Several countries across the globe offer incredible opportunities for investors.

Their economies are growing quickly, giving their expanding middle class access to the internet, Smartphones, and formal banking. This tends to attract the attention of technology companies who are looking to serve that growing middle class with e-commerce platforms, digital banking, and payment processing. 

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But other countries also shouldn’t just be seen as analogs of America. The blueprint for success is unique for every country, due to cultural differences, relationships with governments, and infrastructure. Headlines may suggest that certain companies are “the Amazon” or “the Facebook” of another country. But that’s rarely actually the case. Different markets require entirely different strategies.

In this episode of our podcast, 7investing CEO Simon Erickson speaks with two internationally-focused investors.

Global businesswoman Andrea Agarwal shares her perspective on how Facebook is expanding overseas and why WhatsApp could play an important role in its future success. And Notre Dame Global Affairs and International Development student Zach Thapar describes how local businesses who adapt to the unique needs of their country’s population can displace incumbent leaders and have an advantage over their much larger international rivals.

Each of our guest presents several investment ideas that are on their investing radar. Zach also shares why he’s not investing in China, and Andrea describes what it’s like diving with thresher sharks.

We hope you enjoy the conversation!

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Interview timestamps:

00:00 – Introduction to International Investing and our podcast guests
06:40 – Andrea Agarwal describes Facebook’s (FB) international perception and global projects
11:22 – WhatsApp’s role in facilitating business transactions
16:39 – Companies that Andrea’s following: Razer and Afterpay (AFTPY)
25:05 – Zach Thapar describes the cultural differences in Latin America
26:57 – Negotiating with governments in multiple countries: MercadoLibre (MELI) and StoneCo (STNE)
45:15 – The opportunities and risks of investing in Africa
51:22 – Two potential red flags in international investing

Publicly-traded companies mentioned in this interview include Afterpay, Amazon, Facebook, MercadoLibre, Razer, and StoneCo. 7investing’s advisors and/or guests may have positions in the companies that are mentioned.

This interview was originally recorded on December 15, 2020 and was first published on December 17, 2020.

Transcript

Simon Erickson  00:00

Hello everyone, and welcome to today’s episode of our 7investing podcast. My name is Simon Erickson, I’m 7investing’s founder and CEO.  When it comes to investing, we tend to have a home court bias. We’re simply more familiar with the companies and the leadership teams of those that live and operate in our home country. But is this causing us to miss out on international opportunities? Well, I have two guests joining me for today’s program who have a very highly informed international perspective. My first guest is Andrea Agarwal, who’s lived and worked and run businesses on three different continents, sharing her perspective on an American tech company that has ambitions of expanding overseas.  My second guest is Zach Thapar. He’s a student at the University of Notre Dame, who’s highly tuned in to government regulations and foreign policy and how that impacts companies that are expanding or operating around the globe. So with that in mind, let’s dive into international investing and see what our guests have to say about this investing topic.  Okay, welcome back, everyone. My very first guest today on our international investing podcast is Andrea Agarwal. Andrea is joining me from Paris, France, this evening. Andrea, Bonjour! And welcome to the 7investing podcast.

Andrea Agarwal  01:16

Bonjour, Simon! And thank you for having me. Great to be here.

Simon Erickson  01:20

I’m so excited to hear your perspective. Because I know that you’ve not only lived but also done business on three different continents. Before we get started talking about companies specifically, can you give me a little bit about your background? And how investing has played a key part of that entire journey?

Andrea Agarwal  01:37

Sure, well, I’ve had a bit of a windy path. And I grew up in a small town in England, but I always longed for the big city and had wanderlust and I did my degree in mathematics at Leeds University there. And I wasn’t quite sure what to do with that wasn’t quite ready to settle into a job. And I got a scholarship at the University of Champaign Urbana in Illinois. And so I went there to grad school for a year. I loved America, and went to San Francisco for a couple of months, which turned into 12 years. And while I was there, I pursued another interest of mine, which was psychology. And I did my masters in social psychology. I was focused on attitudes, behaviors, behavior change, why we think the things that we do, and I got into behavioral research there. And I was actually working with AIDS prevention, and that kind of thing. And but because it was the end of the 90s, I think I could have quite easily gone a different direction and gone the whole kind of social dilemma kind of way. But I didn’t. I did something that was good for the world instead.  Then I went scuba diving and absolutely fell in love with that. And so that took me on to the next stage of my life. I went to Thailand, live there for a year did all my professional training, came back to San Francisco. And at the beginning of the 2000s with, with teaching all the .com people how to dive there. I had my own business in San Francisco. And and it was interesting because I leveraged the internet to get my customers in a way that the bricks and mortar dive stores that weren’t doing at the time. So I did pretty well. And they all had their websites, but they didn’t know how to use them really how to reach people. So you know, I taught myself HTML, made my own website. And it was pretty busy. And by 2003, which was when I decided it was time to pack up and move to the Philippines. And but while I was in San Francisco, like many other people there there was, you know, there was the smell of gold in the air and Silicon Valley was booming.  And so that was when I got first got into investing in the year 2000. Of course we all know what happens after that. I got quite badly burned and but not too much because I didn’t just throw it all in there. You know I read books. Peter Lynch. Motley Fool was a great resource for me at the time. It made investing easy for people like me that were quite scared about it. And I kind of put it to the side a little bit. Well, well diving took over my life, but it was still there. I still have my brokerage I was still playing with it a little bit. And but then I moved to the Philippines and went to this tiny little island called Malapascua for two days to go and dive with thresher sharks and ended up staying there. It’s kind of a theme in my life. So that was 17 years ago, I opened up a small dive shop there for employees, and fast forward to 2020. And I had 70 employees at the start of the year in a restaurant and a bar as well. Unfortunately, of course, that’s all closed now due to COVID. And we’re not quite sure what’s going to happen with it. And but about three years ago, I decided I’d been just fiddling with the investing thing over the years but I needed to do something with with my savings. And I looked at getting some money managers. I didn’t really feel comfortable paying them big fees, that kind of thing and decided to do it myself.  So I started to look on investing as a second job. And I’ve spent a lot of time over the last three years, learning more about it becoming more evolved, honing my skills. And since COVID, have gone like pretty much full time into it. So it’s kind of my new passion, I think. And so so that’s where we are now I think I’ve got a great background, you know, the mathematics, the psychology, and having run a business in a very challenging environment, a challenging country for 17 years. And so it’s all come together to give me some great perspectives, I think on on investing, and and there’s a different way of looking at it.

