Tim Seymour on how to invest in emerging markets

Published Thu, Sep 29 20162:02 PM EDT

Tim Seymour, who has nearly 20 years of global investing experience as a hedge fund manager and trader, sat down with CNBC's Mike Santoli to discuss why the average investor should have exposure to emerging markets, even with current economic and political turmoil around the world. Technological advancements and increased liquidity have made foreign stocks accessible to the average investor, said Seymour, who believes emerging market economies present an array of attractive opportunities. "The big picture is that emerging markets, I think, have evolved to a place where corporate governance and the strength of the institutions, the infrastructure of the markets, the liquidity in the underlying markets have come such a long way, certainly in the last 10 years and in light years in the last 20," he said. Seymour explains that in the past few years globalization has allowed many companies in emerging markets to compete and win among their competitors in the U.S. and Europe. "So if you think about the world today, I think the good news for investors is not only are emerging markets a lot more accessible, every major multinational ... in this country or in developed markets has a pretty major exposure to the EM revenue base," he said. Seymour is co-founder of Triogem Asset Management, a hedge fund serving both institutional and high net worth individuals, founder of Emergingmoney.com and a regular panelist on CNBC's "Fast Money . " The investor also touches on: Some of the major investment themes in EM. The virtues and drawbacks of using EM ETFs. The emerging markets with the biggest potential. What to look for when selecting individual foreign stocks. PRO subscribers can also read the entire transcript of the exclusive interview below. (Editor's note: The content below is from a third-party service, so there may be some minor transcription errors. Watch the video for the exact quotes.) MIKE SANTOLI: Tim Seymour has nearly 20 years of global and emerging markets investment experience as a hedge fund manager and trader across multiple asset classes. He's the cofounder of Trigem Asset Management, a hedge fund and wealth management firm formed in 2008, where he acts as chief investment officer and chairs the investment committee, serving both institutional and high net worth investors. Prior to Trigem, Tim was a managing partner and portfolio manager at Red Star Asset Management and held multiple prominent roles at Sberbank CIB, Russia's largest investment bank. Tim is also the founder of EmergingMoney.com, a website he created in 2009 to offer investors broad insight into emerging markets. He joins us now to share his expertise in emerging markets and markets in general. Tim, and thanks for being here. TIM SEYMOUR: Great to be here, Mike. It's a pleasure. MIKE SANTOLI: A familiar spot for you, at the NASDAQ, your fast-money home. TIM SEYMOUR: Yeah, it's wonderful. MIKE SANTOLI: So thanks for doing it. Really broadly, let's talk about the approach to finding investments in emerging markets. First of all, maybe let's start with the initial premise of why it's important to consider having an allocation to emerging markets, what role emerging markets investments might play for an investor. TIM SEYMOUR: Sure. Great to be here. And I think having the conversation that drills down on emerging markets is one that's important. Because while a lot of investors are somewhat intimidated by investing in places that not only geographically they have trouble pronouncing the names, but they have trouble with corporate governance. And they have questions about whether the rules of the game are things that they really can be investing apples to apples. The big picture is that emerging markets I think have evolved to a place where corporate governance and the strength of the institutions, the infrastructure of the markets, the liquidity in the underlying markets have come such a long way, certainly in the last ten years, and in light years in the last 20. When I moved out to Moscow in '98, right before the place blew up, it was a time where not only were you questioning whether you were actually going to see your trade settle. But obviously half the game was getting corporate governance right and finding a company that showed just an iota of attention on minority shareholders was going to it's trading at a massive premium. So if you think about the world today, I think the good news for investors is not only are emerging markets a lot more accessible, every major multinational first of all in this country or in developed markets has a pretty major exposure to the EM revenue base. But I think if you look at EM core ADRs, whether we're talking about a Banco Itau, I.T.U.B. in Brazil, or I.C.I.C.I. Bank ticker IBN in India, these are two of the biggest banks in emerging and probably two of the best banks in emerging. And they're banks