As fundamental stock-pickers we constantly seek to find new and differentiated ways to learn more about the companies in which we invest and the environments in which they operate. We of course meet management teams on a regular basis, and have good relationships with them, but so do other investors, and the executives have often received so much PR training that they may sound like silver-tongued salesmen, rather than giving genuine, insightful answers.
Recently, we had a truly interesting meeting, from which we were able to establish a different angle on our investment thesis for one market. We met the Georgian ambassador to London, at her office at the embassy. She was a highly impressive lady: proud of her country, but cognisant of its challenges; keen to tell its story, but candid about the depth of political feeling on certain issues.
I spoke about the meeting in our latest ‘Taking stock’ podcast, and I’d like to take the opportunity to go into more detail here about some of the topics I covered and why we consider Georgia to be a highly promising market.
1. Economic growth potential
The economy has grown at an average rate of 5.1% in real GDP terms over the last year, although this has slowed more recently owing to the country’s currency devaluation and is expected to end this year at around 3%. This is supported by the country’s strategically important geographic position and business-friendly climate, which is attracting increasingly strong foreign direct investment – at a rate of more than 10% of GDP. This is coming from diversified sources, with the UK’s BP investing in an oil pipeline and Tata group of India backing a large hydropower project.
2. Trade focus
The ambassador describes Georgia as the country most committed to free trade in the wider region – if not in the world. It has free trade agreements in place with all its surrounding countries, and crucially has even started talks with China to become a key part of its grand strategy for a new ‘Silk Road’, which should conclude next year. Georgia’s ambition is to become a hub, not in what it sees as the old-fashioned Singaporean model, but as a competitive European country with advantaged positioning.
3. European ambitions
It is the European identity and ideal that Georgia is especially keen to foster – the ambassador referred to it as a ‘Europeanisation master plan’. Currently, 30% of Georgia’s exports go to the European Union (EU), and on 1 July 2016 Georgia signed an Association Agreement with the EU which aims to deepen political and economic ties, allowing access to the free market and the common market, but stopping short of free movement of labour – perhaps an arrangement the UK would be envious of! While EU membership is the ultimate aim, Georgia is not yet a candidate country, and the immediate course of action is to work to implement this agreement. The pace of any further progress will be in the hands of the EU.
4. Reform schedule
Domestically, Georgia has its own upcoming general elections on 8 October 2016. The internal priorities are for more investment in infrastructure reform, in particular more investment in modernisation of higher education in order to respond to market demands, as that is currently causing delays in certain sectors. Other reforms include increasing government efficiency and implementing an Estonian-style tax policy (which is considered to be the most competitive tax system among the Organisation for Economic Co-operation and Development (OECD) member countries), within which reinvested profits are not taxed.
5. Russian relations
The key tail risk for the Georgian economy and our investments there remains Russia. Georgia has strategically engaged more in international activities to bolster its resilience in the event of any action from Russia, and relations between the two countries have improved. The situation has avoided escalation over the last four years, but when what is meant by ‘escalation’ is military action, the stability is not a comfortable one – it is a stability under occupation.
Georgia tells the tale of being the ‘bigger person’: the country has invited Russia to be an investor and a trading partner, but has been clear that there are rules to the game. The key issue is the territories of Abkhazia and South Ossetia, whose ownership has been disputed since the 2008 Russo-Georgian war. Russia’s thinking is imperialist, with or without Putin at the helm. It does not want to restore peace, but to keep the region in pieces so that it can continue to exercise influence.
6. Iran opportunities
More positively, Georgia is very upbeat about its renewed relationship with Iran following the lifting of trade sanctions. There has been a resurgence of tourism from Iran, and there is the possibility of an energy swap agreement between the two countries, with Iran intending to import electricity from Georgia, and Georgia considering importing Iranian gas. Moreover, Georgia is seen by some as a ‘safe base’ from which to operate in Iran.
7. Currency stabilising
Given the dual-currency, ‘dollarised’ nature of the economy, the local Georgian lari currency is always another key concern for investors. 2015 was a perfect storm, with pressure coming from plummeting oil prices, a strong US dollar, and concerns over Russia. We now feel the currency is at a more comfortable level, and the banks in which we invest, in our view, are replete with reserves to protect them.
Operationally, for the Georgian holdings within our strategies, performance has been solid, characterised by strong growth, high returns and robust asset quality. Guided by our themes of ‘mind the gaps’, ‘population dynamics’ and ‘financialisation’, we believe that this is a good place to invest for the long term.