Simon Erickson  06:33

Yeah, absolutely. I love your story so much. I love it. You’ve seen everything from Silicon Valley to the sharks out there in Asia and the Philippines. Let’s let’s talk about one company in specific for for today’s show, which is Facebook.  And I wanted to touch on this one, because in the United States, at least, we tend to think of Facebook as a social network. You know, this is where you can go and like your friends and put up pictures of your babies doing ridiculous baby things. But internationally, you know, Facebook, for a lot of countries, especially developing economies is actually the internet itself for a lot of people. Can you give us some perspective on our what Facebook kind of looks like in different parts of the world?

Andrea Agarwal  07:12

Yeah, well, um, in 2014, Facebook, rolled out a program called Facebook basics. And it’s for developing countries, and it allows access to the internet for no charge, which is pretty amazing. But there are some drawbacks to that. So it has a very walled garden. And it allows…you need a Facebook account to sign into it. And then you have some other services there, you’ve got BBC News, you’ve got the weather, but it’s AccuWeather. So it’s not necessarily great for remote locations on the other side of the world. It’s got baby advice from Johnson and Johnson. And it’s got Bing search. But in order to click on any of the links, when you do a search, you actually have to buy additional data. And but of course, you have access to Facebook as well. And so in some of these countries, you know, in the Philippines, for instance, where I am Facebook, among internet users, almost 100% of internet users have a Facebook account there. And the vast majority of the population can only access the internet through Facebook. They think of Facebook as the internet.

Simon Erickson  08:34

That’s very interesting. Because you know, the metrics we kind of look at as investors is so heavily focused on advertising. You know, what’s the average revenue per user that Facebook’s getting in the United States and its most developed markets. But then it’s got a very different business model, as you mentioned, internationally. I know another story you and I were mentioning a little earlier was in Africa. They’re laying down what is it, fiber optic cable in Africa – to get people connected over there?

Andrea Agarwal  08:59

Yeah, yeah. So they have been just installing on land thousands of kilometers of fiber cable. And they’ve actually just this year started, and they’re building a huge, a huge cable around the whole of Africa. It’s 23,000 miles underwater, and actually goes through the Mediterranean and the Red Sea as well. It connects Italy, the UK, and France, as well as African countries. And so it’s a huge project. Yeah.

Simon Erickson  09:34

And do you think that other countries, at least the ones that you’ve lived in and been a part of, do they see Facebook as a social network as well? Or is it more geared for small businesses that are looking to build business pages, connect people to the internet and or do other things?

Andrea Agarwal  09:50

Well, it’s interesting that you mentioned that. I mean, COVID really, really brought this out for me. I was living in the Philippines at the time in Cebu, which is the second biggest City. And there was just an explosion after everything shut down on Facebook. And I was really quite scared at the time that supply lines will get cut off, you know, the Philippines has 7000 Islands. And they have disasters quite often. They have typhoons quite often and the world comes in to help. But when the world is also in distress, what’s going to happen then? So, yeah, I was afraid I wouldn’t be able to get any food and basic supplies. But all of a sudden, you’ve got these Facebook groups with local farmers posting that and they would deliver. You know, I was getting my milk from one person, I was getting my mushrooms from someone else. It was it was just incredible. And it wouldn’t have been possible without Facebook. It was how everybody was managing. So people were still able to sell their produce. And people were able to buy it. And intermediaries were able to connect with each other to to get them delivered to people. So it saved us really in the Philippines and many other countries like us, I’m sure.

Simon Erickson  11:14

Yeah, that’s very interesting. It sounds like it’s very local. And it’s very embedded with just how business is done and a lot of different countries.  We know that Mark Zuckerberg plays the long term game. He’s investing for Facebook’s future. He’s not afraid to spend a lot of money on acquisitions, to accomplish those long term goals that he has. One other one that I’d like to talk to you about is WhatsApp. Because we know that WhatsApp was a huge acquisition, you know, small team that he acquired, paid over $20 billion when everything was all considered for this acquisition. And WhatsApp you know, in the United States was definitely not a dominant player, there were plenty of options for for sending money around here in the United States. But how important is WhatsApp in different parts of the world?

Andrea Agarwal  11:59

Well, for me, personally, it’s a social platform that I use the most. And I think it’s brilliant. It’s simple, very easy to use, very clean. You can send messages, photos, videos, voice recordings, which is something that I’m just starting to really get into it’s so handy. locations, you can send documents as well, it’s very easy to find previous media and links, they keep that all separate. You can use it on your desktop as well. You can do calls video calls, video calls with with different numbers of people. And it’s fully encrypted, which is the thing that people like about a lot. And there’s no ads, and there’s no plans to have any ads, it’s free. And so Facebook paid this huge amount of money for it. And they’re not making any money out of it at the moment. So I’m presuming that they are planning to do so in the future. But that plans right now that they definitely look like they’re stepping up to it.

