At Taipan, We¹ll Sell You the Whole Seat… But You¹ll Only Need the Edge!

by Christian DeHaemer

2002–The year of second-tier emerging markets

The key to knowing which countries to invest in is finding out which receive the most foreign direct investment.

Here’s what I see happening in the next 12 months. The newest round of global trade talks will spur greater trade and investment flows to developing nations in the first six months of 2002. Cold cash to build factories and whatnot was the number-one source of private capital flows to developing nations over the past half decade.

In 2000, developing nations attracted a record $240 billion in direct investment. Now, according to what you hear in the corner bar, the current global economic slowdown suggests that inflows have eased this year.

But this cyclical downturn will likely be followed by an upsurge in 2002. New confidence spawned by the international front against terrorism, coupled with the new round of global trade talks, will yield a rise in emerging-market investment. There aren’t a lot of anti-globalization hooligans getting beaten by truncheon-wielding, jackbooted Italian coppers these days.

Survival of the fittest

Emerging markets are like prizefighters. The small number at the top makes the lion’s share of the money.

There are more than 170 third-world countries in the United Nations. Ten of them account for 70% of the total direct foreign investment during the last decade. China led the pack with 25% of all foreign investment. Brazil was second, with a 9% share of the total, followed by Mexico (7.4%), Singapore (5.7%), Argentina (5.6%), Hong Kong (4.6%), Malaysia (3.7%), Chile (2.9%), Poland (2.8%), and Thailand (2.7%).

This list does change periodically, with Chile and Thailand trading places with South Korea and Taiwan. Future up-and-comers are likely to be Turkey (due to its pivotal role in NATO and EU expansion) and India (with its large U.S.-educated elite work force, growing technology, biomedical industries and overall importance in the region).

In Central Europe, Poland and the Czech Republic will be the likely winners of an enormous amount of foreign investment.

Foreign investment alone does not make a country a sure thing. It does, however, bode well for the long term. Elsewhere in this book, you will find detailed investment advice pertaining to China. For my purposes, I find ways to make money in the dregs.

When lightning strikes

I’ve had great success in buying countries with a thriving western-style capitalist infrastructure that have been hit with some sort of crisis. The crisis can be economic, military or political. Usually it is all three.

You won’t get this type of advice on Louis Rukeyser, read it in Barron’s, or hear it espoused by that bald-headed hypester of TheStreet.com–but there are tremendous fortunes to be made by investing during the meanest, most economically crushing selloffs.

Such opportunities don’t come every day, but when they do, the potential payoff is enormous. Right now, I’m seven for seven with my lighting-rod, emerging-market, "blood in the streets" plays.

Proxy for providence

The fundamental thing to remember is that countries do not just disappear. When the Soviet Union went under, Russia still had to honor its debts. After the "Asian contagion," when Thailand, South Korea, Malaysia, and Indonesia got crushed by falling currencies, triple-digit inflation and massive foreign-denominated debt, they all came back with a vengeance.

Because second-tier emerging market economies have very few large, publicly traded companies, these are often used as proxies for the country itself. In other words, the (fictitious) Indonesia Fund must buy Indonesia Telecom (TLK), because it is one of only a handful that are liquid enough to be sold if country undergoes a coup d’état or is consumed by uncontrollable forest fires.

These twin conflagrations happen with cyclical regularity in Indonesia, and, over the years, they have provided a wealth of buying opportunities–and profits.

Buy, hold… and go broke

I am by no means suggesting that you purchase these companies as long-term investments. Given the fickleness of emerging markets, you would likely end up losing half of your investment in 5 years. The constant devaluation of the currencies alone would wipe out most of your capital.

But currency risk works both ways, especially in light of today’s perma-strong dollar. In fact, most local emerging-market investors are less sophisticated than their U.S. counterparts. The glory of emerging markets is that they swing both higher and lower–they overshoot on the high end, and get buried on the low.

Since most investors are wrong at market turning points, we have better opportunities to get in and out on the trends.

Don’t pay the ferryman until he gets you to the other side

You don’t pay the same price for a used car as you do for a new one. You don’t pay the same price for a second-tier, emerging-market company as you do for a top-tier firm.

We are playing on the low end of valuation. You want to ride a P/E from 5 to 10 with TKC, versus a P/E of 100-200 with Oracle or Sun Microsystems. To be successful, you must buy stocks at or near the bottom when the news is at its absolute worst… and sell when it hits the middle.

When it begins to look as if a modern day holocaust or a reprise of Ireland’s famous potato famine will not come to pass after all–sell. In a nutshell: buy the bad news and sell the it’s-not-as-bad-as-we-thought news.

3 STOCKS YOU CAN TAKE HOME TO MOTHER!

INDIA—BANK ON IT

This stock will double by the end of 2002 or Osama been Laid-Down will shave off his beard

Planes falling out of the sky, toxic letters mailed to Tom Brokaw, 15,000-pound bombs dropped on caves. Attacks by donkey cavalry. Peacenik hippy retreads whining in Berkeley. Wars, famine, pestilence…

…and profits.

