specialists who gather hair, which is exported in bulk for wigs.

They’re the starting point of a multilayered, $25 billion industry in India that advances through increasingly specialized middlemen and industrialists to eventually turn garbage into new objects. The work is a moneymaker for conglomerates as well as a route out of poverty for some of India’s poorest people.

All of that has been upended by a crash in a global garbage market dominated by two players: China, which buys most of the world’s garbage, and the U.S., which sells the most. Last year, China dramatically cut the amount of garbage it buys. The reduced demand from China and continued supply from the U.S. flooded the world trash market and drove down the price of garbage everywhere.

Indian recycling companies took advantage of the deep discounts and started importing more trash from the U.S. and elsewhere. In 2018, the imports of mixed scrap plastic to India rose 33%.

The jump in supply pushed prices down for the low-end Indian workers who pick through mountains of locally produced trash for raw materials to sell.

That’s impacting an Indian trash economy powerful enough to have prompted its own migration pattern: thousands of families left their rural villages to collect garbage in cities. Now, with their garbage hauls worth less, many are returning home.

4) A great tip from one of my readers, Quinn C.:

I’ve been subscribed to your newsletter for around half a year now and am getting tremendous value from it, thank you! It’s clear you put a lot of time and effort into it.

In response to your comment about listening to YouTube at 2x speed, I wanted to share a quick tip of my own about the Chrome extension, Video Speed Controller, which you can download here.

It adds a speed controller to any video so you’re no longer limited to 2x speed on YouTube – you can go as fast as you want.

It’s not limited to YouTube – it’ll work on pretty much any video it finds. I find it especially useful listening to company earnings webcasts which often don’t have built-in speed control and can be excruciating at 1x speed.

Cheers, hope you find it useful!

I’ve installed it and love it. Thank you, Quinn!

Best regards,


Whitney Tilson

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.