Simon Erickson  13:05

It seems like they have some momentum behind it. You know, we always kind of look at Facebook and the results. There’s a bar chart that shows all the money they made from advertising, and then the small bar at the top that shows payments and gaming and others. But it does seem like they’re getting some momentum. They definitely, if I hear you correctly, have got a user base that’s highly engaged with that and is using those other services that Facebook has.

Andrea Agarwal  13:26

Yeah, and I know that in the US somewhere 10 to 20% of people use WhatsApp, but everybody I know, uses WhatsApp. I am on it all day. I have all kinds of connections through WhatsApp. I have for work I have with my management team. I have different groups of different people in my management team. And I have my family, my immediate family, I have a group with them and my extended family. I have a group, my father’s from India. And there’s a large extended family there. And so we have one big group for everybody. And it’s going all day notifications. And you know, it’s the elderly people actually on in that group that over 70 years over eight years there actually seem to be posting the most. And we also have a separate group for our cousins so that we can check check out the oldies hearing us you know. And I have I have one from my vacation in the summer where it when I went away with friends. I have one for my Christmas dinner for people that are coming around any event. There’s always a WhatsApp group now. And some countries have 90% penetration. It’s huge. And the British government they have WhatsApp groups, you know, every time there’s a scandal, there’s always a WhatsApp group involved. And so it’s all over the place outside of America. And I just don’t think this is realized within America and maybe within the investing community as well.

Simon Erickson  14:56

Yeah, and it’s smaller groups. It’s for people with similar interests. For payments, for business, for whatever it might be. And wherever they’re on the world that might be too It sounds like,

Andrea Agarwal  15:06

Yeah, yeah. Well, that’s still coming. I think that’s on the way.

Simon Erickson  15:11

One of the things about Facebook is in the United States here, we’ve seen them kind of controversially. A lot of times Mark Zuckerberg is testifying before Congress. Right now, there’s kind of some narrative around Facebook being a monopoly and where there needs to be more regulations on Facebook to limit their power, because it might be anti competitive. Do you see any of that internationally? Is that same narrative true in the other places that you’ve lived? Or is that just a United States thing?

Andrea Agarwal  15:40

Um, well, I mean, this and Facebook basics. This has been said to be the colonialization of the internet. So when that is the only way that people can access the internet? What do you do about that? Is that a good thing to bring the internet to people that don’t have it? Or is it is it bad? Is it is it something that shouldn’t be allowed? I mean, India, for instance, wouldn’t allow Facebook to come in and do that program. They just flat out refused it. And because they said it was against net neutrality.

Simon Erickson  16:29

Yeah, it’s very interesting. It’s really interesting to see Facebook kind of leveraging that core platform, adding the optionality and expanding internationally. I appreciate the perspectives on Facebook. Andrea, let’s talk about a couple other companies that you’re really interested in outside of just Facebook. You’ve seen so much out there lived on multiple different continents. Could you spot me up with one other company, or even two companies that are on your radar right now that maybe we should be paying more attention to as investors?

Andrea Agarwal  16:55

Sure. Well, I’m one little favorite of mine is a company called Razer, who are based in Singapore. And they’re the leading gaming hardware maker in the world. So a lot of listeners may have heard of this. And but they’re not really talked about as a stock. And they, they are led by a very, very passionate CEO. He, he was a gamer himself. And in fact, the tagline for the razor is for gamers, by gamers. And I became interested because I have a very good friend who lives in Singapore who works for them. And about maybe four years ago, I went out with him in Singapore and a group of his co workers. And they, they were passionate as well. They love their CEO, they love their jobs, they love their products, and they love gaming. And then about a year later, it just in my daily reading, I came across Razer as a company. And I didn’t realize that they were a public company. So I looked into this some more and I, I liked them so much I invested in them. And, and they had they didn’t do very well until this year, but this year, so far, they’ve their stock prices about doubles, and their market cap’s about 3 billion and their price to sales is about three. And so it’s a little bit more reasonable than other gaming companies like Activision or EA. And they’ve got 25% year on year growth. But they’re also now they’re going into FinTech and eSports. And so these are higher margin avenues that will hopefully increase their profit and their gross margins over the coming years. And they were actually up for one of the banking licenses that Singapore just issued. And that, unfortunately lost it to Sea Limited. But that’s another great company out of Singapore that people have probably heard a bit more of. But yeah, I just love them. I love the passion around them. And their customers are so passionate as well, if you look at their Twitter feed, people just love their product. So I love that company.

Simon Erickson  19:19

Yeah, and when we say gaming hardware, are we talking about headsets? Are we talking virtual reality? I mean, how is this industry moving these days?

Andrea Agarwal  19:26

Yeah, so they just got a lot of peripherals, the mice, the keyboards. And they do chairs, they’ve got laptops, they tried phones but I don’t think that worked out quite so well. But they’re just really sexy products as well. And they’ve got really cool names like they’re named after deadly creatures like black widow, Death Adder, Viper, Hammerhead, that kind of thing. So they’ve got a really strong call factors.

Simon Erickson  19:57

I can see the connection also to the shark diving. Got a couple of those products. What’s another one that’s on your radar there Andrea?