you can trade right here at home. So I think if you want to get a composite portfolio of emerging market companies that really are representative, I think you could do that better than you've ever been able to do it. I think liquidity in emerging markets also we know at times becomes a vacuum that dries up and at times becomes this mad rush for what seems like these unlimited riches of emerging. But I think on the whole, liquidity is very good. And especially if you are a high net worth investor or someone that's going through your advisory firm or a self-directed investor, your concerns about liquidity are different than maybe mine was as a hedge fund manager, where investing and shorting mid-tier companies is really tough to do. MIKE SANTOLI: So if the markets, as you say, they function well, they're basically investable in every respect at this point, the appeal of them or at least the distinguishing characteristic of them is just kind of underlying growth rates. These are economies that you want to participate in. I assume that's now the calculation is exactly what's an attractive market and not around the world. TIM SEYMOUR: Yeah. EM gets caught in this, "Hey, how much am I really just making a top-down land grab for growth. And I've got to be there. And I've got to have something. And the BRICKs were very interesting and probably appropriate term coined by Jim O'Neil at Goldman Sachs. But it became a bad cliché for exactly how you're supposed to take your investment approach to emerging. And I think without putting it in percentage terms, investors really should be thinking about, I can find great companies that, by the way, if you're a successful company in emerging, you've probably been through multiple down cycles. You're a battle-tested management team. You've probably gone through some type of a restructuring. So in many senses, these banks or some of these industrial companies are world-class companies competing with U.S. and European companies every single day and winning. So to that extent, you want to be finding great companies at great valuations. And I think what's interesting about emerging is that because it's such a top-down and I think a little bit of certainly a high beta and also a high correlation trade to other asset classes, you get these opportunities that are really quite extraordinary. And so all these great little lines you've probably heard attached to other investment classes. But the best times to buy emerging are when things go from just terrible to bad, not good to great and certainly not great to excellent. And I think that if you think about also the dislocations that happen in emerging markets and sometimes are of their own making. And really the irony is that the last seven or eight years of emerging markets trading have been a function of really the dislocation that emanated out of the G3, the G4, whatever you want to call it, but developed markets. And arguably, emerging markets have really underperformed in the last five or six years on a function of the dislocation that happened in wherever it started. We're not here to point fingers. MIKE SANTOLI: Sure. On the eight anniversary of Lehman Brothers failing, a lot of things came after that that led to it. In that period, at least most recently, when you did have emerging markets in one of those panics or basically people rushing out of them and the markets going down a lot more than developed markets did, you start to hear people rationalizing why it really isn't necessary or worth it to invest there anyway. They'll say, "Well, emerging markets is really just a proxy for this commodity super-cycle." TIM SEYMOUR: It was a China trade. MIKE SANTOLI: Or it was just a China trade. Or even if you go back to the '90s, it was just kind of this debt binge. And these countries levered up to it. So how do you counter that argument? TIM SEYMOUR: I think at the end of the day you do have this extraordinary demographic story. And whether it's that the average age in places certainly in the Middle East but also parts of Africa and certainly parts OSF Asia (not China) is 60% of the population is under the age of 25. So these stories about getting attached to the EM consumer I think are very real. And I think to the extent that just small increases in per ca-pita income have this massive knock-on effect with the economies, but also the consumer companies that operate there. So I think investors want to attach themselves to the consumer story. And let's be clear. As much as I think the China commodity story was an extraordinary moment in time, I think it's safe to say I actually believe that China's consumption of commodities is going to be a little stronger than people think. But no question that trade's past. It may offer really good opportunities now to pick up beat up, distressed resource companies. But the consumer, whether it's through the cellular or the mobile trade, through utilities, through obviously