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Investing ahead of transformational events – in companies or countries – can be enormously profitable.

If you had bought shares of Apple as it launched the iPhone in June 2007, you’d have made five times your money in five years.

Or… if in the autumn of 1995, you’d bought a basket of shares in the newly launched Russian stock index – not long after the end of the Soviet Union – you’d have been up nearly 470 percent in less than two years.

If you had bought Amazon shares as the company moved into the cloud in August 2006, you’d be up more than 7,000 percent since then.

And if you had bought China’s Geely Automobile in November 2015 as it started to focus on electric vehicles, you’d have been up 600 percent over the next three years.

Of course, a flashing green “BUY NOW” light didn’t accompany these transformational events. “Transformational” is easy to define in hindsight. It’s never obvious at the time.

Where I was last week

I spent last week in a country that could be at the cusp of a similar kind of transformation. It’s far off the radar of most investors… but so was the iPhone in 2007.

Uzbekistan is a California-sized country in Central Asia with 33 million people and a gross domestic product (GDP) that’s 2 percent that of California. Few people outside the region have ever heard of it. Those who have would tend to refer to it as one of the “Stans” that used to be part of the Soviet Union.

Until recently, Uzbekistan – or rather, the authoritarian strongman who ran it until two years ago, Islam Karimov – liked it that way. The country wasn’t North Korea, but it was an aggressive loner, by choice, on the global stage.

For years it flirted with pariah status for being the government that was one of the worst human rights abusers in the world (joined by, among others, North Korea and Somalia). Until recently, it forced children to work in its cotton fields, a practice denounced as slavery by the UN.

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The Financial Times called his regime “one of the world’s most repressive dictatorships, with… a gruesome record of torturing its opponents.”

Contact with the outside world was minimal – and foreign investment was virtually nonexistent. Uzbekistan got a free pass from much of the west, though, because it helped the U.S. and its allies with the war in Afghanistan.

(I first visited Uzbekistan in 1996. It was grey and felt like a big Intourist hotel – Soviet-style service and hospitality that was designed to make you feel unwelcome).

In September 2016, after 27 years as the country’s first (and only) post-Soviet leader, Karimov passed away (I wrote about it here).

Karimov’s prime minister, Shavkat Mirziyoyev, took over. It seemed likely that Mirziyoyev, who’d grown up under the Soviet Union and spent his career advancing Karimov’s agenda, would serve up more of the same: aggressive xenophobia, brutality, retrograde policies and ideas focused on keeping Uzbekistan as isolated as possible.

The iPhone moment?

Instead, Mirziyoyev has taken Uzbekistan in a completely different direction. He’s launched a comprehensive program to reform the economy, increase transparency in government, be friendlier with the neighbours, improve the business environment, reduce corruption and promote investment. He’s also improved labour regulations in the cotton fields.

One of the biggest changes so far has been currency regulation liberalisation. A bit more than a year ago, the government removed the official peg to the dollar – which meant that overnight the currency devalued by about 50 percent against the U.S. dollar.

That got rid of one of the biggest inefficiencies in the economy. It also removed a system of privileges that benefited some industries and businesses, at the expense of the rest of the population.

Every person I spoke with last week in Uzbekistan – from company directors to government ministers to businessmen to taxi drivers – was enthusiastic about the changes that Mirziyoyev has brought, and were hopeful that they’ll continue.

For example, the government implemented a web portal where citizens can lodge complaints about government services or other community issues that’s very popular. (The bar is so low in Uzbekistan that making it OK to criticise the government is a big deal.)

So maybe it’s not so surprising that the people I spoke with are upbeat about what’s going on. And the changes going on there are attracting attention. U.S. Commerce Secretary Wilbur Ross visited last month, to promote business and investment between the two countries.

The American Chamber of Commerce in Tashkent told me that they’ve had a steady flow of multinationals come through to explore what they can do in Uzbekistan. One of the bigger traded companies I visited said they’ve been receiving visits from a few investors and potential partners every week – up from a few every quarter just a year or so ago.

