JWD Macro Manifesto 2015 Investment Outlook - external

9 January 2015
Original Market Perceptions for the New Year
Macro Manifesto - Investment Outlook for 2015
ABRIDGED RELEASE FOR PUBLIC DISSEMINATION
Unabridged copy for available by request
John Winsell Davies
CIO - Fund Manager
The ‘New Charismatics’, leadership and financial markets
- in the post-consensus, post-parliamentarian world
Narendra Modi - Gujarati brand of compassionate conservatism
Xi Jinping - Bigger than Moa, stocks trump ‘SUFFR’
Shinzō Abe - Brave Diet; audentes fortuna Iuvat ... and Abe
Joko Widodo - Clove Revolution ‘A New Hope’, the Luke Skywalker of Asia
Abu Bakr al-Baghdadi - Badder than Bin Laden, ‘Black Crow’ event in the making
Enrique Peña Nieto - PEMEX RIP, Mano e mano with El Jefe, Yo Soy 132 be damned
Hassan Rouhani - The promise of Khatami realised 2015? EM investors refocus on Iran
Vladimir Vladimirovich Putin - VVP’s Russia, the endgame as I see it
Kim Jong-un - Fun Boy Three, no laughing matter
Emerging Markets corporate governance mandates
- total return not ideology
Where is the floor? Marginal supply and the economics of unconventional oil production
The Dollar Bully World - Captain America still feeling Marvel-lous
What’ll it be? Call drinks for in the New Year
Asset allocation - Huntington, Hopkins, Stanford and Crocker
Geographic dispersion - favoured destinations
Industry sector - priority focus
... Independent Global Macro and Emerging Market Investment Analysis
John Winsell Davies is the Chief Investment Officer of Machlin Oracle Limited (London)
This is an original opinion piece which may not reflect the views of the Firm
No other parties contributed to the production of this publication; the opinions expressed here are his own
Registered in England and Wales: 02895959 | Authorised and regulated by the Financial Conduct Authority: 170913

9 January 2015
Original Market Perceptions for the New Year
Opinion
The ‘New Charismatics’
Leadership and financial markets in the post-consensus, post-parliamentarian world
Backdrop: the political stage in the first half of the 20th
century was dominated by messianic charismatics. From
Mustafa Atatürk to Mahatma Ghandi, Mao Zedong to Joseph Stalin, and Winston Churchill to Adolf Hitler; each
driven by a cause and seemingly by the force of their own will, they were able to change nations and shape the
world.
Mercurial leadership in the first half of the 20
th
century, eclipsed by 65 years of intergovernmental compromise
Ego unencumbered and absolute power spawned
two World Wars and brought the age of man to the
brink of nuclear extinction. Limitless authority
seized by a handful of individuals, and systems of
governance which rewarded insatiable, unchecked
ambition, resulted in 100,000,000 deaths in the
People’s Republic of China and the Union of Soviet
Socialist Republics. In the aftermath of apocalypse,
on a global scale for the first time in history, there
was a call for cooperation, consensus building, and
the implementation of systemic checks and
balances. The death of Hitler ushered in the epoch
of Intergovernmental Agencies specifically
engineered to restrain the power of the individual
and reduce risk.
With the exception of the ephemeral, halcyon daze
when Margaret Thacher and Ronald Reagan
enjoyed a ‘very special relationship,’ the post WWII
to 2010 era was a period dominated by
parliamentarians, conciliators and faceless envoys.
The world watched the creation of cooperative
agencies designed to disperse decision making, and
dilute individual authority. The United Nations
(UN), European Union (EU), North American Treaty
Organisation (NATO), World Bank, International
Monetary Fund (IMF), World Trade Organization
(WTO), World Health Organisation (WHO), Global
Environmental Agency (GEA), Association of
Southeast Asian Nations (ASEAN),
Intergovernmental Panel on Climate Change (IPCC),
International Organization for Migration (IOM),
International Energy Agency (IEA), Organisation for
Economic Co-operation and Development (OECD),
Organisation of Petroleum Exporting Countries
(OPEC), International Criminal Police Organization
(INTERPOL), the G-7, G-8*, G-20 and G-77; ...
Intergovernmental organisations succeeded in
reducing risk and the world has thus far avoided a
third world war. As a consequence, dispersed
command particularly in the developed world, has
been less effectual. The scale and velocity of
‘progress’ quantified by rising living standards, life
expectancy and scientific invention has slowed
dramatically from the first half of the 20th
century.
But on the flip side, the health of the world
measured by an expanding wealth gap,
proliferation of nuclear weapons, new strains of
virulent disease, ecological blight, depletion of
resources, and eradication of species, global
warming, and other indisputable statistical
measure has accelerated at potentially perilous
rates.
Space exploration for example, is a preeminent
science of technological advance and a defining
measure of modernisation. America went from the
age of ‘horse and buggy’ to the space age with a
man on the moon in 50 short years. In the last 50
years, the US has gone from a man on the moon to
explosions on space shuttles Challenger and

3
9 January 2015
Independent Global Macro and Emerging Market Investment Analysis
Ex Libris - John Winsell Davies - St John’s Wood Road 83, London NW8 8QS United Kingdom
Columbia; the period highlight is perhaps an
unmanned space vehicle landing on Mars.
Progress per se was more of function of the R.O.W.
playing catch-up with Europe and America; the rise
of emerging markets, a dynamic which produced
significant unintended consequences. In short,
hamstrung post WWII leadership has done far less
with much more.
Governments have been especially hapless in
addressing the unchecked threat of population
explosion. The population has grown from 1.65
billion in 1900 to 7.2 billion in 2015. This represents
an increase of 336% in little more than a century,
where perhaps 3 billion people is a sustainable
figure at current consumption levels.
At the beginning of his first term, the young Barrack
Obama was considered by some both a charismatic
and a visionary. He enjoyed the support of the
nation, but will languish for eight long years as a
lame duck president, in a two party system
characterised by gridlock.
Washington has been unable to act, paralysed by
partisanship, placing ulterior motive and special
interest ahead of the common good. ‘Defeatism as a
political tool’ has been perfected by the Grand Old
Party. Of sickly consequence, it has been rewarded for
harming the country, by taking Republican majorities in
both the house and the senate in recent elections. The
electorate cannot see the dirt through the mud
As a result, the US has underinvested in
infrastructure, physical and human capital.
Important reforms in entitlements, immigration,
energy, corporate taxation, and campaign finance
have been orphaned to die. The private sector is
adversely impacted and potential growth is not
fully realised. No mistake, the outlook for Captain
America remains Marvel-lous (see page 32), but
this is a question of leadership and at the moment,
the US government is dysfunctional. America rises
in spite of, not because of its political elite and
congressional approval ratings are near all-time
lows of 14%.
America is a house
divided. Despite a long
spell of good weather, a
bickering Ma and Pa
Kettle’ are increasingly
unable thatch the roof,
educate the young’uns,
care for the gramps and
granny, or protect the
garden from varmints
The power of the lobbyists and political action
committees (PACS) pervert the purpose and the
process of government. Gerrymandering carves up
voting districts into black and white extremes as
centrists worry that they cannot be re-elected.
Positively nothing is going to happen in a wing-
clipped Washington until 2016. Capital Hill waits for
elections and the Whitehouse to vacate.
But then, who does the GOP have the lead the
charge against Hillary? Rand Paul or Paul Ryan - ha!
Marco Rubio or Ted Cruz - ha ha! Chris Christie or
JEB Bush - ha ha ha! Mike Huckabee, Rick Perry, or
Rick Santorum – make it stop. The democrats have
a grand total of one (1) potential candidate of
consequence: the esteemed and credible, thus far
untarnished Elizabeth Warren, but she is savvy
enough to take a pass.
The European model may be equally hampered. 65
years of tethered parliamentarian leadership from
1945 to 2010, featured 59 Italian governments and
68 in Japan. Europe ruled the world for 400 years
but has been in a state of rudderless slow retreat
since the conclusion of the Paris Peace Treaties in
1947.
The EU is one clown short of a circus; the single
currency has been in jeopardy since inception.
Functionaries cobble together flimsy governments,
crafted of all manner of politically correct cloth,
from hippies to nimbys to ninnies. The structure
itself provides for extreme minority factions to

4
9 January 2015
punch well above their fighting weight. Shoddy and
weakened, sometimes even the trace elements of
fringe parties can derail a coalition.
Like US gridlock, the parliamentary system might be
similarly encumbered. It does not elect leaders, the
people vote for parties. The parties put forward pulse-
takers, dealmakers, and Ed Miliband
If the sun were not hot, it would not be able warm
the earth. A wolf with no teeth cannot eat. And
sovereignty without a sovereign is adrift upon the
current of the lowest common denominator.
As Captain James T Kirk discovered in “The Enemy
Within,” when stripped of ego, lust, greed, and selfish
pursuit; he also lost the so-called "power of decision;”
his ability to give orders and command a star ship
The rise of Vladimir Vladimirovich Putin changed
the paradigm. Mass appeal for maverick resolve
has touched far points on the map. The popularity
of dynamic, strong-willed captains, from those
under the autocratic boot and in open societies
alike, implies a heightened appetite for executive
risk. The geopolitical issues of 2015 and thus the
investment landscape are being sculpted by
powerful individuals not committees.
As the US stagnates in gridlock and the people-
pleasing parliamentarian world muddles along, of
particular interest are strategic emerging
economies. Particularly those which enjoy the
fervent backing of important populations; these
‘New Charismatics’ wield increasingly unbridled
power. This is a leadership which marshals great
force, which can be harnessed for both positive and
potentially dangerous utility.
I see a new deck and fresh deal from the shoe.
Global investors should understand the players
sitting at the table and make their bets accordingly.
Narendra Modi -
Prime Minister, India
Leader of the Bharatiya Janata Party (BJP)
A Hindu nationalist with deep roots in the
paramilitary Rashtriya Swayamsevak Sangh (RSS),
Modi is the most powerful Indian politician since
Indira Ghandi. He is a disciple of Vinayak Damodar
Savarkar and a proponent of hindutva, or Hindu-
ness. As chief minister of the state of Gujarat, Modi
was believed responsible for aiding and abetting
sectarian violence during a 2002 massacre in which
790 Muslims and 254 Hindus were killed.
He was boycotted by the UK, EU and denied a US
entry visa starting in 2005. Leader of the Hindu
Bharatiya Janata Party (BJP), Modi swept to power
riding a wave of zealous support. On 26 May 2014,