Andrea Agarwal  20:06

And so I also really, really like the FinTech sector overseas. And Afterpay is an Australian company that’s starting to come on the radar and have a few investors in the US as well. And they are now available on the US one of the US exchanges. But they do a buy now pay later model, which has been very, very successful. And they do it really well. They they have caps on what people can buy. And so it stops people overspending, and they’re aiming at millennials. So you know, the kind of people that can’t get credit cards, maybe or just don’t have the credit history to do this. And so if you want to go and buy a pair of sneakers, for instance, you go into the shop, but it gives you immediate approval, you pay a quarter, then you pay a quarter, two weeks later, then two weeks later, and the final payment two weeks after that. And if you don’t make the payment, you’ve got a flat fee, a low fee that you pay. And that adds up a little bit, but then it’s capped, and you just can’t buy anything else until you’ve paid that off. So, you know, they get returning customers, if somebody gets in a little bit of financial trouble, they can just put it off for a while. And then when they pay it, they go back. And there are some companies doing this in the US now, but they’re not quite so nice about it, you know, they’re a little bit stricter. They do credit checks, for instance, which then completely takes out, you know, the millennials that can’t get credit. But Afterpay have just started moving into the US and the UK, and they’ve got triple digit growth there. So you know, I think it’s a very, very exciting I can come and company.

Simon Erickson  21:51

Yeah. Sounds like it removes a lot of the friction makes it easy, as easy as possible for people to be paying things using them. Yeah.

Andrea Agarwal  21:57

Yeah, yeah. Yeah.

Simon Erickson  22:00

Great. And my last question for you, Andrea is, most of us haven’t had the opportunity to live on multiple continents and go diving with sharks and have 70 employees in the Philippines. Definitely love to hear your perspective on what it’s like internationally. But my question would be, you know, for for people that do want to invest internationally, outside of the markets that we live in, and we’re familiar with, what would be some advice you would give to people if they do want to start dabbling and buying foreign stocks? Are there other resources, or things that people should be considering before they jump into the deep end and start buying international companies? Or what would you what would advice would you give to somebody who wants to invest internationally?

Andrea Agarwal  22:40

I’m sure, well, it’s probably easier than you might think. And quite a lot of us brokers offer international stocks. And one of my brokers is Interactive Brokers. And I think they’re available in most countries actually. But they have a huge array of international stocks. And I mean, you do need to be more careful with them. They often don’t have such big reporting requirements. And some people may be familiar with what happened with Luckin Coffee recently. A Chinese company and of course, there’s all this problem going on with the moment with Chinese companies and are they going to be delisted and that kind of thing? And, but you know, there’s that’s no reason not to look at some somewhat, someone from maybe the UK or Australia. You know, something like that. And you can, you can keep it within your field of knowledge as well, somewhat. An example I have of that is sports betting, which has been made made legal in the US. Since 2018. Going state by state, and, you know, there’s no reason just to look at DraftKings. There is a great UK company that I really like called Flutter and Australian company called Points Bet. And, you know, those are countries that have stricter reporting requirements. And can be a good way to get invested internationally.

Simon Erickson  24:11

Sure. Andrea, before I let you go, I’ve got to ask what is it like diving with thresher sharks?

Andrea Agarwal  24:18

[Laughs]. It is amazing! I’ve done several; 100 dives with thresher sharks. And I never get bored with it. They’re just so majestic. They’re just very beautiful creatures. They’re very long. Half of their body is this swishy tail that they move around like this so gracefully. And, and yeah, can’t get enough of that.

Simon Erickson  24:44

Sounds amazing. Once again, Andrea Agarwal, joining us from Paris. Really has seen so many different perspectives across several different continents. Andrea, I really appreciate you sharing those here with 7investing today.

Andrea Agarwal  24:57

Great to be here. Thank you, Simon.

Simon Erickson  25:00

Stay tuned for even more on our podcast on international investing.  Okay, welcome back everyone to our second section on investing internationally on today’s podcast. And now I’m joined by Zach Thapar. He has got a very unique perspective, and is also very interested in investing overseas as well. Zach, thanks very much for joining me here at 7investing!

Zach Thapar  25:21

Yeah, thank you so much for having me.

Simon Erickson  25:23

We’ll be looking a little bit closer at some different regions of the globe to invest in in some specific companies. But could you kick start this off by talking a little bit about your background? And why you find it intriguing to do investing internationally?

Zach Thapar  25:38

Yeah, definitely. So I am a junior at the University of Notre Dame right now. And I study foreign policy, international development and social entrepreneurship Basically, there. So really looking at business development in developing countries across the world, and how, you know, the role of international business can affect development life, and what important factors that brings. And so since I was probably 14, I’ve been really interested in investing, read a couple books, and just started buying some stocks and following along with them. And as time has gone on my gravel depth in that I’ve looked at stocks and my research, and what I’ve actually booked for is progressed. But because of my interest in foreign policy, I’ve kind of always been drawn to international investments and seeing them as a great opportunity to diversify my portfolio and find some really exciting companies across the world. And so, over the last few years, I really started to look outside of just the US and looked to Latin America, Africa, Southeast Asia and so on for some good investing opportunities. And I think there are some really good opportunities across the world that investors should be aware of.

Simon Erickson  26:50

That is incredible that you started investing at 14. And I love the program that you’re a part of right now. Sounds like some great exposure. Let’s talk about Latin America first. You know, one thing that I think we tend to overgeneralize as investors is that there’s going to be analogs between every region of the world, right? We’re going to say, “Oh, this company is the Amazon of Latin America. This company is the Facebook of China.” But it doesn’t really work that way. Right, Zach? I mean, are there cultural differences in different regions of the globe that govern how different companies are going to operate?