hypermarkets. In Russia, there's a company called Magnit, which is the Walmart of Russia. And they run hypermarkets that are as well-run as Walmart's. They really are. And it's a company where I think they spend a lot of time traveling around the world to meet with global investors. And they've raised their game and their profile. So make no mistake, I think investors want to be attached to the consumer story. And as much as emerging markets if you look at the ETFs to track them, the E.E.M. or the V.W.O. are the two big ones, have massively under performed the S & P over the last five years. It's been about 50%. So it's been a terrible relative value trade. But if you look below the surface of these indices or the E.E.M., the M.S.C.I.E.M., which is tracking, you have enormous out performance actually of a lot of consumer companies. And so there have been managers that I think have done very well in investing in emerging markets. And it's not just by timing the Alibaba I.P.O. or something. BABA, by the way, I actually think is much better growth at a much better price than Amazon. I realize there's significant risks attached to not only the big brother to China risk, but also to execution risks that clearly Amazon's got a big head start on. But I digress a bit just to say that I think there have been opportunities and if you think about also the times to buy Alibaba is when people assumed everything was a fraud. MIKE SANTOLI: Most worried about it, yeah, exactly. You mentioned the E.E.M. and these other ETFs that are very simple, convenient proxies (or try to be) for this entire sector, asset class, whatever it is. Are they just too blunt an instrument to get at it? What's the kind of virtues and the drawbacks of using a very broad emerging markets ETF? TIM SEYMOUR: The virtues are I think you know what you're getting. And I think on some level now there's trading history to anticipate what's going to happen. You can see how these things respond from a volatility perspective and from a correlation perspective. And actually as a former hedge fund manager, as a current manager of institutional money and people's money, where I care a lot about maybe being a little bit more active or hedging downside risk, ETFs are also a great way to control volatility in your portfolio. I think if you understand the components of these ETFs I think it's more important. And I think as I said you can probably make investment decisions that are getting you some of the-- if you break it down and say, "Hey, you know what"-- a good example of this is in Brazil, where the E.W.Z., which tracks Brazil, used to be about 65% weighted to Petrobras two classes of shares and Vale. MIKE SANTOLI: So that's energy and commodities? It means commodities basically? TIM SEYMOUR: Yeah. And you had massive concentration risks. And we all know what happened to those stories. But that now the E.W.Z. is probably 42%-43% banks. I.T.U.B., Banco Itau, and Banco Bradesco, BBD, and a couple other high-quality financial institutions, which I think are first of all much better balance sheets than those two companies we just talked about, but also have a real path to I think taking part in this new economy. So ETFs are great. And on some level, I think there's ways to-- at Emerging Money what we try to do is we try to weight the ETFs on a country basis a little differently than the M.S.C.I. does. So if you look at the E.E.M., Asia's over 60% of that weighting. And China is well north of 20%. And so Korea people don't realize how massive of a weighting it is. It's 15%-16%. So what I like to do is, at times (and investors I think if they feel that they can focus on this asset class enough), pick countries that you think have either gone through this rerating period or maybe the currency's bottomed out or use the ETF as a way to make a more active call without taking a single stock risk. So I think that's very smart. And I think there's ways to outperform if you want to do that. MIKE SANTOLI: Sure. Let's talk about where we're situated right now. You mentioned a five or six year underperformance relative to the U.S. market. But it has had a very good run and has come back since the sort of February lows for all markets and probably is outperformed a little bit I guess since then, the overall emerging markets indexes. Where are we set up now though given the fact that as you say these macro influences or air pockets can hit at any given time? TIM SEYMOUR: I think emerging markets bottomed on Jan 11. And I think developed markets bottomed on Feb 11, something like that. And during that time, what's changed is primarily it's been a currency-based rally in emerging. At least it's been the biggest part of it. And that's been a function of dollar expectations and dollar realities. And so when I look at how emerging is up about 15% year to date, so it's outperformed the S & P by anywhere from 700 to 800 basis points. And that's a great run. Something I urge