5
9 January 2015
the BJP defeated the Indian National Congress
(INP), after more than 40 years of rule under the
Gandhi dynasty. As the democratically elected
prime minister of the world’s most populous
nation, the UK, EU, and US have all reversed public
posture and reverted to diplomatic norms.
On the sub-continent Modi is seen as a clean, even
virtuous candidate. His reformist, pro-business,
free market, and anti-corruption platform is wildly
popular. The ‘Gujarat Experiment’ targets
economic rejuvenation by attacking bureaucratic
impediments to laissez-faire growth coupled and
massive reconstruction projects. The BJP has
implemented policy initiatives to develop
impoverished rural areas in the country. The
premier is aggressively promoted FDI by
immediately easing restrictions on foreign
investment in property projects. In the
infrastructure side, the gargantuan overhaul of the
Indian railroad system has already begun. Modi is
the first perceived ‘capitalist’ prime minister in the
country’s history since independence.
Modi’s pro-business reforms and anti-corruption, anti-
bureaucratic policy initiatives drove economic growth
Gujarat RED greater than 10%. The ‘Gujarat
Experiment’ is now the national model since his taking
office in 2014. India to surpass China GDP %  p.a. in
2016
Concrete steps. From an ambitious and
comprehensive reform list, included are the
following 13 items:
1) GST (goods and sales tax) reforms will be
enacted in 2015, potentially adding 1-2% to GDP 2)
sell stakes in public companies and increase limits
of foreign ownership 3) Jan Dhan Yojana, Modi plan
to include millions of citizens in the banking
system, more than 75 million accounts opened,
scheme foresees one banking account per
household 4) Shrink the role of the notary publics
(good plan for ROW especially EM – seemingly a
notary on every block in Kiev) 5) Tough on crime,
Juvenile Justice Act that will treat minors above 16
years as adults for heinous crimes 6) Sanitary
infrastructure, more Indians have access to mobile
phone than a toilet - Modi building 111 million
toilets in the next five years, one per second to end
public defecation 7) Cut fat, fewer ministers, ban
first class and five star travel, slash waste and
padded expenses 8) Eliminate Soviet-era planning
commission and the last Five Year Plan 9)
diplomatic outreach to both Japan and China 10)
Bring broadband to villages 11) Swachh Bharat
Abhiyan - nationwide campaign to clean the
country of rubbish 12) Cut red tape for factories,
ships, and small business, put applications, train
tickets, ballots online 13) Privatise corrupt
inspectors to eliminate institutional bribery
Not meaningless programmes, Modi reforms lift
economic growth from suffocating bureaucracy.
Financial markets have rallied his initiatives. The
SENSEX WHITE rose +29.26% CY 2014 (I include CY here,
not post-inauguration only, as markets ran up in
advance of his anticipated election) vs. MSCI All
Country World (MXWD) GREEN +2.96% and MSCI EM
(MXEF) GOLD which declined (4.72%)

6
9 January 2015
Modi enjoys the support of India’s tech-savvy,
affluent and well educated middle class, the second
largest consumer population in the world. These
250MM are his most important constituent and the
demographic is expected to double in size over the
next ten years. Unlike any global peer of similar
scale, Modi’s middle class has low relative
penetration rate of goods and services. A recent
survey noted only 11 passenger cars per 1,000
Indians; vs. 34 in China, 179 in Brazil, 233 in Russia,
and 440 in the U.S, indicated longer-term upside.
In a rising dollar world, the Indian Rupee (INR) GREY
has been surprisingly buoyant. The currency was down
(2.32%) vs. the USD in CY 2014, our fourth favourite Fx
in world after ($), Thai Baht (THB) RED (0.50%), and
Philippine Peso (PHP) BLUE (0.80%). Short side of the x-
rate? JPY (11.86%), EUR (11.54%) CHF (9.71%) ... I also
see buoyancy related to FDI acceleration in Indonesian
Rupiah (IDR) (1.94%) ORANGE for the year
Perhaps surprisingly, the condition of India’s
decrepit infrastructure may bode well for GDP
expansion prospects and asset price appreciation.
During his 13 year tenure in Gujarat, he
transformed the state into the nation’s industrial
leader. Manufacturing is a 28% co-efficient of state
GDP vs. 13% for the country. In order to increase
Indian competitiveness vs. China where +/- 30% of
GDP is derived from the manufacturing sector,
Modi’s pet redevelopment and construction
projects face little resistance. China has driven
economic development with fixed investment,
infrastructure spend and real-estate appreciation.
These are live rounds that Delhi has yet to fire.
India was essentially a closed economy until 1991.
The first 20 years of privatisation and economic
reform were met with fitful progress well below
potential. There is much work to be done but
therein lies catalyst for longer-term urbanisation
and industrialisation trends already advantaged in
rival economies.
I estimate that India handily beats consensus 2015
GDP of 5.6% with a 6.6% result and passes China’s
growth rate by 2016. A rising bond market (10Y
yield 7.86% down from 9.10% 2014 peak),
moderating CPI (7.82% down from 9.48% YoY) ...
‘global deflation peril Madame Lagarde? - mais
non’, 2015 world inflation estimate 3.4%), the
outlook remains constructive for Indian listed
securities.
Like others of the New Charismatics, Narendra
Modi appears driven by conviction and supreme
confidence. He is a leader with a cause whose
followers are fervent. Power plus passion, met with
initial success sometimes combine to serve a heady
cocktail.
Xi Jinping - 习近平
President, People’s Republic of China
Chairman of the Central Military Commission
General Secretary Communist Party of China
Parallels to Narendra Modi are significant. Xi is a
nationalist and China’s most powerful leader since
Mao Zedong. Appointed by the NPC (National
People’s Congress) to replace outgoing President
Hu Jintao on 14 March 2013, he pledged to reign in

7
9 January 2015
party waste and excesses. He is seen an anti-
corruption reformer whose pro-stock market, pro-
industry, pro-prosperity platform enjoys broad-
based, enthusiastic support. Like Modi, he is a hero
of the investment community and seen as a clean
leader in an otherwise tainted elite.
Undisputed master of the world’s largest economy
on the PPP basis, financial markets have welcomed
Xi policy initiates, ‘law and order’ swagger, and
perhaps even heavy-handed autocracy. Verbal
assurance to rebalancing growth from fixed
investment in infrastructure, construction, real-
estate and public spending; to domestic
consumption will not be enough. To combat
slowing GDP, the PBOC diverted 795 B RMB (CNY)
to five state banks in 2014 and surprised the
markets by cutting interest rates for the first time
in more than two years in response to signs of
weakening growth. Xi’s government is anticipated
to spend up to 10 Trillion RMB (CNY) ($1.5 T USD)
on perhaps 300-400 development projects to lift
the economy by 2017.
Even after recent rally the Shanghai Composite WHITE
is trading below 2009 highs and the would require an
additional 92.5% advance GOLD to reach 2007 pre-crisis
levels GREEN
His ‘330 Reform Package’ (results due 2020) include
an ambitious transformation of property rights,
interest rates, Fx liberalisation, and market-
oriented energy pricing. Xi has ‘talked’ the market
higher and the regulators have taken measures to
drive more people into stocks. Beijing hoping that
rising equity markets offset deflating property
values; has forced brokers to cut fees on retail and
institutional accounts. Xi’s privatisation policy,
reform measures, and most importantly,
stimulation of equity markets have rallied
investors, particularly the local Chinese retail
market.
Failing reform, Xi’s China Dream coined slogan
remains obscured by inefficient state enterprise,
characterised by a 4.5% return on assets vs. 10.2%
for private companies. In apparent contradiction,
this unattractive dynamic bodes well for future
growth. Why? State industry has historically
enjoyed privileged access to finance, resulting in
misallocation of resources and capital to
unproductive ventures. As Xi policy gains traction,
the private sector will benefit, fuelling the next
engine of economic advance while slowing the
spread of unprofitable business activity.
The managed exchange rate Chinese RMB (CNY) GOLD
has appreciated 33.5% vs. USD from the time I lived to
Beijing; juxtaposed to the Russian Rouble (RUB) WHITE
which depreciated near 90% since I moved to the CIS,
...Pound Sterling (GBP) GREEN stable from 1998 (5.54%)
The Shanghai (SHCOMP) composite has
appreciated a remarkable +52.86% in 2014 vs. a
decline of (4.81%) for the MSCI EM (MXEF) for the
year, and the managed currency exchange rate
continues to long-term advance.
As long as Xi keeps his foot on the gas, moderating
yet still powerful GDP of 7.3% and industrial
production at 7.2% do not imply material
slowdown in the short-term. Interest rates remain
low (3.6% 10Y), inflation is in the sweet spot (2.1%
CPI), the country is running a 2.4% current-account
surplus, and China is becoming the world’s bank
(see VVP).

8
9 January 2015
The recent market advance of share indices does
not prejudice the relative attractiveness of China.
Even after the current run up, the Shanghai
Composite is still trading 47% below 2007 levels,
while some of R.O.W. has been making new highs.
For the trailing five years moving out of the Great
Recession, Chinese equity markets are almost flat
(1.3%), significantly underperforming MSCI All
Country World (MXWD) +40% and the S&P 500
(SPX) +86%.
At 12.23x 2015 estimated earnings, the ‘A share
market trades at a 19% and 27% discount to these
same markets. Admittedly China is valued at a
rational premium to the MSCI EM (MXEF) largely
skewed by significant and justifiable discounts in
Russia and Brazil. Adjusted for aggressive earnings
growth estimates of 19.2% 2Y estimate, stocks are
not expensive.
Even after 52% CY2014 advance, the Shanghai
Composite (SHCOMP) WHITE has significantly
underperformed global indices as measured by MSCI
All Country World (MXWD) GREEN and the S&P 500
(SPX) GOLD for five years, currently trading at a 19%
and 27% respective discount to earnings (12.23x vs.
15.16x and 16.69x), with higher YoY corporate EPS
momentum @ 19.2% 2Y estimate
The material risk to the longer-term Chinese
investment case is the inked here: Chinese ‘SUFFR’
(Systemic Unquantified Financial Failure Risk),
unregulated wealth management products,
property market and credit bubbles.
Fixed investment was 30-37% of regional GDP at
pre-Asian financial crisis 1997 peak. Fixed
investment in China was up to 42% by 2008 global
financial crisis. In the six years since, it has grown to
50%, and another $1.5T is right behind it. From
2009 to 2014 private domestic debt ballooned from
$9T to $24T spawning rise in NPLs, a deterioration
of asset quality, bad investments, too much
industrial capacity – large output gaps. That means
half economy, major surge of state and private
spending (debt financed) on real-estate,
infrastructure and public works. Credit growth of >
2x faster than GDP is unsustainable and will
ultimately have to be curbed by the PBOC or the
market or both.
I am more concerned about the statistics that we
do not see in SUFFR. Opaque and unquantifiable
WMP’s, potentially explosive regional and
municipal budget shortfalls, endemic theft which
has yet to be unearthed in the anti-corruption
purge, and a raft of daunting unknowns give pause
for caution. A hard landing scenario perhaps two
years on the horizon is increasingly more plausible
based on less buoyant fundamental data. But
investors should factor in Xi’s ability to kick the can
down the road on these issues for perhaps years to
come. Today is not likely the day of reckoning and
financial markets move in real-time.
Also of significance to the longer-term investment
climate is the question of a collegial integration of a
strong China with the US and its allies. History
provides few examples of a global superpower
being peaceably deposed, but this is our shared
future.
A revival of the 1950 Sino-Soviet ‘Treaty of Friendship,
Alliance and Mutual Assistance’ alliance would more
than level the field