Zach Thapar  27:24

Well, yes, I think there’s cultural differences, as well as there’s just logistical differences. I mean, if you’re looking at different regions of the world, sometimes just the infrastructure won’t support using the same model as a company like Amazon. Sometimes there’s, you know, people don’t trust online payments enough to go straight to ecommerce, like people do in the US or don’t have banks, you know, they keep their their money at home. So it really depends on the culture, how companies are going to operate. And yes, companies can operate under an e commerce model, for example, like Amazon, and a lot of successful e commerce companies across the globe have actually attempted to copy parts of Amazon’s model, because they’ve been so successful. But I think there are, you know, significant cultural differences in all regions of the world that makes it very hard to just draw a comparison to Amazon. And I think at the same time, that comparison can be a bit dangerous, because then you’re expecting that same level of return. And that same timeframe expecting that same market opportunity, same business, leadership, etc. And you don’t always have that. And so that doesn’t mean that companies they’re, you know, using a similar model can’t be as successful as Amazon as time goes on. But to just call a company, you know, the Amazon of this region or the Square of this region, or whatever you want to call it. I think, doesn’t do justice to the cultural challenges that may exist.

Simon Erickson  28:50

Do you think that’s an advantage then for the regional companies that are in different regions? So our regional companies in different regions, the companies that are operating in different regions. We have Amazon in the United States, we’ve seen that be successful here. But does that make it more challenging for these large American based tech companies to compete overseas?

Zach Thapar  29:11

Yeah, so I think there’s actually two components that really benefit homegrown companies in foreign countries. I think the first is that, you know, they’re going to have that sense of cultural familiarity. They’re going to know the ins and outs of the culture. And a lot of the founders of these companies have grown up and their region or the country of the company, their founding. So you know, we lived there for years, the founding team is made up of people from that country, they’re going to be able to operate within that culture and change the model to best fit, what’s going to help them find success within that culture within that country. And then I think the second advantage is just as here in America, people are reluctant to buy from Chinese companies. Or at the very least, would choose to buy from an American company more often than not over a Chinese company. I think the same can be said in other other parts of the world about Chinese companies and American companies and foreign companies generally. I think people prefer to buy things from homegrown companies and all things being equal, they’re going to choose to do so.  So if you look at MercadoLibre in Latin America, for example, they have some markets that they’ve done significantly better than Amazon. And it’s not that they necessarily have had the experience in e commerce or in business building even or that they have more money. It’s that they have a better sense of the culture and are able to appreciate the challenges of that culture better. Which in turn leads to people in that country feeling better buying from them and propelling their stock and their company forward.

Simon Erickson  30:42

Yeah. And I’m glad that you mentioned MercadoLibre, because they’re based in Argentina. But as we know, this company, they’re actually doing operations in a whole bunch of different countries in Latin America. Another point that we wanted to talk about here was the role of governments and negotiating with governments and how that’s a little bit different. Maybe perhaps using MercadoLibre as an example, what is that like, working with several different governments in different regions of the world?

Zach Thapar  31:06

Yeah, so I think for MercadoLibre, I mean, their three largest markets are Brazil, Mexico, and Argentina. But they’re operating in over a dozen countries across Latin America. And I think there is some challenge with that. I think it’s dangerous to make an assumption that different governments in Latin America have many, if any, similarities. I mean, there’s been trends that have been similar across the region over time. But the government of Argentina is very different from the government of Brazil and is very different from the government of Mexico. And so there’s different challenges when you’re operating in each country. At the same time, and some of these countries, there’s a history of corruption. And Brazil, for example, is known as one of the most corrupt countries in the world. Within the last decade, they’ve had the biggest corruption scandal in the history of democracy on earth in their country. And that is really affected trust in government. But at the same time, that scandal came about because of governments taking bribes from businesses and government leaders, you know, working too closely with businesses profiting from them. So there are unique challenges in terms of corruption.  And so if you’re going to be a company, like MercadoLibre has shown to be the star, where you’re going to be transparent. And you know, going to be fair and not take these back channels to the extent possible, then you’re going to face a set of challenges and trying to deal with those companies that are there. And as an investor looking internationally in a market like Brazil or in Latin America, I think that’s something you need to be conscious of. Because companies can have more success, not because their product is actually better, not because their leadership is actually smarter or fairer or whatever. It could be because they have a close relationship with somebody in the government. Which could also be the case in the US to be fair. But I think that is definitely something that’s important to be knowledgeable about. Especially when a company is operating in so many different markets like MercadoLibre is.

Simon Erickson  33:05

Yeah, I think it’s a good point, especially with tech companies. We tend to tell ourselves as investors that they’re infinitely scalable, that tech platforms can translate anywhere in the world. A lot of the times, as we’ve seen with TikTok in the United States, and in several of the other negotiations with China, that’s not always as easy as it sounds. You mentioned the negotiations with government, which is a great point. You know, the direct handshakes and how to deal with things like corruption.  But there’s also indirect impacts that government has kind of a say over as well. How do you think about inflation or interest rates? And foreign exchange rates when you’re investing internationally? Is this a big challenge for investors as well?