investors to do, because you can do it whether you're on your Charles Schwab, your Ameritrade, or whatever you're doing at home. But do a ratio of S & P divided by E.E.M., S.P.Y. over E.E.M. and get this ratio and follow this ratio. Because also it gives you technical levels on where you think-- it puts it in the big picture, which is where also I'm going with this. Emerging markets have underperformed for five years. And just because they've outperformed significantly this year, I don't think that's over. And when I look at the fund flow data also, people seem to forget that fund flows are up this year and we've had a big run, but that actually 2015 back to 2013 you saw about $125 billion outflow in emerging. That more than wiped out the gold rush period of 2003 through 2006 or '07, the BRICK years and all this exciting time. And so EM is still an underweight on valuation at a time when we're struggling. MIKE SANTOLI: It's an underweight meaning people are underweighted it, they're not exposed fully to it? And I think institutions certainly are not. So I look at that and say, "Okay, so what is the next catalyst for emerging to outperform?" Fear of Fed is appropriate, because as we've seen in the last four or five days of volatility for all markets, EMs underperformed. It's underperformed maybe because it outperformed. But maybe more likely because people are fearful of a stronger dollar, which is going to then raise the risks of this EM credit bubble that people think is out there. So my view is generally that by the time we really know what the Fed is doing, EM will have priced in I think a post Fed-hike environment. And it will actually be good for emerging. So I think emerging markets have been waiting for the Fed to hike. And as painful as it seems like it is to get that news, emerging markets have already priced it in. The currencies have already revalued. I would make an argument that floating currencies in EM are the best thing that ever happened, because they allow them to take the pain. And if you think about the Russian economy at $40 oil, it loses money. And it's a contracting economy. But the buffer to the downside by having your cost base be in the local currency that's now devalued by 100% effectively or 80% certainly and having an export in hard currency is a great thing. TIM SEYMOUR: Sure. MIKE SANTOLI: So I think the current state of emerging was oversold. I think the currencies were really oversold. So I think we're in an environment where it's ultimately going to depend on what's going on with earnings. TIM SEYMOUR: Sure, got you. MIKE SANTOLI: No, I was going to say if we can bring it down to some of the countries that you do think might be able to outperform. You mentioned a couple, Brazil. But what are some of the top ones right now in terms of that combination of the fundamental story and maybe the currency and where the valuations look? TIM SEYMOUR: Yeah, I like Korea. And that's E.W.I. is the ETF and obviously home of Samsung, which is 40% of the index. And Samsung is having a little trouble these days. MIKE SANTOLI: Also interesting, it's very hard to invest in the Korean companies directly in the U.S. TIM SEYMOUR: It really is. So the ETF is actually very effective. There are a couple ADRs that trade here. But largely, these big industrial companies, these Chiboles (PH) as we call them, I think owning the E.W.I. is not a bad thing. The currency, interestingly enough, I think now looks very competitive. The South Korean won underperformed for an extended period even relative to other EM currencies. Some of this was a function of really just this sense of a weaker China and a weaker kind of import growth story. Some of this is a function of Japan. And so the move of the yen from 120 down to 100 or 102 is a huge boom for Korea. And a lot of people would call Korea-- MIKE SANTOLI: And just to point out to people, that means the yen's getting stronger. TIM SEYMOUR: Exactly, yeah. And Korea, to their credit, really is what Japan used to be. So they've actually taken technology that other people have perfected and maybe built it better and are this industrial power in that region that's a global power and maybe is more competitive than Japan is at their own game. So I think you've got a currency that's underperformed. But more importantly, I think earnings there are-- I think there's been a lot of kitchen sinking over the last couple years. A lot of the big industrial companies have actually taken advantage of a down draft to really make their earnings I think get the benefit of what's going to be a better environment. I think if I look at other parts of Asia, just to be clear, I think China is-- no conversation on emerging markets is-- get China right, you're going to get EM right. I think Chinese ADRs that are traded here, especially those in the tech sector, are still very well-positioned. We've had a great time watching what Amazon and Microsoft and Intel and Facebook are