Personal View

By Tariq Dennison
MFE 04

Riding the train from Warsaw, Poland, to Vilnius, Lithuania, we pass sleepy Prussian forests outside our window. Our one-year-old starts smiling at the attractive middle-aged woman sitting across from us, and soon she is chatting with my wife about her life in Lithuania. Before we know it, she invites us to dinner at her polished, top-floor flat, where her partner, a successful real estate entrepreneur, teaches me about the Baltic property market.

It’s one of many memorable encounters on our 200-day tour of 20 emerging market (EM) countries that I had previously traded from a New York desk. Until Nov. 20, 2008, when I found my pink slip among the thousands flooding Wall Street that year, I had spent much of my career trading derivatives and structured products linked to emerging markets. So while the New York derivatives job market was in a coma, I decided it was a perfect time to visit countries like India, Slovakia, China, and Malaysia (whose economies were not as heavily leveraged nor apparently as affected by the credit crisis) to search for my next opportunity and see firsthand how well these emerging markets actually work. Our itinerary included traveling to 20 EM countries almost entirely by train. We called our trip “The Road Less Traded.”

Real Estate Lessons

Fortunately, my wife could easily leave her job at the time and my son was not yet in school. I soon came to realize that traveling as a family instead of as “one guy” would introduce me to several aspects of these markets — particularly related to real estate — that I might not learn about on my own.

For example, after our fourth hotel, my wife found an apartment for our three-day stay in Kiev, which immediately proved to be far more comfortable and home-like than a hotel, with more space, a kitchen, and a washing machine. But searching for and staying in apartments in different cities also gave us a quick glimpse at the real estate situation and a better idea of how people live in these places.

In Russia, it proved relatively difficult to find an apartment; most were in dark, tight, smelly Krushchev-era cement blocks and a very poor value. This seemed to be because the Soviets mass-produced just enough of these for citizens to live in, and then the occupants became owners when the USSR collapsed, leading to very high home ownership rates (and probably little surplus for visitors to rent). Our observations reinforced for me how real estate is the most local (perhaps the only truly local) tradable asset and how watching the property markets in these countries should always be part of how I evaluate them.

Russia’s Scarcest Resource

In Moscow, the family played at home one evening while I went to share a drink with a fellow Berkeley MFE working there. While we drank from our $35 glasses of scotch at one of the city’s many trendy bars, he talked to me about the lawless ’90s in Russian business and how the “make a million today, get shot tomorrow” mindset has resulted in most people’s long-term horizon extending only 12 to 18 months.

Similar conversations with a Berkeley alum in Kiev and a friend of an alum in Krasnoyarsk, Siberia, also confirmed that the scarcest resource in Russia is the desire to invest long-term, something I would soon discover was more abundant in China.

Sea of Coal

After hearing for years that “the 21st century belongs to China,” we arrived and began looking for it. Hoping to avoid a limited view of the country by starting in a big city like Beijing or Shanghai, we began our tour of China in Datong, a city of less than 2 million people in the north-central part of the country.

Datong sits on a “sea of coal” — the largest coal base in China. Consequently, the city is enjoying rapidly developing wealth and suffering from tremendous pollution. It looks like one giant, dusty construction site and seems more like a city building toward the future than having already arrived there — often a sign of a “high risk/high return” phase of investment. But with countless high rises nearing completion, it’s easy to envision Datong looking like Jersey City three to five years from now.

As of this writing, we are about to board a train from Guilin, China, to Hanoi, Vietnam, with sadly only Southeast Asia and about two months separating us from our goal of Singapore by November. While we are still sorting out whether the next great opportunity will actually be out here or will be selling EM investments back in the West, we have already discovered no less than a handful of places we’d love to live — Budapest, Vilnius, Shanghai — whose economies have been developing in excitingly different ways and whose markets I hope to continue trading wherever we end up next...