Zach Thapar  33:43

Yeah, so I think to an extent, currency risk is certainly something to be aware of. The value of the currency of that country changes relative to the United States that could dilute returns for American investors. And at the same time, I think monetary policy and fiscal policy within countries that have major stocks that people are investing in from America is also important. So inflation, for example, I mean, if you look at Latin America, Brazil’s rate of inflation is you know, about 3.73% last year. Which is about three times that of the US, but isn’t huge. It definitely would be better if it was lower. But you know, I think you can invest in Brazilian companies without being worried that a 3% inflation or a 4% inflation rate is going to destroy the value of your investment. But in contrast, if you look at Argentina, their inflation rate last year was over 50%. And that’s definitely something to be concerned about. And so I think when you look at a company like MercadoLibre, again, they operate in all these markets. And the advantage of that is you have the ability to scale up or scale down within these markets to focus on one more than the other. If you’re having trouble in one, you can always come back to a different market later. As long as you keep that relationship and continue to operate to some extent.  So for example, this crisis that has played out in Venezuela. MercadoLibre has been able to really slow down their operations there, what operations they did have, and focus on Brazil, Mexico, Argentina. And with Argentina’s inflation rate with their economic policy, that’s certainly something that businesses in that country will hope can be solved and can be fixed. But the advantage of being a company like MercadoLibre, is you can focus on these markets in Brazil and Mexico. You can focus on expanding into new markets where the inflation rate is around 3% or so. And, you know, deal with the challenges in Argentina as they come. And so I think, again, yes, that’s something that should be researched and that should be looked at. And I would be concerned if Brazil, and Mexico both, for example, started seeing significant inflation started seeing poor monetary policy. But, again, because Argentina is just one of MercadoLibre’s markets, for a company like that I don’t think it’s like an at the end all be all. But their inflation rate is so high.

Simon Erickson  36:20

Sure. It’s helpful they’re diversified across the different countries. Zach, you’ve mentioned Brazil a couple of times. I know one other company that is on your radar is called StoneCo, which is based and operates out there in Brazil. Can you tell me a little bit about that company? Why it’s interesting to you?

Zach Thapar  36:35

Yeah, definitely. So StoneCo is a Brazilian digital payments and financial technology firm. And they offer a lot of services to small and medium sized businesses across Brazil, they have three main platforms. Essentially, the first is what they call their ABC platform. And that’s basically for small businesses that’s offering, you know, banking opportunities, access to credit, offering them the ability to complete wire transfers, and so on. Their second platform is what they call their FinTech as a service platform. And that’s an online platform providing a range of services to small and large businesses across Brazil, including payment processing. And then the third is a full commerce software platform, which is helping companies across Brazil to kind of accelerate their e commerce and provide software solutions.  And so just like some metrics, their total payment volume increased last quarter at 114% year over year while their revenue grew at 39%. And so StoneCo is a company that I’m really interested in. And my interest in that kind of took off from an actual look in depth at Brazil. So if you look at Brazil, it’s the ninth largest economy in the world with a population of about 210 million. But the market currently in the banking sector is controlled by roughly five banks, which control about 80% of the market. Yet, a fourth of the Brazilian population doesn’t have a bank account. 85% of transactions are still completed in cash. And Brazilians who do have bank accounts use them sparingly. At the same time, in December of last year, there were 45 million formal economy employees and 21 million employees in the informal economy. And the interesting thing about that is that the informal economy employees, most of them do not have a bank account or access to credit. But a lot of them run small businesses that could very well benefit from banking from credit from point of sale solutions like StoneCo is offering.  And so I think they’re offering a really unique disruption to the banking industry that’s elitist and has left out many Brazilians and many of them aren’t satisfied with or don’t even use. And at the same time, the regulatory environment in the last few years has changed. And it’s kind of opened up a path for companies to start to disrupt this industry. Because the central bank and the government of Brazil are seeking to promote fair competition and innovation. And so I think StoneCo is a really interesting company. And I think if you want an example of a company, a homegrown company, really knowing how to use the culture to their advantage and fit within the culture, it is StoneCo. And my reason for saying that is their customer service model is incredible. They operate basically in a bunch of hubs throughout Brazil. In large cities and small cities, where they respond to the needs of their clients. And in contrast to the customer service experiences that so many of us have had, where you’re on the phone for hours and don’t get your problem solved, 87% of their merchants have their issues resolved on the first call and 90% rate their services excellent. They’ve been known for helping their merchants not just with problems with their technology, but with any problem with their business. And I think that’s really a unique model and a model that wouldn’t be possible without that level of cultural understanding. Without having experience operating in the business world in Brazil. And so StoneCo is a company that I’ve been very interested in and I follow it closely for a couple months now. And it is one that makes up a fairly large percentage of my portfolio because I am so excited about its future.

Simon Erickson  40:19

It really is in a great situation. It seems like there’s not only the macro economic factors that you talked about the population and all that and kind of how they’re just embracing banking and digital payments. But it seems like they also have a lot of government support, which is kind of the topic of, of this conversation.  Do you have a thought, Zach, on the reaction from the banks, to StoneCo and its digital payments down there? And maybe I can give a little bit of background. You know, we know that a lot of people in Brazil, if you wanted to save money, your only option for years was to put it in a bank account, a low interest paying bank account. And now individuals are getting a lot more options, investing in stock market or doing different things with digital payments. Do you think this competes against the banks? Or is this opening up a new market for StoneCo? How would the competitive reaction you think that they would face?