doing. Those names in China have been ripping even harder and faster and have had a better run. MIKE SANTOLI: The Chinese tech companies that trade here, but are exposed to the actual business in China? TIM SEYMOUR: They're exposed to the actual business in China. And in some cases, they may have more regional presence than some of these U.S. companies. So they are getting a lot of growth. They are maybe protected by big brother. When you're investing in emerging markets, you always want to know if you're betting on board with the state. And you really don't want to be at odds. I'm not saying that Jack Ma is always going to be the favorite son inside the politburo. But I do think it's a case where Alibaba is a national company. But more importantly, I think their earnings multiple is very attractive for the G.M.V. (?) growth we're seeing for that company. Other parts of the world? MIKE SANTOLI: Yeah, I was going to say are there Chinese companies, just one or two, that make sense here? TIM SEYMOUR: Yeah. I think if you're looking at search, if you're looking at Baidu, I think it's also a very high-quality company with enormous growth in cloud, with enormous growth in the digital ad space, at a valuation that's-- it's got a fair argument that it's maybe more attractive than Google. China Mobile, to me, is also a company that despite its big slothing state bureaucratic inefficient capex and all these things that are in the price, this is a ridiculously cheap company. But they now spent multiple cycles investing in 4G technology. They're now able to really I think take the benefit of the growth in services and actually hire RPUs, average revenues per users, of the Chinese consumer that's all over their iPhone. So it's a 4.5% div yield stock. It's a company that I think is not always going to be the most transparent company in the world. But it's a stock I'm long. And it's another name I like in Asia. MIKE SANTOLI: Talking earlier a little bit before we started here about multinationals that have a good emerging markets related story. Is that a sensible way to try to gain that exposure? Or just in fact find a multinational that has that growth driver? TIM SEYMOUR: I think it's a great way to get exposure. And I think obviously for some people there's a more comfortable path to understanding that this is a U.S. company. And I know what they do. And at the end of the day also, they're going to have a more hedged revenue model. They're going to be more defensive at times when the dollar's strong. But a company like Anheuser-Busch, Bud, which is really InBev Bud now, ticker BUD, run by Brazilians, and a company that's been slowly consolidating the entire beer industry. At a time when beer growth and consumption trends in beer are actually still quite strong and growing. So the synergies that they can extract from bringing two companies together with massive overlap in distribution and production. And then I think just their ability to push distributors around in terms of their might, I think from a multiples perspective, this company should trade 200 to 300 basis points higher in terms of its multiple than some of the other biggies around the world as well. So I like InBev Bud. I like the Unilevers of the world and the Procter & Gambles of the world, Kimberly-Clark, are very much part of the fabric of just the consumers staples story, because it's a growth in hygiene. It's a growth in things that we take for granted in this country, that these companies are really getting that growth. We know that those companies though right now, because of just the reach for yield and dividend yields, I'm not sure that those are the names that I want to own. A company like Tiffany is a strange one. Because I think it's a very attractive play on EM consumer. It's obviously the luxury end. But it's an aspirational brand that we've seen over and over again. There is this enormous wealth that's being created in emerging markets. And I think the biggest issues for investing in a Tiffany are the currency factors at a time when the dollar's overly strong. But it's another one of these companies that to me has got a moat around its brand, has got a phenomenal track record of executing on distribution and marketing. But they have this consumer in emerging that I think is actually growing. Their target audience is growing. So you could put together a portfolio of multinational stocks. And again, we do this in Emerging Money. Part of the goal is to give people this focus on companies that really have said, "Our future is built upon really the future there." Even though we may know that Intel is really one of the flagbearers for Silicon Valley. Arguably, their business is tasked to EM growth. MIKE SANTOLI: Sure. Let's try to knit it all together here just with a couple, maybe three key points among what we've talked about here for the investor considering how to go about this. So talk about kind of just the fact that they've