9
9 January 2015
Beijing is flexing its muscles in the South China Sea
with territorial disputes involving both Japan and
Vietnam. President Xi is attempting to create a
“zone of exceptionalism” in which international law
would be supplanted by a regional acceptance that
China’s interests and authority trump the rights of
smaller nations ... not unlike the US Monroe
Doctrine related to Latin America. And what do
Hong Kong protestors mean to Xi in the grand
scheme of the China story? Financial markets
suggest not very much.
A fan of Frank Coppola’s Godfather movies, Xi
Jinping permeates an aura of respect (see Ling
Jihua, Zhou Yongkang and Bo Xilai), and as others of
the New Charismatics, the 61 year old Chinese
leader is hugely popular at home. According to a
Bloomberg study which polled 30 countries in
December, Xi is the world’s most popular
president. He was rated higher by the people of
China than any other leader in the survey with
94.8% support. No surprise, the second most
popular world leader was Russian President
Vladimir Putin, with #3 Indian Prime Minister
Narendra Modi rounding out the triumvirate.
Shinzō Abe - 安倍晋三
Prime Minister Japan
President of the Liberal Democratic Party (LDP)
Following the emperor’s August 1945 Gyokuon-
hōsō radio address, fully 27 prime ministers have
ruled the constitutional monarchy, but few will be
remembered much beyond the history books.
Ineffectual, oft-corrupt bureaucrats; the stewards
of the Diet were known as ‘keepers’ 管理人.
Not promise keepers or keepers of the faith. Rather
they were known for keeping big business happy,
keeping secrets, and keeping the seat warm for
their replacement; before slipping out to the
Taiheiyo Club Gotemba Course on a meaty pension.
One should credit the awakening to Junichirō
Koizumi in 2001, but Shinzō Abe broke the mould
of the Japanese conciliatory party man who
masseurs-away a year or two in the post, planning
his retirement. Upon being elected prime minister
for the second time in 2012, that Abe took daring,
demonstrative steps to pull Japan out of economic
stagnation. Importantly, he did this with the ardent
support of the Japanese people.
Collective policy measures known as Abenomics are
a war on deflation designed to shock Japan’s
moribund economy out of a 30+ year malaise. At
>2x debt-to-GDP ratio, Abenomics is quantitative
easing on steroids. It is a no limit gambit to
stimulate growth and raise CPI.
Abenomics:
Step I; weaken the ¥ Yen and lift inflation. Money
printing via massive purchases of Japanese long
dated government bonds (QE), and sharply
increased public sector spending (fiscal stimulus).
The purpose of which is to improve manufacturing
cost competitiveness, revitalise domestic industry,
and fuel export growth
Step II; flood the economy with near zero-rate
financing such that corporate Japan will channel
liquidity into hiring and capital investment
Step III; reflate the stock market; central bank and
general investment fund purchases. Export
revenues in foreign currency, converted back into
deflated ¥ Yen increase earnings. Expensive
imports benefit Japanese domestic producers and
expand the trade surplus
Step IV; stimulate the Japanese consumer via
wealth effect and excess liquidity to drive GDP

10
9 January 2015
Step V; sector reform in energy (chuckle),
agriculture (smirk), and healthcare (wink);
headlines for votes and diversion
Gross domestic product, vs. global peers, Japan is ‘all in
Russia 7.9% China 22.4% USA 71.8% UK 88.4% Greece 174.9% Japan 226.1%
To Abe’s great credit, the Nikkei 225 (NKY) has
appreciated +103.9% 2Y to yearend 2014 vs.
+38.9% MSCI All Country World (MCWD) and
+23.1% MSCI Asia ex Japan (MXASJ).
Corporate profits are booming on export growth and
foreign currency revenues are worth more when
converted to ¥ Yen (JPY) PURPLE down (36%).
Japanese stocks Nikkei 225 (NKY) WHITE have doubled
+103% 2Y, as the Bank of Japan (BOJ) and government
investment fund (GPIF) are aggressively buying
domestic shares
The ¥ Yen has fallen by (35.7%) over the same
period and the economy has moved from deflation
to positive 2.4% CPI. And on 26 December 2014,
the Japanese savings rate turned negative for the
first time on record. A country of savers since 1945,
the savings rate peaked at 23.1% in 1975. Japan's
population is now drawing down savings,
calculated as savings divided by disposable income
plus pension payments = negative (1.3%).
But despite these headlines, Abenomics have not
achieved the desired result and all is not well in
Ōyashima - Great Country of Eight Islands. The
savings rate did not fall because the consumer is
invigorated. Rather the savings rate is negative for
the first time because Japanese Worker Household
Disposable Income (JHHSDINY) has declined from a
positive 4.2% in pre-Abenomics 2012 to a negative
(3.9%) at yearend December 2014. Real wages have
fallen 2.9% YoY and declining purchasing power
(imports in depreciating ¥ Yen terms), has forced
middle-income Japanese to dip into savings.
Labour laws make it hard to fire obsolete workers
or even modify their compensation. Young workers
trapped in low paying jobs with little disposable
income cannot spend. The economic impact is
especially detrimental to the working class,
increasingly unable to maintain standard of living
rates. Japanese society is no longer egalitarian but

2015
Independent Global Macro and EM Investment Analysis
Machlin Oracle Ltd. Cavendish House, 11-15 Wigmore Street London W1U 1PF United Kingdom
increasingly one of haves and have nots, not unlike
the R.O.W.
Household Disposable Income (JHHSDINY) fell (3.9%) at
yearend December 2014, from pre-Abenomics +4.2%
March 2012. Japanese savings rate negative for first
time ever as households offset a decline on real wages
and shrinking purchasing power accentuated by rising
dollar cost imports
Instead of stimulating economic activity and lifting
GDP, Abe’s ill-advised consumption tax hike to 8%,
paired with ¥ Yen devaluation, have squeezed the
consumer. The economy unexpectedly entered a
fourth recession since 2008 with a negative (1.6%)
contraction in Q3 after a decline in Q2. Auto and
retail sales are falling.
Japanese corporates used 2012 to yearend 2014
Abenomics dividend to shore up balance sheets rather
than allocate to increasing headcount or fixed
investment in Japan - (JNBPICDB) above
Concurrently, Japanese corporates have not
deployed currency-driven cash flows and excess
liquidity to increase head count or raise domestic
fixed investment. Instead, Japanese corporates
have used currency gains to reduce leverage, fatten
margins and drive EPS. They have committed
capital to overseas ventures rather than Japanese
operations. Vibrant, expanding South East Asian
economies with attractive demographics, pro-
business labour laws and tax schemes have been
the beneficiary. The local market on a long march,
25 year decline, is increasingly uncompetitive and
unattractive, with no easy fix.
Compounding the problem, the strong dollar bully
has increased the costs of raw materials required
for manufacturers. Not sticking to script, the
current-account surplus actually decreased, posting
negative numbers for the first time in decades as
the price of $ dollar-denominated imports grew
faster than ¥ Yen-denominated exports.
Bankruptcies have risen 140% since pre-Abenomics
2012, hitting the SMIDS, small and medium sized
industries critical to future growth.
The wealth effect from higher share prices has also
been somewhat neutralised by strong USD. Rather
than the intended consequence of increasing
consumption, the rising stock market has
strengthened the balance sheets of the affluent
and the elderly, whose savings patterns do little to
accelerate the economy.
But shoulder deep in economic morass, Abe still
enjoys popular support at home. After the country
re-entered recession and his sales tax hike
backfired, the prime minister called for a snap
election to secure a new mandate. In December
2014, his LDP coalition won a two-thirds majority,
commanding 325 of 475 parliamentary seats in the
Diet. The vote was seen as a referendum on his
economic policy and Abe was given four more
years in to prove it.
Victory over deflation is far from secure but strong
leaders take daring chances and I expect Japan to
post provisionally positive GDP expansion in 2015
of perhaps 1%. Dire circumstance and a 25 year
bear market on everything from the stock market,
to quality of life, to Japan’s status in the aristocracy
of great nations, requires bold action. Even after
the recent two year rally, the yearend close of the
market was still 11% lower than the last time I was

2015
working in Tokyo at the Nomura conference, way
back in March of 2000, almost 15 years ago.
Understanding that the Nikkei would need
legendary gain of +155% from yearend closing
15,307 to return to 1989 market high of 38,915, the
country has been underwater for an entire
generation.
The expression goes, “if nothing changes, nothing
changes.” Abe is making bold moves to reverse that
but such radical initiatives are not without risk.
Should Abenomics fail, burgeoning Japanese public
debt coupled with a weak ¥ Yen, could invoke that
apparition of a credit crisis some years from now.
But for financial markets in the short term, this is
one brave Diet; audentes fortuna Iuvat ... and Abe.
Joko Widodo
President, Indonesia
Head of the Indonesian Democratic Party –
Struggle (PDI-P)
Indonesian politics have been characterised by
duplicity and cronyism since the Dutch lifted
anchor in 1949. As with Modi and Xi, Joko Widodo
is seen by his people as clean leader with a ‘fresh
face.’ Previously governor of Jakarta and mayor of
Surakarta (Solo), the new president was sworn into
office July 2014 as leader of South East Asia’s
largest economy and the 4th
largest population in
the world (257 million).
Although of smaller scope than Mexico’s Nieto or
Modi in India, Widodo is initiating real structural
reform and going after previously untouchable
sacred cows. He has fulfilled a campaign promise to
cut billions from the nation’s budget and current
account deficit. Jokowi increased the price of
subsidised fuel by more than 30%. He initiated a
series of interest rate hikes, to support the
currency further narrowing the budget deficit.
The president has lifted the real-estate ban of
foreign ownership of residential apartments which
is expected to attract billions into Indonesian
property market, currently selling at 4-7x discounts
to region comps in Singapore or Australia. Widodo
made for better transparency in government,
requiring salary disclosure and business holdings of
government officials. He had prohibited the bidding
of family and related parties for government
contracts.
Credible leadership and structural reforms are
significant foreign investment. Indonesian corporates
have deleveraged 66% since 1997 Asian Financial Crisis
as profits have grown. JCI significantly outperformed
world and EM since Widodo took office
An altruist in his time as mayor and governor,
Widodo’s tenures were marked by public spend on
healthcare and transportation. A man of the
people, he was known for meeting constituents
face-to-face at street level. His governments
preserved park lands, constructed pedestrian
walkways, and even enacted some half-hearted