And literally the day after I posted a video to my International Capitalist subscribers from Registan Square – the extraordinary heart of the ancient city of Samarkand, two hours in a fast train from Tashkent – the Financial Times released a story touting the town.

A long way to go

Uzbekistan is at the far end of the adventuresome spectrum of frontier markets. And pre-frontier and frontier markets are littered with well-intentioned reformers that start strong… but give up in the face of pressure from entrenched interests, oligarchs, bureaucracy, inertia and their own personal interests.

Change is difficult in the best of times. It’s even more difficult when it entails a tectonic shift in mentality that will take at least a generation to work through the system.

What’s more, the impetus for change is from the top. If the president decides that he’s had enough, reform will stop. (In the first few years of his first term as Russian president in the early 2000s, Vladimir Putin was a blazing reformer. Then the spark went out… and Russia has muddled through 15 years of stagnation.)

But there is a momentum in Uzbekistan that is hard to ignore. And there are a lot of easy things the government can do to dramatically improve things.

If we waited for the reform process to really get underway… if we waited for the iPhone to prove itself… then the opportunity would be a lot less interesting because it would have already played itself out. Uzbekistan is like a time warp into 25 years ago – and a lot of its assets are priced accordingly.

So if the country isn’t on your radar, it should be.

Good investing,

Kim Iskyan
Publisher, Stansberry Churchouse Research

P.S. One of the biggest mistakes you can make as an investor today is to ignore the potential of frontier markets.

Investing in opportunities like this, when done right, can be highly profitable. In Strategic Wealth Confidential, we uncover opportunities in some of the most-disliked, unloved and ignored markets in the world… and with them, the chance for life-changing gains. Find out more here.

Economic crisis is in the air… whether it’s Italy or Turkey or Argentina (again).

Crisis creates opportunity. But the first part of that aphorism – the “crisis” part – is what you want to avoid as an investor.

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In a book published last year, The Rise and Fall of Nations: Forces of Change in the Post-Crisis World, Ruchir Sharma – head of emerging markets for global bank and funds manager Morgan Stanley’s asset management business – talks about a number of indicators to assess the health of an economy.

These aren’t “tipping into crisis” indicators… but signposts of the long-term trajectory of an economy.

These are some of the indicators that Sharma looks at…

1. Demographics

Two things drive economic growth – population growth (whether it’s natural or through immigration), and higher productivity (that is, how much a person, business or country produces within a certain period).

If a country’s population isn’t growing, its economy will have difficulties growing. By this measure, Africa is in a great place, and parts of Asia are poised to benefit from growing populations. Japan, on the other hand, is the poster child of terrible demographics. And for much of the developed world – with the important exception (for now) of the U.S. – the demographic destiny isn’t a happy one.

2. Billionaire lists

Over the long term, Sharma says, socioeconomic inequality tends to result in political revolt. To gauge this, he looks at billionaire wealth (for example, from those lists in Forbes magazine) as a percentage of GDP; the share of billionaire wealth that’s inherited; and wealth that comes from corrupt industries. If too many people hold too much of an economy’s wealth, there will eventually be a redistribution – and the rich people won’t like it.

A more common way to look at this is using the Gini coefficient, which measures the level of income inequality within a country. By this measure, South Africa and Namibia are the most unequal economies in the world… and Finland and Romania are among the most equal.

3. Cover story curse

The mythology of cover curses – for sports stars, the price of oil, stock markets and much else – is a reflection of the mainstream lagging reality.

As soon as the hot stock, market or country hits the cover of Forbes magazine, it’s already crested – and is on its way down. (Or with the image below, it’s on its way back up.) As my former colleague Peter Churchouse says, “if it’s in the press, it’s in the price”. If you see that hot stock or market on the cover – that’s the time to sell.