under performed. And maybe you might want to consider some exposure. What else do you think as you get started is something that we have to keep in mind? TIM SEYMOUR: Yeah, I think from a tactical investment perspective now versus your time horizon for investing, I think you want to be a longer-term investor in emerging. I think you can be tactical. And I encourage those that have the focus and the alacrity to kind of move when those things happen. But some of the most money I've made as an investor in emerging, as a fund manager, has been when I've made thematic plays. And I've been able to ride through patches of volatility. So I think now is still a very good time to be investing in emerging and to be investing in companies that I think are bulletproof, have good valuations, and you can see what their business model is. So I wouldn't be scared off. MIKE SANTOLI: And focus on some of the countries that seem like they might be pulling away (UNINTEL)? TIM SEYMOUR: For sure. Yeah, I think that's maybe the second part of the question, which is, "How do I go about crunching down this entire world?" And no question, I started out my life on Wall Street learning macro and rates out of business school, at UBS. And that's what I did. And I think that's a great background. Because no matter what, I do think that EM you you've got to get your macro right. So you don't want to be investing in a bad neighborhood. And a bad neighborhood could be a bad currency for exactly, right? MIKE SANTOLI: Sure. TIM SEYMOUR: So I think get your currencies right. I try to take a look at where the currencies really are as best you can judge on a historical trading basis, whether it's purchasing power parity, whether it is relative to its core trading partners, whether it's an exporting country or it's an importing country. Someone like India, I think it's a case where this is a country that's always had very significant inflation threats. And in a world where actually we have some deflationary headwinds, India is one of the biggest beneficiaries of this environment. So find countries where the growth, if anything, is there, but some of the historical impediments to investing there, which were that sometimes growth was too strong, the economy got too hot, massive hyperinflation. So take a look at that. MIKE SANTOLI: And finally, I guess as you said before, I think one thing people can take away is if you think the Fed hiking is a thing to be afraid of, emerging markets are going to probably figure it out before we actually get to that moment. So it's not necessarily something to be feared by the time it happens. TIM SEYMOUR: No, in fact, before the first Fed hike last December, EM currencies had had this major-- I've never seen them move in advance like that. So I guess my view is that I would not be fearful of the Fed. And all kinds of grafts and things. We're going to do this again I hope. And we can drill down. But I think there are misconceptions about where EM is right now. That includes on a debt to G.D.P. basis, the EM credit bubble. MIKE SANTOLI: It's not your '90s emerging markets. TIM SEYMOUR: No. In fact, the sovereigns, Russia's 82% debt to G.D.P., whereas Japan's 400%. MIKE SANTOLI: Yeah, there you go. Tim, thanks a lot. TIM SEYMOUR: Yeah, it's a pleasure. MIKE SANTOLI: We certainly will do it again. Thanks for your time. TIM SEYMOUR: Yeah, I hope so. Thanks. MIKE SANTOLI: Thanks very much. For CNBC Pro Talks, I'm Mike Santoli. * * *END OF TRANSCRIPT* * *

Technological advancements and increased liquidity have made foreign stocks accessible to the average investor, said Seymour, who believes emerging market economies present an array of attractive opportunities.

"The big picture is that emerging markets, I think, have evolved to a place where corporate governance and the strength of the institutions, the infrastructure of the markets, the liquidity in the underlying markets have come such a long way, certainly in the last 10 years and in light years in the last 20," he said.

Seymour explains that in the past few years globalization has allowed many companies in emerging markets to compete and win among their competitors in the U.S. and Europe.

"So if you think about the world today, I think the good news for investors is not only are emerging markets a lot more accessible, every major multinational ... in this country or in developed markets has a pretty major exposure to the EM revenue base," he said.

Seymour is co-founder of Triogem Asset Management, a hedge fund serving both institutional and high net worth individuals, founder of Emergingmoney.com and a regular panelist on CNBC's "Fast Money." The investor also touches on:

Some of the major investment themes in EM.
The virtues and drawbacks of using EM ETFs.
The emerging markets with the biggest potential.
What to look for when selecting individual foreign stocks.

PRO subscribers can also read the entire transcript of the exclusive interview below.