Scenario

In September 2023, you find yourself working in the wealth management division of one of the world’s most respected global banks. The bank has recently been hired by a retired Canadian entrepreneur who, during the commodity super cycle of the early 2000s, founded, grew and subsequently sold a highly successful company specializing in technical software applications for offshore oil producers.

For the last 10 years, your client has shifted her focus to philanthropic endevours through a foundation that bears her name. Your client’s primary motivation for engaging your company’s services is its stellar reputation in managing the global investment portfolios of ultra high net worth clients, of which your client is clearly one.

Team Assignment

Your client has approached you with a specific investment opportunity that she wants your firm to take the lead on. At a kick-off meeting at the client’s downtown office, your client further explained her goals and your mandate:

I want to invest a substantial portion (about 20%) of the Foundation’s funds into a growth- oriented portfolio of equities, and the idea I have latched onto is to purchase country ETFs, maybe 6-8 countries in total, for a select set of emerging market countries. I like this idea for a bunch of reasons, one being that I like to follow world economic developments and so this is a way to attach some “skin in the game” to my intellectual interests. Another is that I like to travel and so this gives me further motivation to visit a set of countries that I haven’t spent much time in. Hopefully, I’ll eventually have a chance to see and experience the “ground truth” of where I have allocated the Foundation’s capital.

The question I want you to help me with is “which country?” I have a list of countries that were suggested to me, and now I’d like to narrow that down. For starters, I want your firm to focus on two countries of specific interest: Mexico and Thailand. These are two countries that fit into a small number of countries in our “upper middle income” category. It’s possible we could end up investing in both, but I’d like to know which country you prefer and why, since we may only have room for one country in this category. I’d also like to know if you really don’t like either of them from an investment perspective. Don’t worry about the rest of my portfolio and issues of diversification – I’ll consider that later once I’ve narrowed down my country list. Right now, I want you to provide me with an analysis of just these two countries.

By way of context, my investment team is very good at “bottom up” analysis, management quality, and financial position (in fact, they’re amazing at Excel modeling, my gosh…and PowerPoint too, now that I think about it). What we want you to do is complement their approach and expertise with more of a “macro view” for each country.

Personally, I’ve read basic country backgrounders (EIU Report kind of stuff) on the two countries. And of course I asked ChatGPT to give me it’s view on which country looks more attractive. But, as I’ve come to expect, ChatGPT is good at coming up with laundry lists of maybe-important factors, but it’s not great beyond that. And I just can’t stand the way it is just so….so neutral…I want a clear recommendation! And I want it to be supported by an informed point of view about which factors will really impact economic performance of the countries in question. In short, I want something a lot spikier than what ChatGPT typicaly delivers – not a bland compare and contrast driven by a seemingly equal weighted set of all potentially relevant variables. I want depth where it matters; and I don’t want to get distracted (and bored) reading stuff that doesn’t matter much.

The other big problem I have with ChatGPT is the hallucination problem – it’s propensity to just make stuff up, or put forward points that are obviously wrong to a trained eye. The other day I asked ChatGPT to come up with reasons for believing Canada had a strong innovation ecosystem (contrary to conventional wisdom). You should have seen some of the howlers it came up with – our strength in natural resources for example (how does that help our innovation ecosystem?); our world class universities (3 in the top 100, ha!); and, wait for it….Blackberry! I nearly fell off my rocking chair I was laughing so hard.

So, anyway, sorry for the ChaptGPT rant.

The investment strategy for the Foundation calls for us to make these investments with about a 7 year window, plus or minus. Unless something dramatic happens, we’ll hold these investments for a minimum of 5 years and a maximum of 10. We’ll begin to look for timely exit moments in that window with a view to being mostly liquidated by the 7 year mark and fully liquidated by 10 years. That means we are not so much interested in the current state of the economy (where they are in the business cycle) as we are in the longer term growth prospects for each.

Your boss at the bank provides a bit more detail:

I pitched the idea of using Blackrock’s i-Shares country ETFs as the investment vehicle for whatever country – or countries – that get the final nod from our client. She thought that would be perfect: fees are low, she gets the full exposure to each country’s equity markets and the i- Shares ETFs provide good liquidity as well as assurances around trade execution. Here are the two ETFs for our focal countries:

Mexico: https://www.ishares.com/us/products/239670/

Thailand: https://www.ishares.com/us/products/239688/

The Foundation’s own investment team will also probably supplement this approach by taking specific positions (long or short) in particular firms in those countries. That’s their job to figure out – that’s what they’re good at. Our job is to provide the top down approach that will steer them toward portolio weightings (including a weighting of zero if we don’t like it) for the various countries, starting with Mexico and Thailand.

Also, in terms of currency exposure, our firm will provide full currency hedging services, so exchange rate movements from an investor perspective should not be considered in this analysis. Of course, the exchange rate may feature into your analysis from the perspective of its impact on the economic performance of the country, e.g., it’s export competitiveness, attractiveness as a