Jack Nelson: ‘Investing in Emerging Markets Should Primarily Be About Analyzing Individual Businesses’
Oct 1, 2024
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Jack Nelson, the lead manager of a sustainability strategy for global emerging markets, brings valuable insights from his extensive experience. He shares transformative experiences that shaped his investing approach in markets like India, China, and Brazil. The conversation delves into the significance of analyzing individual businesses rather than macroeconomic factors, addressing the complexities of governance and the risks in countries like China. Nelson also emphasizes the need for robust communication between investors and companies to foster corporate responsibility and sustainable practices.
Jack Nelson emphasizes that investing in individual companies within emerging markets is crucial for uncovering true growth potential, rather than relying on broad market valuations.
The unique corporate governance structures in emerging markets necessitate a careful analysis of management motivations to ensure alignment with minority shareholders' interests.
Nelson advocates for integrating sustainability into investment strategies by using an ESG framework to address environmental and social challenges in rapidly developing economies.
Deep dives
Jack Nelson's Journey into Emerging Markets
Jack Nelson's journey into the world of emerging markets investment began during his youth when he participated in a UK government program that sent teenagers to countries like India, China, and Brazil. This experience during the 2007-2008 economic boom instilled in him a passion for the dynamic growth and potential of emerging markets. Following this, he tailored his education at Oxford toward development economics, which ultimately led him to a position at Stewart as an emerging markets analyst. Nelson believes investing in emerging markets represents a significant opportunity to be part of a global transformation in living standards, reminiscent of historical advancements seen in the West.
The Logistics of Investing from the UK
Investing in emerging markets from the UK provides certain logistical advantages, particularly due to the accessibility of corporates from London and Edinburgh. The city of Edinburgh is rich in investment management history, allowing for beneficial networking and access to corporate meetings. Interestingly, Nelson mentions that while geographical locations can influence the speed and volume of investment opportunities, the behavioral advantage of being away from major financial hubs allows for a long-term investment strategy without the noise of high-frequency trading. This perspective encourages focusing on sustained corporate growth rather than immediate market impulses.
Understanding Valuation Discounter in Emerging Markets
The discussion around valuation in emerging markets reveals that lower valuations have not always catalyzed investment interest, particularly due to factors such as ongoing geopolitical tensions. Investors often exhibit skepticism due to past disappointments in returns, where companies in emerging markets have not performed as expected despite valuation discounts. Nelson argues that focusing solely on valuation fails to capture the diversity and potential within the emergent corporates, as compelling investments often lack direct correlation with macroeconomic growth. He emphasizes that the true investment opportunities lie within the fundamental analysis of individual companies rather than a broad assessment of the market.
The Unique Landscape of Corporate Governance
Nelson highlights that corporate governance in emerging markets differs significantly from that in developed markets, particularly regarding ownership structures and motivations of control. In many emerging markets, companies are often family-controlled or owned by government entities, leading to distinct governance challenges not typically seen in Western firms. The need for thorough analysis of management and their motivations becomes paramount, as investors must consider the alignment of interests between controlling entities and minority shareholders. This nuanced understanding of governance helps reduce risks and informs investment decisions across different sectors within emerging markets.
The Role of Sustainability in Emerging Markets Investment
Sustainability is critical in emerging markets, where rapid growth often accompanies environmental and social challenges. Nelson emphasizes that as countries develop, they face pressing issues related to pollution, social equality, and resource management, making sustainable investment practices crucial. By assessing companies through an Environmental, Social, and Governance (ESG) lens, investors can identify businesses that not only generate returns but also contribute positively to their communities and environments. This dual focus on profitability and sustainability positions investment strategies to align with evolving global standards for responsible investing.
Our guest this week is Jack Nelson. Jack is lead manager of the Stewart Investors’ Global Emerging Markets Leaders Sustainability strategy, which is highly regarded by Morningstar’s manager research team. Jack joined Stewart in Edinburgh, Scotland, in 2011 after obtaining an MA from Oxford.