2015
measures to prevent the felling of trees on public
roads (unique in a country where deforestation is
the national pastime). While certainly not an
environmentalist by any common understanding of
the word, in the annals of Indonesian leadership,
he is thus far the least rapacious.
Editors Note: the investment community should not be content until
all those who burned Borneo, Sumatra and a thousand other islands
are behind bars. It is just bad business, in this life and the next. 72% of
Indonesia’s old growth forests have been lost forever in just the past
40 years, the most rapid such ecological catastrophe of any place on
earth including the Amazon. The scale of destruction is so large that it
is now having significant impacts on the global climate and blackens
skies across the region. Indonesia is now the world’s third largest
emitter of greenhouse gasses after China and the US, with 85% of its
emissions generated not from automobiles and industry, but rather
rainforest and peat land destruction.
Widodo’s grandparents came from a small village in
Boyolali and his family faced financial difficulties
during his childhood. He is the first Indonesian
president not from the political elite or of a military
background. A neighbour of the people, he attends
heavy metal rock festivals and by his own account
is a fan of Metallica and Led Zeppelin. After his
election victory, he told the New York Times, “now,
it's quite similar to America, yeah? There is the
American dream, and here we have the Indonesian
dream.” The Obama of Asia, he appeared on the
cover of Time magazine ‘A New Hope’ a la Luke
Skywalker in Star Wars IV.
Early days indeed for the architect of the coined
here “Clove Revolution,” his policy moves have
been well received by financial markets. Borrowing
costs declined 15% last year as the yield on the
Indonesian 10 year dropped from 9.17% to 7.67%.
In currency markets the Indonesian (IDR) was the
third best performing major currency down just
(1.69%) in 2014.
In equity markets the Jakarta Composite Index (JCI)
was of the top performing indices in the world,
advancing 22.29% in the calendar year, vs. a
modest gain of 2.96% MSCI All Country World
(MXWD), and loss of (4.73%) for MSCI Emerging
Markets (MXEF). With 5% estimated GDP
expansion, 8.3% industrial production, manageable
budget deficit of 2.3%, rising FDI, falling interest
rates and a stable currency, the investment climate
is benign. Widodo’s presidency is a strong positive
for financial markets.
Abu Bakr al-Baghdadi - ‫و‬ ‫أب‬ ‫كر‬ ‫ب‬ ‫غدادي‬‫ب‬ ‫ال‬
Caliph of the Islamic State of Iraq and the Levant
(ISIL) or ISIS
The former head of Al-Qaeda in Iraq (AQI), Abu
Bakr is both a charismatic commander and an
impassioned, fanatical tyrant. His inclusion on this
list of dynamic global leaders may be terminated at
any moment, courtesy of a Langley-piloted drone
attack. But the same could have been said about
his former boss, Al-Qaeda chief Ayman al-Zawahiri,
who has been wanted by US intelligence since
1998.
Editor’s note: After the Charlie Hebdo terrorist attack in
Paris just hours ago at the time of this writing, the
following inclusion with caricature may seem
insensitive. We do so in solidarity and candour, not in
humour
Too easy to disregard the caliph chief as just
another extremist; my perception is that the rise of
Abu Bakr is a ‘Black Crow’ event in the making.
Unlike Nassim Taleb’s Black Swan event (one
invisible to investors as a result of "collective
blindness"), the world is fully aware of ISIS. But
‘psychological distance’ and unpredictable political
outcomes make for a wide range of potential
effects on the global economy.

2015
His threat to the investment landscape is perhaps
understated. While history may prove his impact
on financial markets to be negligible, the reverse is
equally possible (see global listed securities post
9/11). More will yet be revealed.
ISIS controlled territory yearend 2014
Abu Bakr leads the most powerful jihadist military
in the world, commanding an army of an estimated
200,000 fighters* seemingly ready to die at his
command. ISIS controls significant territory in Syria,
Iraq and Libya. It has operations, fighters and
recruiting platforms in Pakistan, Philippines,
Indonesia, Egyptian Sinai Peninsula, and additional
pockets of influence in North Africa and the Middle
East. In June 2014, Abu Bakr told the world that he
would conquer Rome and Spain (figuratively
meaning the West – Parisian executions only hours
ago). He proclaimed that he had established a
global Islamic state, known as “Caliph Ibrahim,” and
he commanded Muslims across the planet to swear
allegiance to the him.
Khalifah proclaimed June 2014
As the United States pulled out of Iraq and
Afghanistan, Al-Qaeda in Iraq (AQI) was positioned
to fill the void. America has neither the political will
nor the support of the American people, to
redeploy combat troops on the ground. Other than
air support, money, weapons and advisors, further
US military intervention in the region is likely
limited. Al-Bakr understands that the only material
threat to further advance comes from other
Islamist organisations. Indeed when AQI expanded
from Iraq into Syria to become ISIS, he ignored a
direct order from Bin Laden successor al-Zawahiri.
In defiance of Al-Qaeda, his forces attacked the
Syrian Civil War faction and took control over the
al-Nusra Front. ISIS is now the de facto leader of
the global jihadist movement.
The Islamic State of Iraq and the Levant is
considered a terrorist group by the United Nations
Security Council, the European Union, and 11 other
nations. Mass executions of civilian populations,
beheading of hostages, child soldiers, sexual
enslavement, suicide bombing, religious
persecution, ethnic cleansing, torture and organ
harvesting, round out a long list of crimes against
humanity inflicted by Abu Bakr.
In addition to the government of Bashar Assad in
Syria and the US-backed Fuad Masum regime in
Iraq, more than 50 nations worldwide including the
US, EU, all 27 members of NATO, Russia, and the
Arab States of the Gulf Cooperation Council (GCC),
are directly or indirectly at war with ISIS and Abu
Bakr.
Disk drives found in Iraq indicate he controls a war
chest of approximately $1.5B USD in cash, but joint
military expenses to contain him cost an estimated
$1.5B a day. He finances operations from a wide
range of activities from black market crude oil from
captured fields in Syria and Iraq, to the sale of
stolen antiquities plundered from museums,
universities and archaeological digs in occupied
areas, to sophisticated money laundering activities
which target Al-Qaeda’s wealthy patrons on the
Gulf, especially in Saudi Arabia. A modern man, Abu
Bakr met his wives online.
Suddenly there came a tapping, as if someone
gently rapping, Black Crow rapping at my chamber
door. Quoth the raven, ‘nevermore.”

2015
*estimates from regional forces including US backed Kurdish President
Massoud Barzani, fighting ISIS in Ramadi and Jalawlas. The CIA is
publically dismissive of ISIS and estimates a force of only 20,000 to
31,500 fighters
Enrique Pena Nieto
President, Mexico
Popularity is a core requisite to inclusion in the
‘New Charismatics, with only one exception.
Enrique Peña Nieto was elected President of
Mexico December 2012, with only a 38% share in a
three party race. Only in a system that does not
allow for runoffs, would Nieto be given the keys.
His victory marked a return of the establishment
(PRI) Institutional Revolutionary Party, one
associated with corruption and 71 years of
uninterrupted rule until 2000. Cloaked in
allegations of electoral fraud, thousands of
protestors fought with police in the capital on
inauguration day, resulting in 90 arrests.
Some political observers considered him not much
more than a well-groomed, face man of the
business elite. Perhaps a handsome speech reader,
coupled with the appeal of a young Vicente Foxx.
Unlike other leaders who have made our cut, the
Mexican president is not well liked at home. His
historically low approval ratings of 39%, are even
lower than his northern neighbour in president
Barrack Obama at 48%.
Not unblemished by serious incident, Nieto’s
political career has been tailed by the San Salvador
Atenco scandal since 2006 and he has been the
target of criticism from the anti-corruption, anti-
PRI, social student group ‘Yo Soy 132’ since 2012. In
September of 2014, the bodies of 43 murdered
students who were marching in Iguala, Guerrero
were found in mass graves, prompting calls for his
resignation. I do not have any privileged insights
here, but our well-placed Mexican neighbours in St
Johns Wood (he works for Citi in Canary Wharf),
believe that there is blood on his hands.
So what’s to like, what are Nieto’s credentials?
During his first two years in office, he has proven to
be a surprising leader of substance and moxie. A
self-styled compassionate conservative (a young
Modi of Latin American politics?), Nieto has
initiated bold structural reforms and bravely
confronted systemic problems previously thought
unreachable. This is not a moral assessment. Simply
the conclusion that courage met with concrete
actions in the absence of a popular mandate, have
radically improved the investment climate of the
country. His presidency will likely be of great
benefit to Mexican financial markets and investors
in listed securities.
Death of PEMEX
Nieto ended a near 80-year state monopoly on oil
exploration and production. Not many EM
sovereigns are willing to loosen the grip on
hydrocarbon extraction and open the gates to
global competition. Both fixed investment and

2015
upstream production are anticipated to surge. An
estimated $50 billion will be spent in the next four
years by foreign firms alone, tacking on about 1
percent of GDP per year. Domestic stakeholders
and industry participants will likely respond to
maintain market share and the 10 year decline in
crude output is expected to reverse.
‘Mano e mano’ with El Jefe
Nieto broke up América Móvil (AMXL MM) and
opened the Mexican telecommunications market
to global players. In doing so the president needed
to square off with the most powerful man in the
country and the richest man in the world, Señor
Carlos Slim. Competition in fixed line and wireless
markets will put as much as $25B per annum back
in the pockets of Mexican consumers, priming the
M2, lifting consumer confidence, raising retail
spending and the economy.
Nieto’s pro-business, anti-red tape public policy has
revitalised the automotive industry. Nieto has
signed off on green field plant construction with Kia
$1B, Audi $1.3B, and BMW $1.1B. Mercedes-Benz
and Nissan are already building a joint $1.4 billion
auto assembly. Foreign competition has raised total
fixed investment in the sector to $10B.
His reforms have also improved efficiencies and
increased competition in the financial services
industry, leading to lower borrowing costs for
consumers. He has even commenced in earnest
with the task of modernising Mexico’s lagging
public school system, no mean feat. Nieto’s
reforms will usher in a decade of significant FDI and
add perhaps as much as an aggregate 3 pts per
annum GDP for the medium term.
And despite the falling oil price, the macro for
Nieto’s economy is favourable. Unlike LATAM rival
Brazil which is a leveraged play on Chinese
commodity demand, Mexico is a leveraged play on
a strong American economy and rising US
consumer demand. 80% of Mexican exports go to
the US. Sharing a porous border with the world’s
largest economy, one growing at a lights out 5% in
the last quarter, represents a huge logistical
advantage. Mexico is in a cyclical upswing with
exports at an all-time high, rising infrastructure and
construction spend, low 5.25% unemployment, low
interest rates 5.87% 10Y, modest CPI 3.9%, and
higher consumer spending.
Low wage inflation has restored manufacturing and
operational advantages to Mexican industry.
Factory labour costs are now slightly less than
comparables in China. With the opening of a new
pipeline to deliver cheap US shale gas to Mexico in
late 2015, energy costs for Mexican industry are set
to decline with the fall in electricity rates.
Competitive labour rates and falling energy costs
will benefit the manufacturing sector which is
approximately 1/3 of the Mexican economy. And
Mexico is still a net energy importer so a falling oil
price comes with dividends elsewhere in the
economy.
The Mexican Bolsa (MEXBOL) is flat 2Y (1.29%) vs.
+22.77% MSCI All Country (MXWD). The market has
done better than MSCI Emerging Markets (MXEF) but
negative EM index performance has been taken down
by explainable and warranted underperformance in
Brazil and Russia

