This piece is about emerging market investing. The key idea: making money now isn't about buying cheap stocks, but finding companies that generate cash and return it to shareholders. Harvey Sawikin thinks the market has been in a bull run for two years, but money hasn't flowed in yet—he expects it by early 2019. He likes Sberbank (Russian bank, stock up but still cheap), Lukoil (Russian oil, new management started buybacks), and X5 Retail Group (Russian retailer, clean stores, beating rivals). He warns political risk matters and that visiting companies in person reveals things reports miss.
Harvey Sawikin, co-founder of Firebird Management, discusses his 24 years of experience investing in emerging markets. Core insight: Opportunities in emerging markets are often disguised, and uncovering them requires risk tolerance, diligence, discipline, and luck. Key takeaways: The current landsca
Harvey Sawikin, co-founder and chief portfolio manager of Firebird Management, brings 24 years of experience in emerging market investing. The core theme of this episode: opportunities in emerging markets are often disguised, and discovering them requires risk tolerance, diligence, discipline, and timing. The most weighty judgment of the entire episode: investing in emerging markets has shifted from "buying cheap" to "buying value creation" — over the past five years, free cash flow generation and shareholder returns (dividends/buybacks) have become the core metrics separating winners from losers, rather than low P/E or low P/B.
Harvey Sawikin believes Firebird’s founding insight remains valid: emerging market funds underperform because large institutions only enter after custodians and GDRs are in place, while the real profits go to traders who buy directly through local brokers during the "infant market" stage.
In January 1994, Sawikin made his first trip to Russia, staying at the Moscow Hotel (later the Four Seasons) — at the time "dirty, gloomy, and smelly," with no food to be found on the streets until he discovered the country’s second McDonald’s. He recalls: "That was the only time I was so happy to see McDonald’s."
Key data chain: In Russia’s privatization voucher auctions, a company with oil reserves equivalent to Mobil had a market cap of just $40 million in the voucher auction, while Mobil’s market cap at the time was $40 billion — a 99% discount. Sawikin reasoned: "This company doesn’t need to be as good as Mobil; if it’s just 95% worse than Mobil, we can still make 5x." Ultimately, the company traded at roughly a 60% discount to Mobil/Exxon at its peak, delivering a gain of about 40x.
Mechanism breakdown: Vouchers were restricted to Russian holders. Firebird used trusted local brokers to bid on its behalf, and once the vouchers were secured, the shares were transferred to the fund under a pre-arranged agreement. Credit Suisse later became the primary dealer. Sawikin emphasizes: "The Templetons couldn’t do this, but we could — because we run the fund like our own personal account (PA)."
Historical trajectory: Firebird started in Russia, then sequentially seized opportunities in Estonia (buying Hansa Bank in December 1994, later acquired by Swedbank for a 75x return), Romania, Bulgaria, Kazakhstan, Georgia (2004), and others. The fund currently covers 35 countries but is active in only 9 — the rest, "even after 25 years, are still not ready."
Sawikin points out that the biggest systematic mistake made by emerging market investors is: 80% focus on valuation and economics, 20% on politics, when the actual split should be 50/50.
Mechanism Breakdown: Another founding insight of Firebird is that political risk is always a core variable in emerging markets. Any moment when one believes "politics no longer matters" could lead to being "blown out of the water" — for example, when Mubarak fell in Egypt, all emerging market funds were hit hard; in recent years, Poland and Hungary have shifted toward populist governments, and their stock market performance has subsequently deteriorated.
Falsification Conditions: Sawikin divides countries into "post-political" and "frontier" types. Post-political countries (e.g., Estonia, Lithuania) — different parties coming to power do not alter the established path (convergence with the EU), making elections no longer critical. Frontier countries — election outcomes still carry significant risk of losses and require continuous monitoring.
Specific Case: Ukraine — Sawikin's team has conducted ongoing assessments but still believes it is "not yet ready from a macro and political perspective." Nonetheless, they still hold a few stocks, provided they can determine through micro analysis whether these companies can survive even in worst-case scenarios, such as currency depreciation.
Trade-off Between Valuation and Politics: There is no hard rule (e.g., "inflation must be below X%"). Countries with higher political risk require more extreme valuation compensation. Conversely, in politically stable Baltic states, although valuations are at a 40-50% discount compared to Western Europe, they are no longer "dirt cheap" — Sawikin believes this still represents good value.
