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Emerging Market Viewpoints – November

Monday, November 20, 2017

Latest Emerging Market Viewpoints
From Matt Linsey and the North of South Capital team

The top 100 crypto currencies now have a combined market capitalisation of over U.S. $300 billion. This is similar to the total market capitalisation of Turkey, a country with a GDP of close to U.S. $900 billion.

Whether this is a bubble that will be compared to “tulip mania” in the future or a viable replacement of fiat currencies is impossible for us to answer. All we can do at this point is to explore the positives and negatives of the crypto currencies and their potential impact on the emerging markets.

Although Bitcoin is a little over 50% of the total value of the crypto currency asset class, it has garnered a majority of the publicity and is most often associated with blockchain technology.

Blockchain is a constantly growing list of records, referred to as blocks, which are linked together. As a result it can be used as an open ledger which records transactions. Most importantly once recorded, the data in any given block cannot be altered without the alteration of all subsequent blocks, which requires the agreement of a majority of the network. The use of blockchain with Bitcoin essentially makes the currency non replicable (immune to counterfeiting) according to its supporters.

The advantages of this type of technology are fairly clear. It can allow seamless digital payment of any transaction without having to use a financial institution or a traditional fiat currency. There are now over 28,000 active blockchain projects globally, with the stated aim of reducing supply chain operating costs by 30%. These are particularly popular amongst Chinese, Korean and Taiwanese companies who could benefit significantly from the reduction of the so called “middlemen” for their products.

The implications for banks if this is successful are truly frightening as it would eliminate the need for banks as an intermediary as well as the need for foreign exchange services. For a number of countries it would also eliminate the risk of falling victim to economic sanctions, which often include being excluded from the Western dominated SWIFT (The Society for Worldwide Interbank Financial Telecommunication) system that currently enables financial institutions to send and receive information (payment orders) about financial transactions.

For this reason China and Russia have been glad to see the rise of crypto currencies, although that might begin to change should they feel that they are beginning to lose control of their own financial systems. This remains one of the key risks for the continuation of its development. If governments at some point believe that a crypto currency threatens their monopoly position to create money, then it is likely that they would either be tightly regulated or even banned.

From an investment perspective we believe there is currently a miniscule impact on the emerging market asset class. There is no doubt that if the backers of blockchain are correct, then this will change dramatically over the next few years. Those companies that stand between the producers and consumers of goods stand to lose the most. Gold could also find itself vulnerable as it might lose its relative attractiveness as a store of value.

At the stock level there are a number of companies in Taiwan (Gigabyte, Asustek and Micro-Star International) that currently supply motherboards used in the minting of crypto currencies.  At this point it represents a very small percentage of their overall sales and as a result is irrelevant to their overall profitability.


IMPORTANT INFORMATION | Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.



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