War has unpredictable results. The dichotomy of creator/destroyer, crisis/opportunity is such that those who take chances and act during times of maximum disruption have built fortunes out of chaos. Those who fail to act are torn asunder by the cosmic sweep of events.

Don’t get me wrong: there are always risks. Who could have envisioned the effects of an Afghan war on the druggies of the world?

On the nod

Here in dark and lowly Baltimore, The Sun, our local rag, reports an upsurge in murders among heroin addicts and dealers owing to short supplies of Afghanistan’s biggest export. Apparently, tighter restrictions on the borders caused by two months of war have accomplished more than 50 years of prohibition and "just say no" rhetoric.

Conversely, across the natatorium, Britain has used this opportunity to decriminalize cannabis. We will fight along the beaches, in the hedgerows…

An Eastern apocalypse

In India–where just last spring I did some exacting due diligence–they say that at the end of time, Kalki, the machine-man and last avatar of Lord Vishnu, will sweep down on humanity riding a white horse, swinging a flaming sword and destroying all evil in his path.

This apocalyptic event will signal the end of the present eon and usher in a golden age. And that’s as good as any description of lightning-rod investing can get.

Lightning strikes seven times

Taipan has made a ton of money buying "blood in the streets" plays to profit from emerging market chaos. In fact, I’m seven for seven over the past few years. Long-time readers will remember my 102% gain from the makers of Red Stripe. Or 55% from China Telecom. Or, most recently, 178% from Turkcell.

Taipan believes that you can consistently make money by buying companies that act as proxies for countries when it seems the news cannot get any worse.

In search of the Afghan market

There are no publicly traded firms or funds in Afghanistan. Pakistan has two, but they are impossible for foreigners to trade. India, the superpower of central Asia, has thousands, and its largest non-government-owned bank has been beaten down to extreme levels–plus it trades in New York City as an ADR. Shazam! What a buy!

Taipan believes this offers an excellent opportunity to profit.

ICICI Ltd. (IC:NYSE-ADR) was established as a development bank in 1955 with the support of the Indian government and the World Bank. It has gone on to become the second largest commercial bank in India. It has the obvious benefit of not being owned by the government. And the way it has expanded shows that it wants to become a major financial institution.

Indian GAAP

Get this: returns for the first half of 2002 are excellent compared to the half year ended September 30, 2000. Profit after tax per Indian GAAP increased 87%.

Earnings per share increased to 11.93 Indian rupees (INR) from INR7.13. Net income per U.S. GAAP increased 87%. The company has 1.52% market share in deposits and 2.01% market share in customer assets.

Cost of deposits decreased to 7.4% compared to 7.9% during H1/2001. Operating expenditures increased by 120% to INR277 crore (crore = 10 million) from INR126 crore.

ICICI Bank continues to be the leading private-sector bank in the country. Deposits grew 80% on September 30, 2001 compared with September 30, 2000.

ICICI Bank’s share of total deposits in the Indian banking system increased to 1.52% from 0.97%. Retail deposits constituted 67% of total deposits, compared to 48% the year before. This means that ICICI Bank is successfully going after retail customers. Savings deposits showed a substantial growth of 159% to INR2,186 crore from INR843 crore the year before.

In view of the selloff based on regional strife, all of this is good news. Even as the stock price gets cheaper, the growth in customer accounts continues. The bank added about 1.1 million new customer accounts during the first half of 2001, taking the total to 4.3 million. That number includes 2.2 million savings accounts. The number of Internet banking accounts increased to 746,000.

If growth like this isn’t enough for you, ICICI Bank’s total capital adequacy ratio on September 30, 2001 was 13.00%, of which Tier I capital constituted 10.25%.

ICICI has a forward (2002) estimated P/E of 3.2. Based on further organic growth coupled with a buy catalyst that will come with the end of conflict in the region, the ADR is a buy under $5.50.

For investor information, contact Bhashyam Seshan, tel. (91) 22 653 8420 or 653 7460, email: bhashyams@icicibank.com.

MEET THE NEW TURKEY—SAME AS THE OLD TURKEY

The European Union expands by 10. That’s right, folks, the super-state EU may take on as many as 10 new member countries by 2004. The chances that this will happen have increased thanks to the united front against terrorism. Taipan believes there is plenty of upside in these markets.

Alas, Turkey remains a long shot to get into the EU during the next round. The bureaucratic EU Commission’s findings on Turkey do nothing to alter the impression that this swarthy country won’t be allowed into the world run from Brussels any time soon.

What’s more, Turkey has recently been bitch-slapped with two financial crises in 2000-2001 and a sharp contraction in real GDP.

That doesn’t mean that rumors and tradeoffs won’t provide upside catalysts for select Turkish stocks. For instance, Turkey has made some political progress in the form of constitutional reforms recently submitted to parliament.