Zach Thapar  41:08

I think to some extent they are competing against the banks. And StoneCo has focused a lot on providing banking solutions to those Brazilians who are operating businesses or working within the business world. So, you know, they’re not the same as a traditional bank in the sense that traditional banks, you know, at the same time are offering banking solutions to just everyday individuals. I think that is part of the model and potentially part of the plan for StoneCo. But it’s not necessarily their main focus. And I think they are competing with the banks. To an extent, we have seen some of these large Brazilian banks start to transition to a more economically friendly and technologically advanced and inclusive model.  But I think this is a huge market. It doesn’t necessarily have to be a winner take all market. And I think that competition is good for StoneCo. And I think the disadvantage these banks have is they’ve gotten a name for themselves is something that a lot of Brazilians either have been pushed out by or felt doesn’t include them or just don’t want to be associated with. And so when you see these newer companies working with people across the country, StoneCo, for example, during the COVID pandemic has offered vouchers and a variety of different solutions to help businesses in Brazil stay alive. And I think that’s won a lot of people over.  And so when you have this new, exciting company that’s operating with this great customer service model that’s helping its clients get through this challenging time in this pandemic in a country where banks have historically not helped people, I think that is really disruptive. And although those banks may be able to provide some level of competition, I think that it opens up a huge opportunity for StoneCo too. Even if they don’t capture a majority share of the market to have huge success.

Simon Erickson  43:01

That makes a lot of sense in a country with 210 million people in it. Zach, talking before the program, you said you actually are not investing in any Chinese companies right now. I want to ask you why that is? Is there something about China that stands out right now? Or maybe has a lot of risk for investors?

Zach Thapar  43:15

So I think there’s a couple things. And you know, one for me as I think when it comes to international investing, it’s important to do your research and to have some level of familiarity or be able to learn about the culture to an extent that you feel comfortable investing in it. And right now, I don’t necessarily have that level of experience in Chinese politics and Chinese society, that I feel comfortable investing in Chinese stocks.  Other reasons are the regulatory environment there. There’s not as strict of accounting standards, which has allowed some companies like Luckin Coffee, as an example, to get away with fraud without the level of pushback or necessary transparency that you might see in the US. And there’s also a history of the government meddling in the affairs of businesses and kind of shaping them or creating laws to shape businesses to their desires. So that’s kind of scared me away from China. And the last thing has just been the sort of trade war, if you want to call it that with the US. Although it’s not the fault of businesses. And although businesses could still have huge success with that happening, I think anything that could negatively impact the Chinese economy in a significant way. It is not great for businesses. So that’s not to say that there aren’t great Chinese companies or Chinese companies to be excited about. Agora’s one I’ve researched for example, ticker API, which I think is offering a really exciting solution and it’s a really cool company. As far as you know, there’s companies just like Alibaba that have done great and been great over time. But for me, that lack of familiarity coupled with the sort of regulatory and government risk. I prefer to focus on Latin America, Southeast Asia outside of China, and other regions of the world where I’m more comfortable. And more, I feel like I’m more knowledgeable.

Simon Erickson  45:15

Yeah, so great points about China, Zach. And you know, let’s look at a different continent now. Not Australia, we’re not going to go there. And we’re not going to go with Antarctica, I’m actually going to go to the final frontier out there, Africa. Africa is a developing market with a lot of people there. And a lot of companies are really interested in Africa. But again, some considerations, whether it’s culturally, whether it’s government, whatever it might be, that I think companies should be considering in Africa. Is this one that’s on your radar at all, as an investor?

Zach Thapar  45:44

Yeah, so Africa is a continent I’ve looked to. And there’s not, to be fair, a ton of opportunities there currently for investors. But I think it’s definitely a really exciting continent. And something that, you know, international investors should definitely be conscious about and research. So Africa, you know, right now has a population of about 1.2 billion people. And something that I think is really exciting for investors is that the median age throughout Africa right now is 20. And the exciting thing about that is, younger generation of Africans, they’ve grown up with more technology. And as globalization increases, as the world becomes more internationalized, I think there’s going to be some really exciting opportunities for global corporations to take off in Africa and homegrown African companies to find success. In some of the industries, we seem to find success in Latin America or the United States, like financial technology, like e commerce and so on. And at the same time, I think a lot of kinds of countries in Africa have very fast growing economies, some of the fastest growing economies in the world. In fact, they’re in Africa. Ghana, for example, is growing at 6.5%, as well as the Ivory Coast. And there’s a handful of countries growing at three, four, or 5%, which is really exciting when you couple that with the young population and the increase in technology across Africa, for a lot of different sectors.  So, you know, I think as Africa continues to develop, and I believe that is, many African countries are an exciting path towards development, technological advancement. And we’ve seen some great businesses, you know, founded in Africa over the last decade or so. I think, in the next, you know, 10-20 years, there could be some really exciting opportunities for investors there. That being said, if we go back to what we said at the beginning about how you don’t want to compare things to the Square of Africa, the PayPal of Africa, the Amazon of Africa, and so on, I think there are a lot of risks there that investors need to be conscious of. And I don’t think companies can’t navigate those risks. I think they’re all things that could be overcome. But there are definitely things that need to be considered.  So for example, just a lack of infrastructure right now makes it really difficult for a lot of industries to operate. You know, in certain parts of many African countries, they’re very poorly built, or even no roads. A lot of people don’t have addresses in the way that we do in the US. So for companies that are seeking to provide people services at their homes, it’s hard to build a database or ship things, mail things, whatever. At the same time, there’s a lack of trust in online purchases, and non cash purchases. Very low rates of adoption of credit cards, or any sort of digital payments right now. Which, you know, in a continent of 1.2 billion people, that means that’s a massive market, and something that’s really exciting. But somebody is not just going to be able to come in and offer, you know, a Venmo or Cash App like solution and see people just pick it up and adopt it because people don’t have a don’t have bank accounts, and just don’t feel that both trusted and sending money electronically in any way right now.  And at the same time, I think there are a lot of countries there are significant security concerns. If you look at some of the largest economies in Africa like Nigeria or Egypt, there’s exciting population growth, exciting technology growth. But at the same time, there’s prominent terrorist groups, there’s prominent parts of the country that have been taken over or where you can’t get business done without paying bribes without dealing with significantly corrupt governments and corrupt figures. And so there’s a lot of challenges in all parts of Africa. But if you just look at where a lot of African countries were 10 years ago and look at them now, you’ve seen really exciting growth. In high levels of technological advancement in countries like Rwanda, Morocco, Egypt, just across the continent. And the thing is, as Africa continues to develop, we could see that high level of success that we’ve seen with some companies in Latin America begin to happen in Africa. But I think patience is important when it comes to investing there. Because of all of those challenges, you can hardly expect a company to just copy a model of a foreign company and have that same level of success or even be able to grow at that same rate no matter what they’re offering. Because there’s just so many things outside of their control that they need to navigate. But I think a lot of these concerns are getting better. And as they do, businesses will be able to find huge success, and what is going to prove to be a massive economy with a massive population.

