Robert Abad.
Aquick glance at local media offers a stark reminder that lower oil prices have left Colombia’s economy in its toughest patch for over a decade. It’s not just Colombia: the end of the commodity super cycle has left many commodity-producing emerging markets (EM) economies in the doldrums.
Robert Abad, after 25 years in the world of EM bond markets, is discovering something rather concerning as he encounters young professionals and students in the sector.
“Development in emerging markets is not linear,” he says. “It is messy and volatile, and sometimes violent.
“This can create disillusionment among young people who are often more trained and qualified than I was at their age and who have a tremendous capacity to solve problems, but don’t know what to do when faced by today’s troubles.”
For Abad, investing in emerging markets is a “journey that revolves around progress”. But this journey has peaks and troughs.
Through EM+BRACE, a mentoring and advisory initiative he set up last year, Abad wants to ensure that these troughs act as learning experiences.
New lessons
Colombia has the chance to learn a lesson that simply “did not exist” before, says Abad. The emerging market boom of the last decade, of which Colombia was a prime part, was created by an unprecedented combination of friendly conditions, most prominently the explosive growth of China’s economy and quantitative easing and zero interest rate policy in the US.
With the resulting weak US dollar and strength in EM currencies (not excluding the peso), a historic rally in commodity prices and the mass reach for yield, money flowed into emerging markets like Colombia.
“Never before had so many factors created such perfect conditions for EM,” says Abad.
But good times tend to create a rather inward perspective, he adds.
“Corporates felt they could do no wrong, so [they] expanded market share and carried out acquisitions, while the boom was mirrored by consumers seeing real estate prices taking off like crazy.”
Such a boom has, of course, created a bust. Oil producers are going out of business, economic growth has fallen, the government has been forced to cut spending and Colombians are finding their pesos are only stretching half as far when abroad or buying the latest smartphone.
“The lesson we need to be taking here is that the big picture matters not only when things are falling down around you, but when there’s a boom too,” says Abad. “The recent unravelling in many emerging markets has been a wake-up call.”
Abad’s words are prudent ones to which several Bogotano friends of mine would do well to pay heed, given how persistently they encourage me to buy property in Bogotá. They say “you can easily sell it for so much more in a couple of years”, as though the myth that house prices would always rise was in fact some unassailable truth.
Investment managers earn their living by attempting to assess this array of risks, but “someone living through a boom period doesn’t necessarily understand what country risk means,” says Abad.
“You can live here and feel that everything is cool but the reality is that there is a whole world affecting things.”
Local knowledge
But if broader perspectives may have been useful during Colombia’s flush years of USD$100 per barrel of oil, a similarly broad view of the hard times should provide the country with reason for hope in the medium term.
“Foreign investors sometimes can have a narrow view because they are always looking for a sound bite,” says Abad.
In Colombia’s case, this sound bite was oil. In financial markets, Colombian assets – in particular the currency and bonds – have more or less traded in conjunction with the oil price for the last two years. But this does not tell the full story about the country.
“It is not correct to view Colombia as simply an oil story,” says Abad. “Colombia is endowed with a lot of interesting natural resources – including industrial metals, base metals, coal, gas.”
Add to this other encouraging fundamentals: a “tremendous” English fluency, relative political stability, none of the ‘old time’ EM worries such as balance of payments vulnerability, and a peace process of great potential benefit but to which the economy “is not hostage”.
“There is a very strong base to work from,” says Abad.
In fact – whether you’re a student graduating from business school in Bogotá, a young, ambitious and entrepreneurial new arrival, a fund manager seeking a bargain, or the representative of a multinational – the slowdown may well offer the best time to invest in Colombia.
“There is no question that whenever there’s chaos there’s opportunity, and these opportunities are biggest whenever things are unravelling,” says Abad. “Foreign investors will take their cues from locals and when a crisis hits they’ll pick up on the panic and start selling.
“Remember, every seller has a buyer, that’s the definition of a market. People who are shedding exposure are looking for buyers.”
Sticking around during tougher times for the economy gives you “more room to set up base camp, lower your overhead costs, and the chance to get assets on the cheap,” says Abad.
“This applies whether you are with an oil exploration company or just looking to set up a restaurant. The important thing is always to take as informed a view as possible on risk.”
Robert Abad is a California-based financial professional and university professor who spent 25 years working in EM debt markets before setting up EM+BRACE in 2015 with the intent of “supporting, developing and inspiring the next generation of emerging market professionals and trailblazers”. Visit www.embracem.org.