Most investors think that bad headlines make for a bad investment opportunity. And that would be wrong.
Take Brazil, for example (which we flagged as a compelling opportunity on January 15.)
“Brazil’s President Dilma Rousseff promised her opponents a long fight in her first public comments after the lower house of congress voted on Sunday evening to impeach her,” the Financial Times wrote yesterday. “The president, under pressure over a collapse in economic growth and a vast corruption scandal at Petrobras, the state-owned oil company, has characterised moves by congress to impeach her as a parliamentary coup.”
Brazil is in the midst of a perfect storm of economic and political crises. But as shown below, the country’s stock market doesn’t seem to read the Financial Times. The biggest Brazil ETF (New York Stock Exchange; ticker: EWZ) is up 34 percent so far in 2016. (It’s up 60 percent from its 2016 low on January 21.) The dollar-denominated return has been helped by the 8 percent jump in the country’s currency since the start of the year.
(The MSCI Brazil Index UCITS ETF on the SGX (code: J0O), and on the Hong Kong exchange (code: 3048) are also both up 38 percent so far this year.)
But EWZ is still down nearly 60 percent from its five-year highs. It would have to rise almost 150 percent just to get back to that level.
Malaysia faces a similar kind of crisis as Brazil, in the form of a worst-ever corruption scandal.
In early April, investigators requested information from international banks as part of the ever-growing scandal surrounding1MDB, the country’s state investment fund.
“Swiss investigators have said they found ‘serious indications’ that $4bn had been misappropriated from Malaysian state companies… 1MDB has said its internal investigations have uncovered no evidence of crimes. Malaysia’s attorney-general has said [prime minister] Mr Najib has no case to answer over transfers in 2013 of $680m to his personal bank account, adding that the money was a donation from the Saudi royal family. The prime minister has denied the money is linked to 1MDB,” the Financial Times reported earlier this month.
But as we wrote recently, investors don’t seem to notice. Malaysia’s stock market hasn’t been a star performer in 2016 – it’s up a relatively modest 1 percent – but it’s been on the longest bull market run of any market in the world. It hasn’t experienced a 20 percent decline since March 2009, and is up 88 percent in U.S. dollar terms since late 2008.
That’s partly because Malaysia’s stock market includes a lot of defensive companies. Also, it helps that the stock market is relatively cheap. And steady domestic buying, in particular by the country’s pension fund, has supported the stock market.
Brazil and Malaysia aren’t the only markets with lousy headlines that have been performing well. A list of the world’s best-performing stock markets in 2016 so far includes a who’s who of countries that are in the news for all the wrong reasons, like Russia, Thailand, Turkey, and Egypt.
An asset that’s fallen in price can always fall further. But when a market, or country, is a total disaster that can’t get any worse is often the best time to invest. When things can’t get any worse, they can only get better. So the recoveries in the stock markets of Brazil and Malaysia suggest that investors think things can’t get too much worse.
What happens when some of the pending disasters finally take place? Like when Brazil’s president is kicked out of office – as seems likely – or when Malaysia’s prime minister gets in trouble? If markets have already gone up in anticipation of things get better, upward momentum might be exhausted by the time they finally do. That can be the time to start looking for the next market, or asset class, where investors have lost all hope.