
What the Super Bowl says about Asia’s stocks
Last Sunday was the biggest (unofficial) holiday of the year in the United States, as just under 100 million people tuned in to the Super Bowl, the American
> READ MORELast Sunday was the biggest (unofficial) holiday of the year in the United States, as just under 100 million people tuned in to the Super Bowl, the American
> READ MOREWhile the Gregorian calendar’s new year is already a few forgotten resolutions ago, the Lunar New Year is fast approaching. Next week, people living in
> READ MORECompared to a generation ago, China's economy is unrecognizable. And in another 20 years, it will have totally changed again. For starters… it used to
> READ MOREEditor’s Note: Today’s piece comes from our friend and colleague at Stansberry Research in the U.S., Brett Eversole. Brett works alongside Dr. Steve
> READ MOREHow fast the Chinese economy is growing is a constant obsession of global markets. But no country - especially one the size of China - can continue expanding
> READ MORE“What could go wrong?” It’s a question I always ask myself when I look at investing in a stock or company. What stands in the way of a strategy
> READ MOREEditor’s note: We’ll be rebranding to Stansberry Pacific Research on November 26. This won’t impact you as a subscriber… but look for our new
> READ MOREEconomic 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
> READ MORELast Sunday was the biggest (unofficial) holiday of the year in the United States, as just under 100 million people tuned in to the Super Bowl, the American football championship. They watched the New England Patriots (from the U.S. state of Massachusetts) beat the Los Angeles Rams (from California).
Of course, the Super Bowl has nothing to do with stock markets. But there’s been an unusual correlation between winners and stock market movements… like the “January barometer” and the Winter Olympics.
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This is where the “Super Bowl Indicator” comes into play.
Professional American football is divided into two conferences, the NFC (National Football Conference) and the AFC (American Football Conference). The Super Bowl is played between the winners of these two conferences.
Since the first Super Bowl in 1967, when an AFC team (represented this year by the winning New England Patriots) has won the big game, the U.S. stock market has returned an average of 9 percent for the year. That’s slightly worse than the S&P 500’s average return of 11 percent over the period. When the NFC team has won, the market has posted an average return of 13.1 percent.
So it might be bad news for U.S. stocks this year, if you believe in the Super Bowl Indicator, because the team from the AFC won.
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However, when looking at Asian stocks, the results are strikingly reversed – with an even bigger swing towards higher returns when an AFC team wins. In the years when the AFC won, the MSCI Asia ex Japan index returned 21 percent (in U.S. dollar terms). That’s far better than the 6.3 percent in years that the NFC team won the Super Bowl, and the 12.5 percent average annual return over the period.
There’s no scientific basis for the Super Bowl Indicator. And there’s also no basis for the January barometer… and a lot of other coincidental indicators like this. Why would stock markets in Asia tend to perform better when the AFC wins the Super Bowl? There’s no good reason.
Of course, in investing (and in much of life, for that matter) the past has no bearing on the present. But historical indicators like this give at least a bit of reason for optimism for Asian stocks in in 2019.
Good investing,
|
Kim Iskyan
Publisher, Stansberry Pacific Research
While the Gregorian calendar’s new year is already a few forgotten resolutions ago, the Lunar New Year is fast approaching.
Next week, people living in China – and elsewhere throughout much of Asia – will celebrate Lunar New Year by spending time with family and exchanging gifts.
Every year on the Chinese Lunar calendar is named after one of 12 animals in the Chinese zodiac cycle. The year of the dog is coming to an end, and before that was the year of the rooster. Other years are named after dragons, rabbits, rats and snakes, to name just a few.
There’s no particular reason that the Lunar New Year (sometimes called Spring Festival) should have much of an impact on stock markets. Whether in Asia or in the U.S., stock markets don’t know the month – or the zodiac year.
But it’s a historical fact that some years of the Chinese zodiac are better than others for stock markets. And the year of the pig – which starts on February 5 – has been a strong performer in the past. In the past, the year of the pig has meant above-average returns for both Asian and U.S. stock markets.
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The MSCI Asia ex-Japan Index reflects the performance of major Asian markets, excluding Japan’s. Unfortunately, the index has only existed since 1988, so it hasn’t yet completed three full 12-year cycles of the Chinese zodiac. Thus the sample size used to calculate the figures below is quite small.
But with the data we do have, the graph below shows that the year of the pig has been the third-best year for Asian markets.
Past years of the pig have averaged a return of 25.2 percent. That’s 21.3 percentage points lower than the best-performing zodiac year, the rooster. But it’s well above the index’s average return of 12.9 percent a year.
Again, the MSCI Asia ex Japan Index’s performance during the year of the pig only has a sample size of two. So take these results with a giant helping of salt.
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Even though Lunar New Year is one of the world’s most popular holidays, it’s more of a cultural curiosity in the U.S. It takes a backseat to Christmas, Halloween and other western holidays.
Since 1928, U.S. markets, as measured by the S&P 500, have performed in line with the overall average for the index. The year of the pig’s historical performance of 18.1 percent is higher compared to the index’s average return over the period of 11.4 percent.
These results are a little more robust than those for the MSCI Asia ex-Japan Index, as the S&P 500 has existed longer. We used performance figures for the S&P 500 going back to 1928, so the above reflects nearly eight full cycles of the 12-year Chinese zodiac.
Of course, there’s no scientific basis for the predictive powers of the Chinese zodiac. Just like there’s no basis for the January barometer, or the “sell in May and go away” trading rule (but they seem to work).
Good investing,
|
Kim Iskyan
Publisher, Stansberry Pacific Research
Compared to a generation ago, China’s economy is unrecognizable. And in another 20 years, it will have totally changed again.