Sawikin argues that over the past five years, emerging markets (especially the regions he covers) have undergone a fundamental transformation: the market no longer rewards low-PE "cheap stocks on paper," but instead favors companies that generate free cash flow and return it to shareholders.
| Metric | Old Paradigm (2000s) | New Paradigm (Post-2010s) |
|---|---|---|
| Core Focus | "Headline numbers" such as PE and PB | Free cash flow, dividends, buybacks |
| Typical Pitfall | PE of 3 but zero free cash flow (due to inefficient capex and corruption) | Companies borrowing to pay dividends, unsustainable |
| Winner Characteristics | Resource stocks, state-owned enterprises, liquidity-driven | High ROE, cash returns, Westernized management |
| Market Structure | Dominated by insider trading | New generation of MBA-trained management, emphasizing value creation |
Data support: The MSCI Eastern Europe Index currently trades at a PE of 10x, with a dividend yield of 4%. Sawikin compares this to 2005-2006, when the PE was also 10x, but the dividend yield was only about 2%. "This is a completely different situation."
Specific case: A Russian steel company — the first to implement quarterly dividends, with a new policy of distributing all free cash flow until its debt/EBITDA falls below 0.3x; if already below that level, it distributes over 100% of free cash flow to maintain the target leverage. Sawikin remarks: "20 years ago, asking 'where did the money go' could get you shot. Now Russian steel companies are competing over who has better corporate governance."
Exception for China: Sawikin explicitly excludes China from this trend — "China is a different animal; investors need to be experts." He repeatedly emphasizes "ex-China" as a qualifying condition.
Sawikin believes the global economy is currently experiencing its first "coordinated growth" since 2007 — the U.S., Europe (with GDP growth even exceeding that of the U.S.), and China are all expanding simultaneously, and Chinese exports are once again a growth engine (as Europe, its largest export market, is recovering).
Historical analogy: The current environment resembles 2003–2007 — 4% global growth, cyclical and resource stocks benefiting, and emerging markets leading. This was followed by a decade of "severe contraction," during which developed markets (especially tech/FANG) outperformed. Sawikin asserts: "Leadership has already shifted."
Capital flow forecast: Sawikin cites a fund-of-funds (FoF) manager's view — after emerging markets begin to outperform U.S. markets, it takes investors a year to start paying attention and another year to formulate a strategy. Therefore, substantial capital inflows are expected in the first quarter of 2019. At present (early 2018), Firebird's funds have risen for 23 out of the last 25 months, yet "there is absolutely no new money coming in."
Warning to investors: Sawikin implores investors, "Don't give me all your money only at the top 20% of the bull market." He observes that the biggest investor mistake was redeeming at the end of 2015 (when oil prices were about to bottom and the global economy was about to turn) — "selling at the cycle bottom."
Different strategies for bull vs. bear markets: Sawikin cites advice from his early mentor, George Robinson — "The primary task of an emerging market fund manager is to determine whether they are in a bull or bear market and act accordingly." In a bull market, let winners run (e.g., Russia's Sberbank, which fell from $350 to $19 but still trades at only 1.2x book value with a 20% ROE); in a bear market, "go into the backyard and kill all your darlings" — even long-term favorites must be sold.
Sawikin emphasizes that even in more developed emerging markets with ample research coverage, on-site inspections can uncover truths that financial statements and sell-side reports fail to reveal.
Comparative case: Russian retailer Magnit vs X5 Retail Group. Two years ago, Magnit was a market darling, but on-site inspections revealed its stores were "dirty, with inventory scattered across the sales floor." In contrast, X5 had launched a new store format at only slightly higher prices. Sawikin sold Magnit (then the third-largest ETF holding) and bought X5 — "X5 subsequently outperformed by several hundred percentage points." On a recent revisit, Magnit's renovated stores were still "dirty, with empty shelves and inventory piled in shopping carts," while X5 stores were "sparkling clean and well-stocked."
Judgment on management: Last summer, Sawikin met with the newly appointed head of investor relations at Lukoil — "He told me things that, while not insider information, were highly insightful, including an upcoming buyback decision." This significantly strengthened conviction in the position, and the team subsequently added to it.
Necessity for frontier markets: "Without on-site research, you cannot form a view on frontier markets — you need to understand the people, the business culture, and feel the local atmosphere." Even so, mistakes are still possible — "We have had some major missteps, thinking a country would be great, only for it to head in the opposite direction."