Turkish prison

The EU is constantly slamming Turkey for its human rights abuses. Another obstacle is the unresolved issue of Cyprus. Our very own archaeologist adventurer, Dr. Eric "Zanesville" Lapp, the original model for Indiana Jones, tells me that the Cyprus thing may never be resolved, any more than Northern Ireland will be.

The root of all this is probably plain, old-fashioned prejudice. Europe simply doesn’t believe that Turkey is fit to join the club. But in view of Turkey’s importance as the western world’s only real Muslim ally, the country now has a great deal of leverage.

It should be noted that 10 days after Turkey provided the U.S. with 90 special forces troops on the ground in Afghanistan, the IMF came through with US$10 billion in loans.

In 1999, Turkey was the best-performing market on the planet!

From the low of October 1998 to the April 2000 high of 19,205.71, in just 16 months, the Istanbul Stock Exchange gained 774%! This bull market was partly driven by promises of a new government and sweeping reforms in the spring of 1999, coupled with the IMF recovery package.

Shake it up

On August 17, 1999, the first of two earthquakes measuring more than 7.2 on the Richter scale killed over 20,000 people in the densely populated northwest. Stiff 25% communication taxes were imposed to rebuild the devastated area. These will end in 2002.

The IMF sped up its scheduled charity disbursements, but the pace of government reform slowed to a crawl, and the IMF issued a series of warnings to Ankara.

Then the fez hit the hopper

In February 2000, the Turkish prime minister had an argument with the president about his listless anticorruption campaign. The Prez immediately declared a "crisis" in government.

The very next day, the Central Bank lost US$7 billion in a bid to defend the currency. Today, the Turkish lira is down roughly 50% against the U.S dollar.

This reminds me of Prime Minister Mahathir in Malaysia, who cast the blame for his economic problems on "Jews and foreigners." Every time he opened his mouth, the currency fell. Finally, his foreign policy aides had to show him a stock market chart, with his derogatory rants marked in right before the selloffs. Blame Jews and foreigners, and they will take their money and go home. He shut up.

As in Kuala Lumpur, whenever the politicos in Turkey open their mouths, the little guy takes it on the chin. Since February, an estimated 600,000 Turks have lost their jobs–out of a labor force of 20-odd million. And you thought Berlin had an immigration problem before…

Turnaround jump shot

When you are on the bottom, you have nowhere to go but up. Last quarter, the Turkish market jumped 40%–and again was the best-performing market in the world.

The country has received billions of dollars in IMF loans in recent months, including a US$1.5 billion installment on July 12. As I write, the IMF is talking about another $10 billion loan.

Turkcell

In the past, Turkey didn’t make New York’s radar screen for the simple reason that there were no easy-to-buy issues. You couldn’t buy any Turkish companies without paying a lot of fees and suffering from the trap of low liquidity when it came time to sell.

But just recently, a company that has a de facto monopoly on the cellular phone business in Turkey got itself listed as an American Depository Receipt (ADR) on the NYSE.

I know it has a monopoly because it just got fined by the Turkish Competition Board, which said, "Turkcell has a dominant position in the Turkish mobile market… and violated certain provisions of the Law on the Protection of Competition."

Turkcell was fined TL 7 trillion (approximately US$5.2 million). Hell, I’d buy a cell phone monopoly for US$5 million.

Q3 2001 produces excellent results–well, sort of

Turkcell’s subscribers increased by 4% to 11.8 million in the third quarter of 2001. New subscribers consisted of 85% prepaid and 15% postpaid customers.

Revenue increased 10% to $457.6 million from $415.6 million in the second quarter. EBITDA on a pre-FX basis increased 9% to $176.9 million from $161.9 million in the second quarter.

Turkcell posted a net loss of $26.6 million in the third quarter, compared to $40.7 million in the second quarter. This loss was due to the depreciation (18%) of the Turkish lira against the U.S. dollar coupled with low consumer demand. The depreciation has now turned around.

The company’s revenue projections for 2002 have dropped from US$403 million to US$70 million. These are obviously guesstimates, as it is nearly impossible to predict the effects of the upheaval on revenues and earnings. I expect that Turkcell will beat these estimates handily.

Investor sentiment

The pragmatic truth is that TKC isn’t an earnings and revenue story. It’s a volatility play. TKC’s share price will continue to bounce back with investor sentiment. The company is the clear and unabashed market leader (10 million subscribers in a country with 20 million official citizens). It has the most advanced network in place. It will likely continue to gain market share as the competition gets wrung out by the bad times.

There is reason to believe that the currency will bounce back (as it has begun to do in the fall of 2001) with the help of the US$10 billion IMF package and a return of bargain hunters.

Any recovery in the economy and in the currency will have a direct positive impact on TKC’s income, revenue growth, and debt levels.

I believe the negative news is now priced in, and TKC looks like a great speculative buy. By that, I mean this could easily be a stock that trades in the US$20 to US$30 range.

Buy (TKC:NYSE-ADR) on specific crisis-induced selloffs over the next year. Look to your monthly Taipan issue as well as the 247profits e-Dispatch for specific buy and sell recommendations.