2015
Lastly Mexican markets have not yet moved in
response to positive policy initiatives and
presidential leadership. Investors have not assigned
any value to Nieto’s material structural reforms
which I expect will be of substantive and long-term
benefit to the country.
Viva Quique - Viva Bombón - Viva Mexico!
Hassan Rouhani - ‫سن‬ ‫ح‬ ‫ی‬ ‫روحان‬
President Islamic State of Iran
The promise of Mohammad Khatami, buried by
Mahmoud Ahmadinejad, may be fulfilled in 2015;
and emerging market investors refocus on Iran.
After 36 years of Western isolation, one man has a
chance to lead the Islamic Republic back into the
mainstream. As the pendulum of popular opinion
reversed from the posturing of a hard-line
Ahmadinejad government, Iran elected a moderate
president, Hassan Rouhani in 2013.
I remember the morality police busting into our
offices on the corner of Baharan and 23rd
street, in
the late 90’s. They were checking to see if my
analysts Lisa Rutherford and Leila Danesh were
wearing full hijab in the workplace. We were trying
to calculate private market valuations for publicly
traded companies on the TSE. Shares like Darou
Pakhsh, Siman Fars & Khuzestan, Iran Vanet
(Bahman Group), Sanati Behshahr, Iran Khodro
Company and Shahdirau were valued between 1.5x
and 3.2x primary earnings, and often priced at less
than book value.
The Iranian Rial (IRR) was trading at 3,015 IRR/$1
official rate when we closed shop in 1999. It is trading
today down (93.55%) at 27,073 IRR/$1 at yearend
2014. I wonder what kind of value we might find on the
Tehran Stock Exchange today if it was open to
foreigners. If Hassan Rouhani succeeds, we may soon
find out
Unlike Khatami and his protégé, Mohammad Reza
Aref who ran against Mr Rouhani in the 2013
election, the president is not a true reformer.
Neither is he a charismatic in the traditional sense.
Rather he is a pragmatic leader in a position to
drive meaningful change in his country, of both
great economic and geopolitical importance to the
world. Rouhani has surrounded himself with
technocrats and distanced public policy from
dogmatic nationalists. According to Oliver August of
the Economist, his cabinet contains more
doctorates from American universities than Barack
Obama’s.
Rouhani’s position on this list of New Charismatics
has more to do with his ability to help Iran realise
its massive investment potential, than the
standalone dynamism of the leader himself. His
political objectives include ending the sanctions,
making a nuclear deal with the West, and enacting
structural reforms designed to open Iran’s markets,

2015
culture and people to the R.O.W., for the first since
the 1979 Revolution.
Rouhani’s motivation has nothing to do with
religion or ideology. No liberal, he is not a friend to
foreign governments. The president wants the
international sanctions lifted in order to grow GDP
per capita of just $4,769, 98th
place according to
the World Bank 2013 estimates.
The public is weary of the revolutionary discourse and
is interested in higher living standards, ease of travel,
access to goods and services at global prices
Iran is the last big ‘green field’ prize for emerging
market investors. With GDP of $368.9B, Iran is 30x
larger than another closed market in the spotlight,
the aforementioned Democratic People’s Republic
of Korea (DPRK), with GDP of only $12.38B. The
Iranian economy is 7x larger than Myanmar
(Burma) which opened in 2013, and 6x larger than
Cuba which had sanctions loosened by president
Obama last month, after 50 years of US economic
embargo. The Saudi Tadawul stock exchange opens
the doors to foreign investors this year. There are
no other closed markets remaining of comparable
investment scope and scale.
The world’s 18th
largest economy with the 17th
largest population (77.45MM), the World Bank
classifies Iran as an upper-middle income country.
It has a young demographic (average age 27.1
years), characterised by pent-up consumer
demand. It is situated on some of the most
valuable hydrocarbon deposits in the world,
including the second largest natural gas reserves
and the fourth largest oil reserves. Iran is the last
table to flip and the best game in town; the
investment potential for financial markets is
massive.
Modern Iran. Asghar Farhadi’s 2011 film “A Separation”
won Iran’s first Academy Award, taking the Oscar for
best foreign language film ‫ی‬ ‫جدای‬ ‫ادرن‬ ‫از‬ ‫ین‬ ‫یم‬ ‫س‬
All bets hinge on job one: signing a nuclear accord.
The deal met a setback in November 2014, as
negotiators failed to reach a ‘next step’ agreement,
which would have lifted most sanctions in
exchange for a cap on Iran’s nuclear activities. It is
unclear if the accord can be signed by the new
deadline June 2015. But indications remain that
there is willingness and a drive in Rouhani, capable
of realising this ambition. It also appears that he
has the political power to stand with Iran’s
Supreme leader Ali Khamenei, the Republican
Guard, and other hard liners at home, who had
previously refused to make any compromise at all
on the nuclear programme. The president’s
counter-part in Washington will have similar
internal conflicts, especially now with a republican
controlled congress, so this is far from a certainty.
But there is hope, real hope for the first time since the
Revolution, that Tehran will be soon be open for
investment. Like the Bodhizafa waiting for the 50 year
storm at Bells Beach Australia, I wouldn’t miss it

Machlin-Oracle Ltd. Cavendish Court 4
th
Floor, 11-15 Wigmore Street, London, W1U 1PF, United Kingdom
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Vladimir Vladimirovich Putin - Владимир Владимирович Путин
President, Russian Federation 2000 to 2008, 2012 to present
Prime Minister, Russian Federation 1999 to 2000, 2008 to 2012
Director of the Federal Security Service (FSB) 1998 to 1999
Leader of the United Russia Party 2008 to 2012
Lieutenant Colonel, KGB 1975 to 1991
If the New Charismatics have a Zeus, his name is Volodya,
primus inter pares. In the hierarchy of the geopolitical
animal farm, VVP is the ‘most equal of equals’. He is the
world’s most powerful man and depending on who is
counting, the wealthiest. As with Modi, Xi and others, the
Russian President enjoys tremendous popular support at
home. Russians have never been more supportive of
Putin. His approval rating in the most recent Levada
Centre survey was an astounding 88%.
While no leader is universally loved, Putin has a cult of
personality greater than Kim Jung-un dimension. Despite
reports to the contrary, has been venerated for more than
a decade, by large swaths of the population from youth
groups to pensioners. But that is where the similarities
with the Indian premier and the Chinese president stop.
Related to capital markets, Putin’s rule can only be
described as value destructive. Far from pro-business, his
modus operandi is patently state-control of industry
(strategic and otherwise, resources to media ... even the
Orthodox Church). Russia has reverted to a command
central economy with free-market trappings. While this
macro manifesto 2015 outlook in clearly not an academic dissertation, the investment case for Russia is layered
in history and singularity which some EM investors find fascinating.
Consider that in Western Europe, the Dark Ages gave way to the Renaissance in 1342, but Russian feudal society lasted
more than another five centuries. Neither did Russia experience the Protestant Reformation, the Age of Enlightenment,
and the Industrial Revolution. The emancipation of the serfs did not take place until 1861, the year before Schramsberg
was founded. Tsarist Rule lasted another 56 years until 1917 and then 75 years Soviet Socialist oppression ... 650 years
of insular cultural evolution

9 January 2015
The collapse of the USSR essentially freed a nation
of oppressed peoples, an unequalled corridor of
the world’s landmass unlocked for the first time in
history. It was like all the jails were emptied at the
same moment without any rules. The people had
been figuratively “imprisoned” for the millennia,
and did not know what it was like to live without
bars. The strongest would surely rule and in less
than 10 years, a succulent tenderloin of world’s
resources which had ostensibly belonged “to the
people,” belonged to the few. After the chaotic
decade of the 90’s, there was a backlash against
lawlessness. There was a movement to restore
order with strong hands of authority consistent
with history. The Russian siloviki under Putin
reclaimed “for Russia,” the power, prestige, and
the wealth misappropriated by the oligarchs during
privatisation. Then there followed a decade of
consolidation, from 2004 to 2014.
Putin’s Russia is run like a private club; an ice-blue
‘treasure island’ with much of its great beauty hidden
from view. It is a fortress guarding unrivalled wealth
and promise, managed by a closed society of pirates.
Under an undisputed Black Beard, each hook-arm,
glass-eye, and peg-leg is trying to ferry as much booty
off the island as possible, to safer shores without being
caught. Wives, children and high-value collectibles are
included in the exodus
You read it here first: Capital controls are a near
certainty; but the next one that I am watching for is
implementation of exit visas. Not a misprint.
The reader should consider that ordinary Russian
people may soon need approval to depart the
island. I anticipate a process requiring the
documentation of where one will be going, whom
one will be visiting, when one will be returning, and
importantly, what one will be taking with him. The
rationale of which will be framed against the ruse
of national security.
It is already difficult for Russian citizens to travel
freely, to all but a handful of countries without
visas. My wife for example is a law-abiding citizen
and lawyer formerly employed by a subsidiary of
Muenchener Rueckversicherungs - Gesellschaft AG
MunichRe (MUV2 GR). She has been denied a travel
visa to enter the United States by the US
Department of Homeland Security, four times
starting in 2012. She has yet to see America or
meet family and friends, even as a tourist. But one
may now understand that the difficulty in the
future; maybe be obtaining permission from Russia
to leave in the first instance.
No reformer, some political observers have
characterised Putin as a throwback to autocratic
rule in the style of Iosif ‘Stalin’ Dzhugashvili. Not an
anti-corruption champion, according to
Transparency International, the world’s leading
NGO watchdog on the subject, Putin’s Russia is tied
with Nigeria for 136th
most corrupt country in the
world.
Casual observers may be under the misimpression
that weakness in Russian financial markets began
with the annexation of Crimea. Contrary to what
one may have read elsewhere, the disconnect
between Putin’s popularity and capital markets is
not a recent event. The Russian Rouble for
example, has been in a 16 year bear market -
nothing new. Only the trajectory of the fall has
steepened. As was most recently detailed in this
publication in the November 2013 and March 2014
issues, the Rouble was trading 6.11RR/$1 when I
arrived in the late 90’s. Following the 1998 Russian
Financial Crisis, it traded to 31.95RR/$1 by
December 2002. After the 2008 Financial Crisis, it

