A doppelgänger is a look-alike or double of a living person, sometimes portrayed as a ghostly or paranormal phenomenon and usually seen as a bringer of bad luck. Some traditions and stories equate a doppelgänger with an evil twin. The phenomenon of an identical yet non-related shadow brings fear and superstition.
Strangely, something similar can be observed in listed corporates and international exchanges.
When investors assess the risk for their capital, they take many factors into account, one of which is the market in which the company operates. Developed markets are perceived to be mature, less risky, but also with more measured growth prospects. Emerging markets, by contrast, allow faster growth in valuation, but with increased risk attached.
But sometimes, companies in emerging markets look more like their mature and steady peers in the developed world, while some developed market companies have all the attributes of the most exciting fast-growth EM stocks. The Doppelgänger effect has come into play.
Take these two examples:
Company A is a racy, disruptive digital business which has grown at breakneck speed. After rapid international expansion and a multi-billion dollar valuation, it prepares for an IPO. But its business model is being called into question, its impact on societies, its employment practices, and its governance are coming under scrutiny. It finds itself battling against regulators, governments, and incumbents, to the extent that its flotation is under question. A classic example of an emerging business unable to handle the demands of a developed world exchange, you might think.
Now take company B:
A stalwart of the food industry, Company B has been in business for over fifty years, and market-listed for 14. It has managed to grow through cycles with some expected volatility over this period. Its business model is tried and trusted. It is risk-averse and conservative in outlook. Its management is experienced and respected. Its share price has seen gradual if unspectacular growth over the long term. This sounds like an established developed market business, doesn’t it?
Which of these is the Emerging stock, and which the Developed? How much risk do investors need to tolerate before they commit their money to one of these? Which company would fit the conservative asset allocation of an income fund?
Company A in this example is Uber of the US. Company B is Almarai of Saudi Arabia. And just like them, there are many thousands of other firms around the world which look thoroughly uneasy in their current investment categories.
These Doppelgängers appear in the worlds of corporate and capital markets; And yet, on closer inspection, they might also inspire fear and superstition.
So how should investors approach these firms? How do they apply an Emerging risk premium to a business that looks and behaves like a Developed heavyweight? And how do they apply a Developed valuation to a company that would appear to be uncomfortable with developed notions of governance, and which carries emerging market-style risk?
Now think about the line up of firms waiting to IPO in 2019. In addition to Uber itself (valuation around $72 billion), ride-sharing rival Lyft ($15 billion), social platform Pinterest ($12 billion) and messaging platform Slack ($7 billion) are all confirmed or reported to be coming to market in 2019. And these are just a few of the fast-growing, young, disruptive, businesses eyeing the public markets.
Investors are going to be asked to apply Emerging Market valuations and growth predictions to Developed Market businesses. Of greater concern is that we are being asked to believe that these firms will be wholly comfortable with the rigid regulations and requirements that come with a public listing. Perhaps, like Microsoft, the disrupters will become the establishment. Or perhaps, like Tesla, they will buckle under the weight of these requirements.
In other words – are they the real deal, or are they Doppelgängers?
The fact is that the globalised nature of business and investment today has blurred the traditional lines between emerging and developed markets. The average salary in Abu Dhabi is higher than in the UK (source: payscale.com), but its listed companies trade in an emerging market. Huawei and Samsung are the biggest smartphone manufacturers in the world, but their markets are “emerging”. Apple sells more phones in China than anywhere else: does that make it an emerging market business? Standard Chartered does almost no business in developed markets, but its shares are London-listed.
The list goes on. But perhaps the real cause of the shrinking distinction is how these markets are categorised in the first place. Index providers like MSCI and FTSE Russel are responsible for determining which markets are frontier, emerging and developed. And yet once a country has reached one of these categories, it is almost impossible to return to its previous category. The list of emerging markets gets longer every year, like a football league where promotion is possible but relegation impossible.
The Doppelgänger is forced to live life in the shadow of their lookalike: this is their curse. And like the Doppelgänger, the distinctions between emerging and developed markets become smaller and smaller, leaving the observer confused and disturbed. Perhaps the only way to sum up the right approach for investors is the old adage “do your own research”. Because one thing is for certain: the market category a firm operates in is no guide to its prospects.