Steve Forbes Interview: David Riedel, International Investing Expert? ~ MAKE MONEY BLOG$

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The Formalization Of Worldwide Retail

Forbes: Define what you mean when you use the words “retail format.” You make a distinction between non-formal. We think of retail –

Riedel: It is quite striking. Those of us who have spent time on the ground in these countries can recognize that a lot of retail transactions happen in fresh markets, wet markets, open air markets, things like that. And a lot more transactions happen in small mom and pop operations that are real cash –

Forbes: Sort of like our food carts in New York?

Riedel: Yes. Exactly. And like our farmer’s markets on the weekends; but every day and all the time. At some point in a developing economy’s growth, people start formalizing retail. They start building drug stores that look like drugs stores as we would understand them – a skilled pharmacist behind a counter, a number of other products in front, well lit, open certain hours, transactions are reliable and consistent.

Food does the same thing. It’ll migrate from an open market to an enclosed space, perhaps with refrigeration and other bells and whistles of modern retailing. The same happens with apparel and electronics and other things. And soon you have 20%, 30%, in the case of somewhere like China, 50%, or in the case of somewhere like India, 5% of your retail transactions are happening in formal environments.

But there’s an interesting statistic about India. Currently the top five retailers in India account for 2% of the market share of retail volumes. They’ve got a long way to go in terms of formalizing retail. And that’s an opportunity in the long run for investors to participate with winners in that space.

Understanding Global ETFs

Forbes: Now are there ETFs or indexes, David? Does one really have to go stock by stock?

Riedel: You can use ETFs. You can use country funds. You can use regional funds. ETFs have gotten more sophisticated and targeted to a particular use. But I do caution users of ETFs to understand what they’re buying. If you buy the ETF for Brazil, for example, 40% of that ETF is just two companies: Vale, the big iron ore exporter, and Petrobras, the big oil company. So there, 40% of your investment is going to companies that I would argue don’t highlight the strengths of Brazil. They just highlight the strengths of those two commodities.

And if you buy an ETF out of China, the FXI 25 or one like this, you’ve got 45% banks and 20% energy companies. So you’ve participated alongside the government in these two major investments that I don’t think have the kind of upside that we’re looking for when we’re taking the risk of investing into somewhere like a China.

So if you can find ETFs – there is one for Brazil that strips out those two large companies and just leaves the rest – that might be of interest. But I would encourage people to understand what’s in those ETFs and funds and know what you’re buying.

Forbes: Is the bloom off emerging markets? Brazil, until recently, their currency went down, what, 25% in a short period of time?

Riedel: It did. Brazil has really underperformed. It’s down 32% year-to-date. And the emerging markets index is down 25% year-to-date. So it is underperformed. I don’t think the bloom is off emerging markets, but I do have one strong, cautionary tale for everyone.

Emerging markets, as I’ve talked about, depend on the emergence of a consumer, this demographic moving through their life cycle, changing what they’re buying – buying cell phones and life insurance and opening bank accounts and buying apartments and cars and so on and so forth. That’s what drives emerging market growth. The one thing that can derail that is inflation.

The typical developing economy household spends 55% to 60% of their monthly income on food and fuel.

Forbes: You see that especially in India.

Riedel: Absolutely. And if you have food prices going up the way that they have in recent years, if you have fuel prices rise the way that they’ve shown their ability to in the past – we’ve been very fortunate that they haven’t risen more recently.

If they start rising in tandem, that takes a lot of disposable income out of the hands of these consumers that we and these companies and the world are depending on to maintain this change in their lifestyle and increase of their consumption. Are emerging markets over? Absolutely not. I think they’re very cheap right now and I think there are a lot of great opportunities. Are emerging markets threatened by inflation? Absolutely.

Forbes: Do you think the Federal Reserve understands that they’re not just playing in the U.S. sandbox when they do what they do?

Riedel: I have become concerned that people are hugely underestimating the power of inflation to derail the beginnings of any sort of recovery. And we’ve been incredibly fortunate to not have the inflation yet that I think could develop.

Forbes: One last thing. Everyone focuses on Europe for obvious reasons. Do you think that if they ever get their act together that Central and Eastern Europe will once again emerge as the real drivers of a continent that otherwise has been stagnant?

Riedel: I think they really could. They have shown an ability to be nimble. They provide a very useful component to European growth. Turkey, for example. Not the region you’re talking about, but has a large young population which Europe does not. Poland has a lot of very skilled workers. They’ve proven it time and time again. They’re the workshop behind Germany’s industrial machinery-based success. It’s all those things that are built –

Forbes: Even little Slovakia.

Riedel: Exactly. Even Slovakia. And Czech has been closely tied to what happens in Germany. I’ll always remember from my days in Thailand the risks of borrowing in one currency when your revenue or your salary is in another currency. And we’ve seen a little bit of that, as many of these countries took out too many loans in euro and Swiss Francs without being on those currencies themselves.

But as we get through that in the next five, 10 years, and as I believe the EuroZone stays together and begins to strengthen, the periphery countries play a very vital role in making that a functioning continent. And I hope those markets do come back strong.

Lessons Learned In Bangkok

Forbes: One thing you learn is humility. Just describe your story about what you learned in Bangkok first hand in terms of how the world can turn on you when you least expect it?

Riedel: Yeah. We were living in Thailand for nearly six years when we started getting hit by waves of bankruptcies. All these concerns about a slowdown. Huge over borrowing and half-completed buildings dotting the landscape.

Overnight, as a representative of an American bank, I was called to the central bank to be told that they were not going to support the baht anymore at the time honored level of 25 baht to the dollar. It quickly went to 55 and everyone who was teetering at that point certainly faced trouble. So I know very well what it looks like when companies start hitting a wall and going bankrupt. Watch those cash flow statements and watch those balance sheets. They’re a critical part of the puzzle.

Forbes: David, you wrote this five years ago but it still has relevance today. You still believe that, despite the downturn in emerging markets, hot spots are still out there?

Riedel: They’re out there. And that’s a roadmap for finding them.

Forbes: David, thank you.

Riedel: Thank you.

source: forbes.com

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