9 January 2015
fell further still to 36.37/$1 by February 2009. The
Rouble made an all-time low of 67.91/$1 last
month, down 90% from 1998 levels.
Russian currency collapse not a war discount, rather a
prolongation of 16 year bear market. Rouble RUB down
(90%) RED from 1998, Ukrainian Hryvnia UAH (75%)
GOLD, Kazakh Tenge KZT (58%) ORANGE, Azeri Manat
AZN flat PURPLE, and Georgia Lari GEL GREEN actually
appreciated +14% for the period
The same is true for stock markets. This is not new
information and only a calculation of magnitude.
Russia is currently valued at a (65.3%) discount to
Emerging Markets MSCI EM (MXEF), a (71.5%)
discount to China Shanghai Composite (SHCOMP),
(74.8%) discount to Brazil (IBOV), (75.6%) discount
to South Africa (JSE Top 40), (75.9%) discount to
Developed Markets MSCI World (MXWO), and a
(77.6%) discount to India (SENSEX). But even during
the 2001 to 2007 boom times for the MICEX, Russia
always traded at a significant, fundamentally
warranted discount to BRICS, EM peers and ROW,
between 30% and 50% depending on the market
During the 2000’s glory years for Russian equities,
the stock market advanced in spite of, not because
of the activities of Putin and his administration. It
was lifted on the back of the only of four major
publicly traded asset classes, that government
officials and bureaucratic mismanagement could
not undermine. That is the commodity class. This is
because commodities are priced in USD and trade
in a global market place. An ounce of gold or a
barrel of Brent is worth the same in Geneva as it is
in Hong Kong.
The commodities super-cycle of the 2000’s drove
the Russian indices, most leveraged to natural
resources of any investible market in the world (but
still at a big discount). The wall of money lifted all
other sectors from real-estate to consumer.
Russian shares were a leveraged proxy of the
underlying commodity with unfavourably high
correlation coefficient.
So what about bonds? No different. Moscow
defaulted on its own Rouble denominated GKO
debt in 1998, and the Russian bond holders were
left with nothing. Credit markets in Putin’s Russia
2015 are the asset class in perhaps the most
perilous position. The country has $500B-$600B in
debt to roll over (refinance) in the next two years.
Most of this debt is denominated in USD, some in
Euros now +/- 2x a greater repayment principle in
rouble terms, and at a much higher coupon rate in
interest rate terms (future maturing paper to be
rolled).
Rating agencies are far behind the curve. Alfa
Bank 7.75% 2021 price 0.71 offer, good luck
finding a bid and still S&P rated BB+? Extrapolate
this incongruity across the whole asset class!
Capital markets are closed and sanctions are
indefinite. Where is the money going to come from
- the $450B in Forex reserves? No, that will be
needed to defend the currency. To support the
Rouble, Putin has only two legitimate levers. He can
only raise rates or burn reserves. But the Russian
Central Bank has already raised rates on 16
December 2014 from 10.5% to 17%. There is no dry
powder and no new trixx in Felix’s bag. So what will
happen when the reserves dry up? Forex reserves
cannot be replenished at $57/bbl oil.
Then what?
… capital flight >$100B per annum, 8.9% inflation,
recession, neg (4.5%) anticipated 2015 GDP,
rouble wouble down 44% TTM, oil down 45% TTM
… how is this math going to work?
It won’t.

9 January 2015
Either:
a) Putin must allow the rouble to collapse or
b) Putin must allow for defaults of the semi-sovereigns corporate paper (state controlled, state affiliated
companies), which then means spill-over contagion into rest of economy and banking system failure
risk
c) Or both, hence my view on capital controls and exit visas
d) I guess the deus ex machina option is that China, banker of last resort, bails out Russia in exchange of a
long-term supply of whatever Beijing wants most at below market prices
VVP’s Russia, the endgame as I see it; real long-term suffering and no easy way out The administration has taken a path
that it will not likely retreat from. Putin has boxed himself in and difficult to envisage him backing down unless
removed from office. The probability of swanning off into a warm, wobbly Yeltsin-style retirement is de minimus; lines
are too deep, too much to lose and too many enemies. Internal pressures will only harden his stance. Agents of change
will be repressed (at least initially). The leadership may become increasingly insular; then grandiose and perhaps
paranoid. Strategists should be concerned that as economic pain increases and inevitable resistance becomes more
vocal; the presidential grip will not slip. No, I would expect it to tighten.
Public perception. There is a commonality
between large populations in both Russia and the
West who feel that media coverage of Putin is
unfairly biased. Many believe that foreign
governments pressure the media to characterise
the Russian president as a dictator for political
purposes. Some reasonably doubt that one man
“could really be as bad as all that.”
The ‘Axis of Evil,’ and satanic characterisations of the
Saddam Hussein by Bush and Blair, have left educated
populations sceptical of bogeymen theorists. People
in the west are less gullible after following Cheney,
Wolfowitz, Rumsfeld, and Fox News on the ‘snipe
hunt’ for the weapons of mass destruction (WMD)
that killed 654,965 Iraqis and 4,491 US servicemen

9 January 2015
Having lived and worked in the Russia and the CIS countries from 1998, I can only agree to the extent that
media coverage is inaccurate. But this is not because the Russian president is treated unfairly in the press;
rather that the western media understates the reality on the ground. It does not appreciate scope and scale of
the challenges facing the Russian people, in no small part exacerbated by 16 years to Putin’s first appointment
as prime minister 1999.
The financial crisis (part III) is not simply because the Russia flag flies over Sevastopol. I think that many honest
politicians, informed emerging Europe investors, Ukraine watchers, and academics, could conclude that this
reunification of historically Russian territory in many ways understandable. A strong case can be made that
Moscow’s position is indeed justified. So this is not simply a Crimean discount, a reach from Donetsk to Odessa,
or memories of cold nights and hot flames on Maidan Square. Rather it is the culmination of a legacy of the
inexplicable and incomprehensible, a chronicle of power, avarice, and brutality. Russia and therefore the
region, is now in the middle of the third and (perhaps) final act of a tragedy which has evoked equal parts joy
and sorrow, with convoluted plot that featured:
The Citizens of Norway vs “Farimex” Vimplecom (VIP US)  Anna Politkovskaya and 165 murdered
journalists since 1991,  the phantom Baikal Finance Group and Yuganskneftegaz,  Mycotoxin T-2,
Thallium, TCDD dioxin, and Polonium 210,  Sakhalin I, II PSA’s Exxon Mobile (XOM US), Royal Dutch Shell
(RDSA LN), Mitsui (8031 JP) and Mitsubishi Heavy Industries (7011 JP),  Sergey Magnitsky, the Hermitage
Fund and Bill Browder,  Sidanco and Svyazinvest,  the attempted assassination of President Viktor
Yuschenko and the successful assassination of Alexander Litvinenko,  Kovykta Gas Field and BP Plc (BP LN),
 Kirill I (Vladimir Gundyayev), the FSB, Pussy Riot, cigarette smuggling, and the £20,000 Bregue,  TNK
Preferreds (TNBPP RU), Transneft Preferreds (TRNFP RU) and Surgutneftegas Preferreds (SNGSP RU), 
Georgy Gongadze and Viktor Yanukovich,  Pechatniki and Kashirskoye neighbourhood ‘explosions’, 
Sibneft (SIBN RU) to Gazpromneft and Roman Abramovich,  Sochi Olympics and the missing $40B,  the 26
secret palaces,  Yukos (YUKO RU) to Rosneft (ROSN LI) and Mikhail Khodorkovsky, Nord-Ost and Beslan
Total Fina Elf (TOT FP) and Northern Lights,  RIP Galina Starovoitova opposition Duma Deputy, Sergei
Yushenkov co-chairman of the Liberal Russia political party, Yuri Shchekochikhin member of the Kovalev
Commission, Nikolai Girenko a prominent human rights defender and professor of ethnology, Paul Klebnikov
editor of the Russian edition Forbes, Andrei Kozlov First Deputy Chairman of Russia’s Central Bank, Daniel
McGrory, The Times of London, Stanslav Markelov human rights attorney ... and a thousand more that most
have never heard of
Over the years some have advised me to stick to
the financials. “Don’t worry about the politics, its
just business – right.” But they continue to be
proven wrong. Consistent with the following
opinion piece in this macro manifesto:
‘EM corporate governance mandates - total return
not ideology,’ my point remains that these
investment considerations are positively
fundamental.

9 January 2015
Particularly in emerging markets, such country
peculiar elements are principle drivers of asset
valuation. Others have taken the position that one
should invest in Russia or any domicile with only a
view of enterprise-specific investment in question.
Forget the macro; let’s project future cash flows in
a vacuum. That is the same as saying that one
should make buy-sell recommendations of for
example, integrated E&P companies, in the
absence of any opinion or any understanding as to
the direction of the oil price. These are high  beta
markets which demand a detailed knowledge of
risk. A bank teller with an HP 12/c can model
valuations if given the data inputs. The required
requisite is the ability to correctly detail a rationale
for the current basis and more importantly, to
accurately forecast to what degree and under what
measurable circumstance, the basis will change in
the future.
The country is inward looking, the mood is
generally patriotic, and much of the population is
highly supportive of the president. Some of my
colleagues in Russia have candidly explained that
while they do not relish the prospect of a military
conflict with America, they are proud that Putin is
preparing the country to defend itself for when
that day happens. After all it was NATO who
constructed the Missile Defence System (Shield) in
Eastern Europe.
Sensationalism you may wonder. No, there is a
pervasive feeling that war in inevitable. And a
significant percentage of the people would
welcome this escalation. Russian military spending
has grown from $20.1B in 1998 to an estimated
$97.5B in 2014, representing a 10.4% YOY increase
for 16 years. Russian military expenditures are third
largest in the world after the US and China, but 2x
larger than China, as a co-efficient of the economy
(4.2% vs. 2.1% of GDP).
I do not share the view that military conflict is
eminent. But as the saying goes: “war is never
inevitable, though the belief that it is can become
one of its causes.”
So where might the hottest flashpoints of potential
conflict exist today?
European Union members Estonia, Latvia, and
Lithuania share an eastern a border with Russia, and
are flanked on the west with Kaliningrad (Russia).
NATO members since in 2004, all three Baltic nations
have sizable Russian minorities. More than 1,000,000
“Russians” in total that Moscow has long claimed are
being persecuted. 14% of the Lithuanian capital of
Vilnius, 27% of the Latvian capital of Riga, and 38% of
the Estonian capital of Tallinn are ethnically Russian,
with an even higher percentage of people who speak
Russian as a native tongue
When Putin tests the West for weakness, he may
find it here in the EU. On might envisage a scenario
which requires Russian intervention for peace-
keeping purposes, to protect the lives, property
and rights of Russians across the border. NATO is
essentially a mutual security pact where
neighbours have agreed to defend all the houses in
the village. The NATO charter explicitly states that
an attack on one is an attack on all.
But where is the West’s resolve? NATO had also
guaranteed Ukraine its territorial integrity in
exchange for giving up its nuclear arsenal in 1998.
Then NATO and the US turned tail on Kiev, at the
first hint of violence in Simferopol.
How about a probe at Estonia, my most likely
candidate? Russia routinely violates its territorial
waters and airspace with its navy, submarines and
fighter aero planes. In December 2014 NATO
reported it conducted approximately 70 intercepts
in Baltic airspace in 2014. It further stated that
Russian jets violating Estonian air space posed a