Sawikin summarizes the biggest mistakes from two dimensions: fund manager errors and asset allocator errors.
Fund Manager Errors:
1. Arrogance and Style Drift: Forgetting that one is an "outsider" and attempting overly flashy maneuvers (e.g., allocating an entire equity fund to a single private company), ultimately getting "burned" and losing the fund.
2. Liquidity Mismatch: Sawikin himself learned from the 2008 crisis that fund terms must be aligned with asset liquidity.
3. Lack of Patience: Firebird endured a bear market lasting nearly 10 years (2008–2016) — "underwater, no performance fees, unhappy investors." The survival strategy was "extremely disciplined bottom-up stock selection and investing in dividends."
Asset Allocator Errors:
1. Chasing Rallies and Panic Selling: "Buying at the top and selling at the bottom." Several of Sawikin’s largest investors redeemed at the end of 2015 (the cycle trough).
2. Treating Emerging Markets as "ETF Substitutes": Sawikin argues that emerging market investing is more akin to distressed debt investing — requiring professional managers rather than passive indices. He notes that ETFs and mutual funds have historically underperformed top hedge fund managers (even after deducting performance fees).
| Position | Analyst View | Key Data |
|---|---|---|
| Sberbank (Russian bank) | Bullish, continues to hold | Share price fell from $350 to $19; valued at 1.2x P/B, ROE 20%; "only halfway there" |
| Lukoil (Russian oil) | Bullish, has added to position | New IR head brings confidence; buyback already initiated |
| Bank of Georgia (Georgian bank) | Bullish, holds | Subsidiary is building Georgia's first hospital chain and first neonatal clinic |
| X5 Retail Group (Russian retail) | Bullish, has bought | New store format outperforms Magnit; "beats Magnit by hundreds of percentage points" |
| Magnit (Russian retail) | Sold | Stores are dirty, inventory management failed; was once a market darling and the third-largest ETF holding |
| Via (U.S. ride-hailing, private) | Personal investment, bullish | Algorithm developed by two former Israeli military personnel; Mercedes-Benz participated in the same funding round |
| Hansa Bank (Estonian bank) | Historical case, exited | Bought in December 1994, achieved 75x return before being acquired by Swedbank (2004) |
1. "Emerging market investing has shifted from 'buying cheap' to 'buying value creation'" (Harvey Sawikin) — Over the past five years, free cash flow and shareholder returns (dividends/buybacks) have been the core metrics distinguishing winners from losers, rather than low P/E or low P/B. The competition among Russian steel companies over "who has better corporate governance" is a landmark signal of this shift.
2. "The weight of political risk should be raised from 20% to 50%" (Harvey Sawikin) — Emerging market investors focus 80% on valuations and economics and 20% on politics, but the actual split should be 50-50. The lessons from Egypt, Poland, and Hungary show that political risk should never be overlooked.
3. "A fund manager's primary task is to determine whether they are in a bull or bear market and act accordingly" (quoting George Robinson) — In a bull market, let winners run; in a bear market, "kill all your darlings." This is one of the hardest tasks to execute.
4. "We have been in an emerging market bull market for two years, but capital has yet to flow in — it is expected to begin only in the first quarter of 2019" (Harvey Sawikin) — The current environment resembles the globally coordinated growth of 2003-2007, but investors remain on the sidelines. Sawikin pleads with investors, "Don't give me money only when we are at the top 20%."
5. "Emerging market investing is more like distressed debt investing than U.S. equity investing" (Harvey Sawikin) — It requires professional managers, and the historical performance of ETFs and mutual funds lags far behind that of top-tier hedge funds. Sawikin admits, "This sounds a bit self-serving, but I believe it is true."
6. "On-the-ground research can uncover truths that financial statements and sell-side reports cannot reveal" (Harvey Sawikin) — The case of Magnit vs X5 proves that even in markets with ample research coverage, seeing store conditions firsthand (messy vs clean) is more convincing than any number.
7. "Emerging markets are 'highly cyclical' — you have to survive until the good times come" (Harvey Sawikin) — Firebird endured a nearly 10-year bear market from 2008 to 2016, surviving through "extremely disciplined bottom-up stock selection and dividend investing."
8. "The best investors are those who are 'a bit stubborn, have been through cycles, and will add positions on dips'" (Harvey Sawikin) — Firebird's typical investors are high-net-worth individuals, not institutions. Sawikin worries, "Whether the next generation is adequately educated on how to invest — the answer is usually no."