Asset managers have been chasing down undervalued opportunities in the emerging markets for the better part of two decades; some investments turned out to be runaway winners, others diminished in value at a rapid pace, and more than a fair proportion ended up being revamped and restructured many times over.
In actual fact, while an underdeveloped economy does provide for any number of undervalued investment windows in general, specific opportunities invariably demand specific analysis; in other words, if third-world investments fail to meet value arbitrage benchmarks, they become little more than gambles based on optimism, and on statistics which have no relevance to the investments themselves.
Value arbitrage is the processthrough which an investor must determine the gap between the price of a given investment situation in an emerging market on one hand and the valuation of a similar situation (as nearly as may be) in the mature capital markets on the other.
Value arbitrage is not an art; it strives to be an exact science.
Furthermore, the value arbitrage process enables an investor to identify what emerging market risks must be offset, or diminished, at the point of making an investment, e.
g.
political risk, the risk from economic upheavals due to natural disasters, the risk of higher energy prices and the risk of legislative changes.
Numerous emerging market investments have failed due primarily to their reliance on poorly gathered government data.
Growth yes, but which segment of society will benefit from that growth? Consumers yes, but is the rise in consumerism boosted by excessive debt? It is questions like these which need to be answered before any logical decision on valuation can or should be made.
Value Arbitrage is the only process can justify investments in more than 100 countries around the globe.
The extreme variances in economic development are certainly creating new undervalued situations with each passing day.
But the overwhelming proportion of such undervalued situations qualify as dangerous, even unnecessary, bets which do not lend themselves to any reasonable risk-reward profile.
That said, the cost of securing of risk coverage is perhaps the most vital single indicator which determines whether an undervalued investment opportunity is truly undervalued in the first place.
This involves the exclusion of certain businesses where insurance premiums are clearly prohibitive, e.
g.
infrastructure projects in countries where the rule of law, and commercial law, still does meet acceptable standards, or exploration concessions in a highly corrupt environment.
The Value Arbitrage process must also take into account the potential of post-investment mergers and acquisitions, in the chosen country and in neighboring countries, in order to enhance shareholder value at an above-average pace.
It should not be forgotten that the M & A scenario in the developed capital markets constitutes one core foundation of corporate value.
In actual fact, while an underdeveloped economy does provide for any number of undervalued investment windows in general, specific opportunities invariably demand specific analysis; in other words, if third-world investments fail to meet value arbitrage benchmarks, they become little more than gambles based on optimism, and on statistics which have no relevance to the investments themselves.
Value arbitrage is the processthrough which an investor must determine the gap between the price of a given investment situation in an emerging market on one hand and the valuation of a similar situation (as nearly as may be) in the mature capital markets on the other.
Value arbitrage is not an art; it strives to be an exact science.
Furthermore, the value arbitrage process enables an investor to identify what emerging market risks must be offset, or diminished, at the point of making an investment, e.
g.
political risk, the risk from economic upheavals due to natural disasters, the risk of higher energy prices and the risk of legislative changes.
Numerous emerging market investments have failed due primarily to their reliance on poorly gathered government data.
Growth yes, but which segment of society will benefit from that growth? Consumers yes, but is the rise in consumerism boosted by excessive debt? It is questions like these which need to be answered before any logical decision on valuation can or should be made.
Value Arbitrage is the only process can justify investments in more than 100 countries around the globe.
The extreme variances in economic development are certainly creating new undervalued situations with each passing day.
But the overwhelming proportion of such undervalued situations qualify as dangerous, even unnecessary, bets which do not lend themselves to any reasonable risk-reward profile.
That said, the cost of securing of risk coverage is perhaps the most vital single indicator which determines whether an undervalued investment opportunity is truly undervalued in the first place.
This involves the exclusion of certain businesses where insurance premiums are clearly prohibitive, e.
g.
infrastructure projects in countries where the rule of law, and commercial law, still does meet acceptable standards, or exploration concessions in a highly corrupt environment.
The Value Arbitrage process must also take into account the potential of post-investment mergers and acquisitions, in the chosen country and in neighboring countries, in order to enhance shareholder value at an above-average pace.
It should not be forgotten that the M & A scenario in the developed capital markets constitutes one core foundation of corporate value.