4. Inflation

In recent years, the fear of deflation – that is, prices going down – has haunted central bank policy makers around the world (Japan, again, is a trend leader). Sharma advises keeping a close watch on asset price inflation because of the tight link between asset bubbles and recession.

If asset prices – like stocks or real estate – move up too much too fast, a bust may be on its way.

5. Debt

You might think that the 2008-2009 global economic crisis delivered a crowbar-to-the-head message about debt: Too much debt is bad. But since then, overall levels of debt haven’t declined. Total lending is up by more than 40 percent since then.

Markets where private debt rises a lot faster than the economy as a whole are particularly worth keeping a close eye on. And in particular (see: Argentina, now) beware of markets that have borrowed a lot in hard currency, only to see the local currency depreciate to the heavens are especially dangerous.

6. The “second city” rule

If the population of the capital of a country is far bigger than the second-largest city (for example, more than three times bigger), Sharma looks for a high risk of rural rebellion.

For example: Bangkok, Thailand’s capital, has 8.3 million people. The country’s second-biggest city, Samut Prakan, has just under 400,000. And… Thailand has a long and rich history of city-vs-country divisions.

But it’s not always the case. The Philippines, for instance, has 24 million people living it its capital of Metro Manila. Its second largest city, Cebu, has 2.8 million inhabitants. Both are growing fast and have a booming middle class.

7. Domestic capital flows

If local capital leaves the country, it’s bad news. After all, who knows better than people at home whether their currency is in trouble, and whether they can earn a reasonable return that reflects the risk of holding the currency.

Foreign capital – “hot money” – is often pointed to as the cause of currency crises, but frequently it’s local money that is the first down the spillway.

I’ve seen this in a number of markets… most memorably in 1998, when Russian investors were selling everything that wasn’t nailed down to ditch the ruble. Meanwhile, foreigners were gleefully lining up to buy ruble-denominated sovereign bonds, drawn in by sky-high yields. Then the ruble collapsed and the Russian government defaulted on its debt. Local investors may have missed out on a bit of yield. But they weren’t blown up when everything went to pieces

We recently wrote about corollary to this rule: Where are rich people moving from… and to? Maybe they’re leaving their home in search of a better lifestyle… or lower taxes… or more opportunity. Whatever the reason, it’s not a good sign when a country is hemorrhaging millionaires. (Last year, China, India and Turkey saw the largest number of high net-worth individuals leaving for good.)

8. Stale leaders

Sharma shows that economic reform – for many emerging markets, a critical building block of growth – usually happens during a leader’s first term. After that, it probably won’t happen at all. Leaders lose the impetus to change, and grow content with the status quo. That’s especially true (in more corrupt countries in particular) if the status quo entails state-sponsored stealing by the head of government to enrich himself.

For example… during the first few years of his first term, Russian President Vladimir Putin was hailed as a reformist hero. He brought about big and important changes in regulations and policies regarding land, fiscal issues, the judiciary, and pensions. And then, after a few years, his interest in changing things ended, as Sharma suggests.

9. Good spending vs bad spending

An investment bubble that results in acres of empty office buildings – which don’t produce anything or help anyone – is an example of “bad” spending. But if investors, or the government, go overboard on spending on assets that will eventually boost productivity (like technology, research or manufacturing), it will be a lot better for the long-term health of the economy.

No country is going to fail on all these measures – just like no economy is going to sail through. But they are important to keep in mind as you look at market opportunities around the world. If a country fails more measures than it passes, chances are that it’s going to face problems soon.

Good investing,

Kim Iskyan
Publisher, Stansberry Churchouse Research

P.S. Later this week I’m going to be visiting Turkey, which is in the eye of the storm of an economic crisis right now. I’ve seen a lot of financial crises in my professional life… and I also know that you can’t get a real sense of what’s happening – and where opportunities are – unless you see it in person. I’m excited to go, and to tell you what I find.