9 January 2015
threat to aviation safety. In addition having to the
highest Russian population, there is a long history
of ethnic Russian-related conflict in Tallinn. With
cyber attacks between the two nations, diplomatic
spats, and political threats, tension have been
elevated for years. And anti-Russian discrimination
in one form or another most certainly does exist.
72% of Russian-speakers polled in Estonia believed
that ‘ethnic background is hindering to workplace
advancement.’
But the memories are older and the history more
complex. Dating back to the Great War, Russia still
accuses the Baltic peoples of siding with Nazi
Germany. Historians concur that the majority of
Estonians did in fact, initially see the German army
as a liberator from the oppression of the Soviet
Union, when the country was invaded in June 1941.
Estonian collaborators murdered tens of thousands
of people including Estonian Russians and Soviet
prisoners.
Does NATO have the will to deploy forces to defend
Estonia? It seems highly unlikely. Putin would then
be further emboldened and majority of Russian
people will respect him for it. Nationalist zeal could
crest and the music group Lyube would be
performing live renditions of Kombat, Davay Za and
Soldat at the Crocus City Mall.
Russia may then look to protect its “compatriots,”
Russian diaspora and Russian-speakers residing
elsewhere in the former Soviet Republics. Not
limited to the Baltic’s, Crimea, Eastern and
Southern Ukraine including Odessa, there are
Russian-speaking populations in Moldova’s
Transnistria, Georgia’s South Ossetia and Abkhazia.
But far bigger prizes rest in Central Asia.
The highest value target is “European Kazakhstan”
west of the Ural River. The land lied east of a line
from Uralsk in the north to Atyrau in the south,
where the river meets the Caspian Sea. They are
geographically part of the European continental
landmass. Valuable territory which has historically
been part of Russia, these ‘rare earths’ are
precisely the chunk of soil on the North East
Caspian which controls the largest hydrocarbon
deposits in the basin. The giant Caspian Pipeline
Consortium (CPC) pipeline which terminates in the
Russian Black Sea port of Novorossiysk, is filled with
Kazakh crude rom Tengiz.
Most importantly the region includes the Kashagan
reserve, the world’s largest oil well discovery in 44
years. Kashagan has been designated as the primary
supply of crude for the Kazakhstan-China oil pipeline
and commercial production commenced in September
2013. Development of the project cost an estimated
$120B, making it the most expensive energy project in
the world

9 January 2015
Of interest, China’s Xi Jinping signed a deal to buy a
minority stake in Kashagan 2013. And in September
2014, Putin inked a deal with Beijing to start work on
the RF-China gas pipeline, planet's largest construction
project. The result of a 10 year negotiation, the pipeline
will supply China with $400B of natural gas over 30
years
Better to supply the Chinese with both oil and gas?
China might be happy to finance Russia’s territorial
aspirations at the expense of the West. Beijing may
help Moscow in exchange for long-term, below
market deliveries of energy and raw materials.
Russia may need China as its banker of last resort,
after being cut off from access to global finance.
A win - win all around except for the Kazakhs. But it
would be a formidable challenge for a population
of only 18MM trying to defend the largest
landlocked country in the world, encircled by
Russia and China.
The commercial capital of Almaty more than 2,700
away from Kashagan might willingly ‘return’ these
historically Russian lands in exchange for
sovereignty. The West would not likely intervene
and a tsunami of hero worship would crescendo for
VVP.
Putin the Great, the one who restored Russia to its
rightful place in the pantheon of imperial nations...
A policy of appeasement and accommodation will
not likely end well. We have seen the closing
credits of this film before.
A close friend of mine who is a partner in an NYSE
publicly traded asset management company, with
$91B in AUM, called me from Los Angeles back in
November 2013. He knew that I sold all Ukraine
and Kazakh holdings in Q3-Q4 2007, and the last of
my Russia positions in May of 2011. A value guy at
heart, he asked me if it was time to get back into
Russia. I asked him why and he said: “because crisis
creates opportunity, and there is blood in the
streets of Moscow.”
I said, “There isn’t yet.”
Kim Jong-un 김정은
Supreme Leader, Democratic People’s Republic of
Korea (DPRK)
Supreme Commander of the Korean People's
Army
First Secretary of the Workers’ Party of Korea
A third generation military dictator, Kim Jong-un is
the grandson of Kim Il-sung, and youngest son of
Kim Jong-il. Admittedly, both the financial
community and likely the reader, are bored beyond
interest with the North Korean narrative; a legacy
of head fakes and brinksmanship, endless loop of
bravado and bluff.
But his is not a boy who cried wolf story. To the
contrary, from cyber attacks to nukes, Kim is the

9 January 2015
second most dangerous man on the planet.
According to a December 2014 report by the US
Senate Armed Services Committee, he is the
biggest security threat in Asia, where 60% of US
military assets will need to be redeployed by 2020.
Like Abu-Bakr, the young Korean represents an
evolving ‘Black Crow’ event. But unlike his fellow
charismatic in Levant, Kim commands the fifth
largest standing army in the world with 690,000
soldiers, 10,000,000 reserve personnel, 1,061 naval
ships, 943 military aircraft, 6,600 tanks and 78
submarines (albeit antiquated, the largest fleet on
planet).
Of greater concern than its conventional
armaments, North Korea is fully fledged nuclear
power. Kim has an estimated 15-27 nuclear
weapon equivalents in his arsenal. His rule poses
particular event risk to financial markets of Japan
and Korea.
Repel the American invader to save us from misery and
pain (translation DPRK billboards)
The DPRK already possesses the capability of
launching a ballistic missile capable of reaching
Seoul or Tokyo. The Hwasong-13 has a maximum
range of 5,500 kilometres, bringing Alaska within
Kim’s scope. Military analysts in South Korea and
elsewhere believe that Pyongyang’s arm is longer
and can already reach the US Pacific Coast.
According to Bloomberg September 2014, Kim’s
regime is building a road-mobile, intercontinental
ballistic missile that could threaten the continental
United States with a range of up to 10,000
kilometres. Road mobile missile systems pose an
enhanced threat to global security, because the
ICBM can be fired from anywhere in the DPRK and
are difficult to pre-empt.
Kim Jong-un promised to ‘wipe out’ Baengnyeong
Island located near the 1953 Northern Limit Line.
The island was a recent point of combat where the
ROK naval vessel Cheonan was torpedoed by the
DPRK, on 26 March 2010 killing half the crew.
Pyongyang has repeatedly threatened the United
States with a "pre-emptive nuclear attack,” and
Kim’s administration has detailed plans for
conducting nuclear strikes on U.S. cities, including
Los Angeles.
The enemy who has spilled the blood of our people.
Century-long nemesis. Death to the Americans!
The United Nations published a recent 372 page
report which catalogued state-sanctioned
abductions, rape, enslavement, executions and
Gulag-fashioned concentration camps. It
specifically named Kim Jong-un and accused him of
committing ‘Crimes Against Humanity.’ The
chronicle detailed his ordering of mass killings,
utilising starvation as a tool against opposition
members, and systematic torture. “The gravity,
scale and nature of these violations reveal a state
that does not have any parallel in the contemporary
world,” the report said.
There can be little doubt about Kim’s willingness to
commit acts of heinous atrocity. In a purge of party
loyalists of his father’s regime, he sentenced his

9 January 2015
uncle Jang Song-Thaek (previously the second most
powerful man in the country) and five of his closest
advisors, to ‘quan jue” or execution by dogs. The
supreme leader and 300 senior officials reportedly
observed as the dissidents were thrown into a
cage, where some 120 starved hounds ate the men
over the course of an hour. Relatives of Song-Thaek
including children in multi-families, were
subsequently put to death.
Kim attempted to assassinate his own half-brother,
now in Singaporean exile guarded by the Chinese.
The young despot has executed hundreds by firing
squad including an ex lover, a pop band, journalists
accused of making pornography, ex DPRK
ambassadors, and proponents of reunification of
Korea.
When provoking a war of aggression, we will hit back,
beginning with the U.S.
Not all stick and no carrot, like others of the New
Charismatics, Kim Jong-un wildly popular at home.
The supreme leader inspires the passionate
adoration and hero worship of the great majority of
his people. Described as both the son of a god and
the ‘Sun of the Nation,’ Kim has expanded on what
was already the second most powerful cult of
personality in the world from 1948.
Importantly and unlike any other global threat, Kim
enjoys the tacit backing of the People’s Republic of
China. This is not to suggest that Beijing supports
Pyongyang’s nuclear ambitions. No, the ancient
relationship once “as close as teeth and lips” has
been stretched to the gum. It simply means that
Kim Jong-un can do was he wishes without fear of
attack from the West. Military intervention in
North Korea would be treated as an invasion of
China’s sphere of influence. Their bi-lateral defence
treaty stipulates military assistance if the DPRK
comes under ‘armed attack from any state.’
As such, China is a AAA-rated insurance policy and
guarantor of Kim Jung-un’s personal security from
external forces. He cannot be captured or
assassinated like Saddam Hussein, Muammar
Gaddafi, Osama bin Laden or ... Abu Bakr al-
Baghdadi. But at China’s sole discretion, he might
be replaced with perhaps even his Beijing-
protected half brother Kim Jong Nam or his
European-educated nephew Kim Han Sol. Both are
kept alive such that China has face cards to play if it
decides that Kim Jung-un must be retired.
Ruthless Punishment to U.S. Imperialism
While the Kim Jung-un narrative may ring as
tedious and uninspired as a lowbrow Seth Rogan
movie, the reality is one which requires careful
monitoring and some foresight. North Asian
markets in particular, have a high correlation
coefficient to Pyongyang news flow. Pig Boy - Fatty
the Third, as he is disparagingly referred to by
Chinese bloggers, is a ‘Black Crow’ event of
potential concern.
One to watch ...
Alexey Navalny
Opposition Leader, Russia