Simon Erickson  50:54

Those are all great points. And you can almost feel the tailwinds of the population that just wants to embrace innovation, embrace that technological advancement. Like you had said, and it’s always important to remember in developing economies, it doesn’t have to follow the same trajectory that we did in the United States. They’re not going to have to go through dial up internet and DSL and then plugging in through Ethernet and then to wireless. A lot of times you can leapfrog a lot of that and there can be opportunities for companies in the right place at the right time.  Zach, we talked a lot about risks. And I think that maybe to close this out, I’d like to ask a different type of question. Which is, as international investors, it’s a different game than just investing in homegrown companies locally based or traded on our exchanges here. You’ve got different reporting, you’ve got different risks, you’ve got these countries specific considerations that we have.  What are two red flags that would immediately stick out to you if you’re investing in a company that’s not based in America? That just jumps off the page and you say, “Okay, that’s it. I’m out. This is a this is a deal breaker for me.”

Zach Thapar  51:54

Yeah. So I guess the first red flag for me, and this is one that wouldn’t be more company specific, I guess, would have would have to do with the context more broadly, is I don’t want to invest in companies in a context where there is a significant history of governments meddling in the affairs of successful companies. So one context that comes to mind for me, personally, is Russia. And my reason for saying that is that, you know, there’s a history of leaders of very successful businesses in Russia, going head to head with the government or disagreeing with something the government says, and it leading to the downfall of their business.  So Yukos, for example, was one of Russia’s biggest and most successful oil companies in the early 2000s. But after the CEO had a falling out with Vladimir Putin in 2003, Russian courts basically convicted him on baseless charges threw him in jail. The government took control, the company took control of its shares, distributed them to government leaders, and the company was bankrupt and gone a few years later. And yes, that was 15 years ago. And there are some exciting opportunities in Russia, I’m not saying nobody should invest there. But for me, personally, when a company can do everything right and still be destroyed, not by competition, not by even regulation, but just by the egos of government leaders, I think that’s a serious concern. Because it’s impossible to predict as an investor. And if it happens, you know, there’s nothing you can really do about it. And it’s going to be costly. So looking at the context, more broadly, I think that’s red flag number one.  My second red flag would be, you know, more of a business specific red flag rather than in the culture more broadly. And that would be if there’s fraud, mismanagement, or poor guidance on the part of the company’s leadership. And, you know, American companies and foreign companies, we obviously don’t want to invest in a company that is known for fraud or that has fraudulent leadership. But I think that looking at companies internationally, it’s really important in terms of my trustworthiness and confidence as a shareholder, to have a leader who is driven, who is transparent, and a leadership team that is experienced and is talking and promoting their business in a way that I can support and I can get behind. And so if I see a company that has repeatedly set expectations for themselves, and then failed to hit those expectations, or that has, you know, raised a controversy and its home country because of something it has done that has not sat well with the people of that country. That’s something I would be concerned about. Because again, if you look at the cultural differences, we may see things that happen in America with companies and say, “Oh, that’s great.” You know, that’s fine. I can support that as a shareholder. But if you look at those same things happening in a different context, if a company tries to copy those, or does that same thing, people in that country might really not like it. And it might get, you know, a lot of negative press or see different problems.  So I think when you look to the leadership of the company, you need to see a driven team that does not mismanaging that is not misguiding. And not committing fraud, but as you know, transparent and honest and, you know, can promote a better society as well as a good company

Simon Erickson  55:24

And won’t fall into those landmines or the traps that are so common in some of those developing economies.

Zach Thapar  55:29

Right. Yeah.  

Simon Erickson  55:31

Well, thanks again to Zach Thapar. Again, giving some great perspectives in Latin America, in Africa, and how it really is operating in different countries around the globe. Hey, Zach, I had a lot of fun. Thanks for joining 7investing this afternoon!

Zach Thapar  55:44

Yeah, thank you so much for having me. And I’m on Twitter @ZTinvesting.

Simon Erickson  55:49

Thank you. @ZTinvesting on Twitter. Thanks very much, Zach. And again, thanks for tuning into this show. We learned a lot about international investing. I had a lot of fun with this one. I really appreciate you tuning in.  Once again, I’m Simon Erickson and we are here to empower you to invest in your future. We are 7investing!