Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
This report says frontier markets like Brazil are cheap right now, while developed markets are expensive. The author thinks Brazil's stock valuations are near 2008 crisis lows, making it a good contrarian bet despite political risks. He highlights two holdings: Petrobras, whose valuation is at its lowest since 2002 but faces dividend cut risks; and Vamos, a truck leasing firm whose sales multiple has fallen even as revenue grows 46% annually.
One-sentence summary: The author believes that frontier markets (especially Brazil) are at multi-year valuation lows, standing in stark contrast to expensive developed markets, representing a contrarian "Unknown, Unknowable, Unique" (UUU) opportunity, with a [Bullish] stance.
The article notes that many frontier markets, battered by the pandemic, political upheaval, and high inflation, are trading at multi-year low valuations, while developed markets are generally expensive. The author states: "Many frontier markets are trading on multi-year low valuations as their battered economies limp from wounds inflicted by the pandemic and lockdowns, political upheaval, and the ravages of high inflation. This is in stark contrast to large parts of developed capital markets which are expensive on typical measures." This means: "Many frontier markets are trading at multi-year low valuations, with their battered economies limping from the wounds inflicted by the pandemic, lockdowns, political upheaval, and the ravages of high inflation. This stands in stark contrast to large parts of developed capital markets, which are expensive by typical metrics." The total debt of emerging markets and developing economies (EMDEs) has surged to a 50-year high, with 2023 investment 8% below expectations, and one-fifth of countries locked out of global debt markets (compared to one-fifteenth in 2019). China's weak economic recovery and the impact of the Russia-Ukraine war on food and energy have further exacerbated the plight of frontier markets.
The author argues that Brazil embodies the above challenges but also shows initial signs of economic stabilization, with valuations approaching levels seen during the 2008 financial crisis. The price-to-earnings ratio of Brazil's Ibovespa index has fallen to lows seen during the global financial crisis. Citing Professor Richard Zeckhauser's theory, the author categorizes such situations as "Unknown, Unknowable, Unique" (UUU), viewing them as opportunities for high expected returns. The author quotes: "Do not engage in the heuristic reasoning that just because you do not know the risk, others do. Think carefully, and assess whether they are likely to know more than you. When the odds are extremely favorable, sometimes it pays to gamble on the unknown, even though there is some chance that people on the other side may know more than you." This means: "Do not fall into heuristic reasoning, thinking that just because you don't know the risk, others do. Think carefully and assess whether they are likely to know more than you. When the odds are extremely favorable, sometimes it pays to bet on the unknown, even if there is a chance that the other side may know more than you." Brazil's Selic rate stands at a multi-year high of 13.75%, but inflation has fallen to a three-year low of 3.2%, with market expectations of a possible rate cut in August. The author observes that rebounds in emerging market high-yield hard-currency bonds and a recovery in local debt markets often precede improved performance in frontier equity markets. For example, the situation in Sri Lanka has prompted funds to increase holdings of existing positions like John Keells and initiate new positions in Tokyo Cement (up over 100% year-to-date).
Through field research on 50 companies, the author believes there are attractive contrarian investment opportunities in Latin America's complex governance environment. Latin America accounts for 1% of the benchmark index (as of Q2 2023), while Hosking Partners' current weight is 2.3%, with plans to increase it moderately. The author highlights two positions:
The core investment implication of the article is that in highly uncertain "UUU" scenarios, contrarian investing in frontier markets (especially Brazil) may yield excess returns. Through field research and capital cycle analysis, the author argues that current low valuations provide sufficient margin of safety. However, it should be noted that this is the perspective of a position holder. The article's optimistic assessment of Petrobras and Vamos may carry an element of self-justification. Readers should pay attention to uncertainties surrounding Brazilian politics (Lula's relationship with Congress) and governance risks (government intervention).
| Ticker | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Petrobras | Hold & Watch | Valuation is extremely low with ample margin of safety, but the new CEO plans to increase renewable energy investments and limit dividends, posing risks of government intervention | EV/sales (LTM) has fallen to its lowest level since 2002 |
| Vamos | Hold & Watch | Valuation shows a significant discount relative to similar businesses, with strong growth, but governance risks need attention | EV/sales dropped from 6.5x to 3.5x, revenue CAGR of 46% |
| John Keells | Add Position | Conditions in Sri Lanka are improving; the fund increases its existing holdings | No specific data provided |
| Tokyo Cement | New Position | Conditions in Sri Lanka are improving; year-to-date gain exceeds 100% | Year-to-date gain exceeds 100% |