9 January 2015
Emerging Markets corporate governance
mandates, total return - not ideology
When I first traced my steps through the mystical
dusts of the Absheron Peninsula on the Caspian
Sea, emerging market fund managers saw
themselves as no more than impartial observers.
Starring out across the thousands of once nodding
oil-donkeys, they wondered ‘what if.’ But none
found their way to the Former Soviet Union by
following a moral compass or ever pretended to.
In the shadows of the Ateşgah Fire Temple at
Surakhani, there could be found a frontier breed of
global opportunist. Pioneer investors seeking to
find the highest possible risk-adjusted rate of
return, wherever maximum inefficiencies in the
markets presented themselves.
Baku Atashgāh ‫گاه‬ ‫ش‬ ‫,آت‬ Zoroastrian temple of Hindu
architecture. Built in the late 1600’s, it was a
philosophical centre of fire worshipers who made the
pilgrimage from Multan (modern day Pakistan)
They came to see the dinosaur pump jacks, now
moribund in beautiful but tainted turquoise pools.
They dreamt of bringing them all back to life via
privatisation, like the amber DNA in a wildcatter’s
Jurassic park.
But Brent crude would drop to $9.64/bbl by the
end 1998. Thus with a $15.00/bbl F&D lifting cost,
coupled with the Russian default of GKO, it was not
meant to be. Not for us, not on that day.
The Azeri economy grew an annualised rate of 14.14%
for the ten year period 31 December 1998 to 31
December 2008, the fastest GDP acceleration in the
world. Oil Donkeys, Absheron Peninsula, South of
Sumgait 1998
The mantra of the period was laissez-faire; do not
interfere with local customs. Do not involve oneself
with politics, do not judge by western standards,
and play no part the ethical referee. It was a free
market spin on Theodore Sturgeon’s, “Prime
Directive,” the guiding principle of the United
Federation of Planets, ours was not to proselytise.
This is not to say that blood-in-the-claw-capitalism
drove out all humanity.
To the contrary, good works were initiated by well
intentioned asset managers including the
Mingechevir Refugee Project, computers for
children in public schools, the funding and
formation of a battered women’s shelter. But this
was a time when bullet-proof trucks drove to
Caucasus Mountain fortress towns and
antediluvian Silk Road capitals. Deals were cut with
regional strongmen, share vouchers were
exchanged for metal briefcases, and global
strategic investor sharks trolled the murky waters;
hunting for sub-sea mineral rights, rusting
pipelines, and dilapidated electrical generation
grids.

9 January 2015
Mingechevir Refugee Project 1998 Coordinates:
40.7700° N, 47.0489° E A 7-story unfinished building
housing 68 families out of a total 23,000 refugees in the
surrounding area
Just exiting the 1997 Asian Financial Crisis, I had
spent the prior three plus years at Templeton
Investment Counsel, the hallowed tabernacle of
emerging markets fund management. But moving
to the ancient lands of the Zoroastrian fire
worshippers marked the first time that I would be
living and working in the developing world. This
began a 16 year odyssey which would take me from
Baku to Bishkek, Belize to Belgrade, Bohol to the
Bahamas, Beijing to Byelorussia and beyond.
All along the journey, the view was that activist
investors may find themselves embroiled in conflict
which would ultimately hurt fund investor returns
(Bill Browder - exhibit A.) This is because in part,
activist investors in the developed markets are
willing to square off against essentially corrupt
‘companies,’ and importantly, they have support of
the State and the Law behind them. Activist
investors in the emerging markets however, must
be willing to lock horns with corrupt ‘governments’
and as such, they often have the force of the State
and ‘the law’ against them.
The question was also one of core competency.
What did one strive to be good at? Did one want to
spend time sourcing an antiquated cement factory,
from an autonomous oblast at $20/tonne of output
capacity? Replace inept management, close
inefficient operations, refurbish malfunctioning
kilns, and surgically invest some much needed
capex in PP&E? And then derive a fair private-
market valuation of $200/tonne output capacity,
10x return for investors, from a multinational like
Lafarge (LG FP), Heidelberg (HEI GR), or Holcim
(HOLN VX)? Did one want to focus on the business
at hand, or were precious resources better spent
examining the fairness of local elections and trying
to figure out who was bribing who at the
parliamentary level (Majlis, Duma, or Rada)?
Qaradağ Cement, south of Baku on the Caspian Sea,
privatised by Holcim (HOLN VX) in 1999
Being an investor activist never made any money in
China, at least not on the long side - credit to
Muddy Waters LLC’s analysis of Sino-Forest (TRE
CN). George Soros called his Svyazinvest
acquisition, ‘the worst business investment of my
life,’ and even Dr J Mark Mobius eventually
surrendered his board position at Lukoil in
restrained frustration. Shareholders activists have
been arrested in India: Peabody Energy (BTU US),
Union Carbide (UK US) acquired, Coca Cola Co (KO
US), others. And being an activist investor
destroyed Hermitage, the one-time largest fund
manager in Russia. It is understandable that
emerging market managers in the main, have
historically prioritised the importance of
performance, not principles. Indeed ‘the’ principle
of the era was performance.
But somewhere around Q3 of 2007, I decided that
there might be a ‘third path,’ another way to look
at this question of investment methodology. Of
critical understanding was the delineation between
investor activism on principle, and principled

9 January 2015
investing for ‘total return, not ideology’. From a
business perspective, it remains an inefficient use
of time and resources, to try to ‘change the world’
as a minority investor in emerging markets. But it
became equally clear that enterprise-specific line
item allocations should be weighted by corporate
governance considerations, like any other
fundamental valuation.
We were witness to failed
privatisation in the CIS
countries, and felt the ‘power’ in what it means to be
the Chinese local partner. My experiences included a
dilutive rights bank offering, a preferred-to-common
share conversion ratio failure, two corporate bond
defaults, and three minority shareholder squeeze outs.
We were met with counter-party failures (Refco and
MF Global), accounting irregularities, untraceable
missing cash flows siphoned off as capital
expenditures, lost revenue from transfer pricing and
worse
We even participated in the ill-fated attempt to
gain a seat on the (TSE) Tehran Stock Exchange
when then reformist President Mohammad
Khatami promised to integrate Iranian capital
markets with ROW and allow for the free
repatriation of foreign currency from rials into
dollars. So early on during the formation of the
2007 ‘Credit Crunch,’ it became apparent that a
detailed understanding of corporate governance
risk, and the ability to quantify its impact on
performance, was central of EM fund management.
The third path was never meant to include the
lobbying of management, politicking with other
investor groups, showing up at the annual meeting,
or necessarily even proxy voting. Rather it is a
statistical ranking and knowledge-based
understanding of the investment landscape; the
complexity of specific geographies, industry
sectors, and line items. The purpose of which is to
measure the effect of corporate governance on
mean anticipated future returns. Then to employ
this process to influence buy-sell decisions, the
purpose of which is ultimately to achieve a positive
impact on performance.
Impact on the bottom line, what of practical
application
A ten year (1998 to 2008) EM corporate
governance study was conducted by the
International Finance Corp (IFC), a department of
the World Bank. The report was published in
cooperation with the Organisation for Economic
Cooperation and Development (OECD), on 1,073
listed companies in Latin America. An equal
weighted portfolio of all constituents in the
population sample produced a positive return of
12.8% p.a. for the decade. An equal weighted
portfolio of the top 12 companies ranked by the
OECD’s internal corporate governance scale,
produced a return of 29.8% for the holding period,
greater than 2x the performance for 10 years. Both
holding period and population sample size are
statistically significant.
Latin America Companies Circle,
a group of 12 Latin American
firms recognised for their
corporate governance
leadership in the region – with
the support of IFC, Organisation
for Economic Cooperation and
Development and the IFC Global
Corporate Governance Forum.
The companies: Interconexion Electrica Columbia (ISA
CB),), Argos SA (ARGOS CB), CCR SA (CCR03 BZ), CPFL
Energia SA (CPFE3 BZ), Embraer (EMBR3 BZ),
Marcopolo (POMO4 BZ), Natura Cosmeticos (NATU3
BZ), Net Servicios de Comunicacao (NETC4 BZ),
Ferreyros (FERREYCI PE), Suzano Papel e Celulose
(SUZB5 BZ), Desarraolladora Homex SAB (HOMEX MM),
and Ultrapar (UGPA3 BZ)
Similar studies in different geographies and
different time periods have produced similar
results, with positive share price performance
linked to higher corporate governance standards.
Notably: ‘East Asian Financial Crisis of the 1990s’
Report by Baek, Kang and Park (2004).
Back to the present and specific to LATAM,
December: Petrobras $5.25B of 2025 bonds trading
down to 0.88 cents to the dollar. Graft discount as

9 January 2015
S&P lowered Brazil’s largest company’s credit
rating to BB. Downgrade on the heels of 18
businessmen being arrested last month, 30 total
indictments and rising, members of a cartel used
$3.7B in a secret slush fund to fix public contract
awards worth $22B. Looks like the world’s largest
corruption scandal ever. Minority shareholders
have filed suit and president Dilma Rousseff may be
called as a witness. Skeletons of World Cup Soccer
graft not yet unburied. 2016 Summer Olympics in
Rio might not catch 2014 Winter Olympics in Sochi
for theft of public funds, but more will yet be
revealed.
The Emerging Market Corporate Governance mandate supports a) board of directors committed to stock price
appreciation via share buyback, b) firms where management is compensated by stock options and not above-
market salaries plus hidden compensation; and c) companies that are managed for market capitalisation and
not run as cash cows. The mandate includes the targeting of firms with d) greater distribution of free cash flow
in the form of dividends, e) larger free floats, and f) broad participation from minority board members with
actual representative voting power. The emerging market corporate governance mandate will not include
holdings with ‘bridge to nowhere’ CAPEX programmes that are little more than cash extraction accounting
schemes which steal from shareholders. It would not invest in companies with transfer pricing mechanisms -
value destructive thievery which is harmful to investors and in many cases, the citizens of a country who are
often the legal owners of the resource.
Importantly, high corporate governance equals lower cost of capital, improved efficiencies, higher multiples and an
unbiased distribution effect of the ‘benefits of ownership’
The emerging markets corporate governance mandate does not tell management what to do or effort to
influence government activities. It remains focused on core competencies of investment management and
makes no attempt to influence people, places and things beyond its limited sphere of control. It is a detailed
analysis of corporate governance and a mathematical ranking of its risk which ultimately results in a vote with
the wallet. It is the silent ‘support’ of government and management with investment capital rather than policy
demands. One should expect to see the growth of emerging market corporate governance investment
mandates, for ‘total return’ – not ideology. I believe that they will be met with institutional and retail demand,
because investors will always seek risk-adjusted improvement in fund performance.
The Dollar Bully World
Captain America still feeling Marvel-lous From initial August 2010 macro call, unwavering
throughout the period, and most recently detailed
again in the April 2014 issue of this publication:
Captain America – the outlook remains Marvel-
lous. Global Fx is pouring in USD denominated
assets and we are living in a rising dollar world.
The Bank of Japan (BOJ) continues to weaken the ¥
Yen, down (35%) in the trailing three years. The
European Central Bank (ECB) will initiate to
quantitative easing to further devalue the € Euro,
already trading lowest level since 2006 to the dollar
at the time of this writing. Other central banks
around the world Korea, Chinese, Swedes, Suisse,
are also weakening their currency. Some to make

JWD Macro Manifesto 2015 Investment Outlook - external

JWD Macro Manifesto 2015 Investment Outlook - external

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