The Case for Emerging Markets

We believe investors are under-invested in private assets in emerging markets.  Emerging markets form the bulk of the global economy, and they are less levered and distorted by quantitative easing than markets in the developed world. Emerging markets also have higher growth rates and often more policy dynamism, and they are less vulnerable to external disturbances than they were in the past, as their domestic savings are increasingly institutional, and their dependence on external capital has been much reduced.

Commodity and goods prices are increasingly set in emerging markets due to the fact these markets are home to 85% of the world’s population.  One implication of emerging market price setting is that the liabilities of institutional investors, when considered in terms of purchasing power, increasingly lie in these markets.  Investment exposure to emerging markets is therefore required to match these liabilities.

Richard DobbsNo ordinary Disruption (2015)
…we calculate that through 2030, the world needs to spend an estimated $57 trillion to $67 trillion on roads, buildings, rails, telecoms, ports and water just to enable expected economic growth.

Risk is multifaceted, but it is largely perceived as a measurable scale.  U.S. and other developed market sovereign bonds are widely seen as ‘risk-free’, as other assets have higher returns in exchange for higher risk.  From this convenient fiction comes the idea that, however risky a developed country is, and however over-valued their exchange rate happens to be, emerging market assets are always and everywhere riskier.  It’s this misperception of risk that sustains emerging market allocation opportunities.

Africa's entire power generating capacity is smaller than Spain's, despite having a population more than 25 times bigger.
Indian cities with populations of over 1m: Urban housing demand in India is expected to grow by 15m units by 2019.

The Case for Private Markets in EM

Many investors have ventured into emerging markets, but they have largely restricted themselves to listed stocks and liquid bonds.  These segments, though undeniably large and growing fast, do not capture as large a share of economic activity as they do in the developed world, and these investors miss out on some of the more attractive––if complex––sectors.

We believe that due to problems with conventional finance theory and short-term thinking, there has been significant under-allocation in private markets within emerging markets, some of which, such as infrastructure and real estate, are highly complex and require expertise and specialism. This is why we have built teams with both experience in and deep knowledge of these sectors.

Allocation to Reduce Risk

Power generation, infrastructure and real estate assets can shield a global portfolio against systemic risks that affect more liquid markets.  Investors who are more interested in avoiding large permanent losses than they are in withstanding short-term volatility should consider significant allocations to such assets, not solely for risk-adjusted returns and diversity, but, fundamentally, to reduce the overall risk to their portfolio in the event of a major global financial crisis.


Sector Specialism

At New Sparta Asset Management (NSAM), we specialise in private markets within emerging markets. We believe that as an investment community, we need to do more than simply provide capital in order to access the best emerging market investments. Our strategy isn’t just to bring funds into these markets, but also to find areas where we can add value and produce sustainable, positive externalities.

Risk is complex, and we believe varies depending on who is making an investment––not solely what the investment is.  People have different levels of knowledge, different reaction speeds and different levels of ability when it comes to risk reduction.  In order to reduce risk in complex investment areas and those with large information asymmetries we favour Sector Specialism: investment teams with long experience in a particular sector.