For starters… it used to be that cheap labour was a centerpiece of China’s economic growth.
I remember traveling to the Canton Trade Fair in the early 2000s. It was the biggest trade fair showcasing just about everything that Chinese companies could manufacture at a lower cost than anyone else.
Stuffed dolls, plates, Christmas decorations, wooden furniture and countless other household items were on display in a building the size of 10 football fields.
There were lots of “Made in China” knickknacks… but there were no coffee shops close to my hotel in Guangzhou. The restaurant there featured bad service – and no English-language menus.
There were no glitzy shopping malls or supermarkets within walking distance of the hotel, and no convenience store for a late-night snack.
15 years later, it’s a different place.
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China’s labour is no longer cheap. Minimum wages have been rising nearly 10 percent a year in the biggest cities. At US$3,700 to US$4,200, annual minimum wages in Beijing and Shanghai, respectively, are two to three times those of Indonesia (US$1,304) and Vietnam (US$1,526).
And the country’s economy has been undergoing a seismic structural shift, from being largely focused on manufacturing for export – to focusing on services (everything from education to entertainment). These are the industries that support higher wages.
That evolution is clear on the street. While I was in Beijing last month, I stopped for coffee at Starbucks, wandered the malls along the Wangfujing shopping district and grabbed some snacks for my 14-year-old son at the JD.com convenience store right around the corner from my hotel.
I also came across a different kind of change… one that doesn’t usually feature in investment theses or financial models, but which reflects other, also seismic, evolutions: Clean public bathrooms.
Ask anyone who went to China in the 1990s about their worst experience, and you’ll probably hear about epically dirty bathrooms.
When I was in my late teens, I traveled to China near the border with Hong Kong several times. I’ll spare you the details, but the bathrooms at the Lo-Wu border customs and immigration office were memorably gross.
Clean public toilets indirectly reflect development, wealth, and an understanding of quality of life. (Singapore, for instance, has some of the cleanest public toilets in the world.)
Hong Kong could do with a few more public toilets. But there are so many malls and hotels in the city, you don’t have difficulty finding a clean bathroom to use at any time of the day.
This makes it a pleasure to travel within the city. It’s one of the reasons why tourism is thriving in these two countries.
Tourism and travel are responsible for 17 percent of Hong Kong’s GDP. In China, it’s only 11 percent. In Singapore, it’s 10 percent, while the industry accounts for 15 percent of Malaysia’s economy.
Last year, tourism added US$580 billion to China’s economy – about 5 percent of GDP. But it could reach US$1.1 trillion if it reached the same level of contribution as Singapore.
To promote domestic and international tourism in China, in 2015 President Xi Jinping announced a US$3 billion “toilet revolution” throughout the nation’s cities and popular destinations.
A total of 68,000 public toilets have been refurbished, or built from scratch.
In some cities that are popular with tourists, such as Beijing, Haikou and Taiyuan, nicer public restrooms have been built. They function more like rest areas, offering bank ATMs, snack machines, Wi-Fi and recharging stations for mobile phones.
But they’re only half done. Another 64,000 will be refurbished or built over the next two years.
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New, and clean, toilets are just another subtle sign that China is transforming its economy into a more service-oriented one.
Beijing is promoting domestic travel, and also making it more enjoyable and convenient for foreigners.
According to Travel China Guide, a Chinese travel statistics website, each foreign visitor spends, on average, US$884 per trip to China. That’s 550 percent more than what domestic tourists spend (US$134).
So there’s enormous potential for increasing the travel industry’s contribution to China’s economy, which has been slowing.
China gets only 29 million foreign visitors each year (not including visitors from Hong Kong and Macau). By comparison, 77 million people visit the U.S. each year.
That means foreign visitors to China are equivalent to just 2.2 percent of the Chinese population. In the U.S., it’s 25 percent.
So China’s foreign tourist arrivals could quadruple in size — to 116 million a year — and still have plenty of room for growth.
Admittedly, there are still things Beijing needs to address before inbound tourism breaks out.
For starters, pollution in key cities from having too many cars on the roads turns off tourists from first world countries. There are also horrendous traffic jams in Guangzhou and Beijing… a lack of multi-lingual signs… and Chinese-only-language menus that make it difficult for foreigners to know what they’re ordering.
But technology is making travel within China a more pleasurable experience.
Smartphone apps can now translate your message to your driver, sales attendant, or airport security within a couple of seconds. An Uber-like ride-sharing service, called Didi, is making travel within cities safe and convenient.
English-speaking tour guides are becoming more common.
High-speed trains that connect all of China’s major cities, including Shanghai, Beijing, Guangzhou and Shenzhen now operate daily.
All of this, including cleaner toilets, is going to further open the country’s tourism industry to growth.
One way to gain exposure to this industry is through the PowerShares Golden Dragon China Portfolio (Exchange: New York; ticker: PGJ).
PGJ is one of the few exchange-traded funds that holds a substantial amount (10 percent) of its assets in travel-related Chinese stocks like online travel and reservation behemoth CTrip.com and China Lodging Group, one of the largest hotel management companies in the country.
Good investing,
|
Brian Tycangco
Editor, Stansberry Pacific Research
Editor’s Note: Today’s piece comes from our friend and colleague at Stansberry Research in the U.S., Brett Eversole. Brett works alongside Dr. Steve Sjuggerud on his True Wealth, True Wealth Systems, True Wealth Opportunities: China and True Wealth Opportunities: Commodities investment newsletters.
We have a simple recipe for making money in the markets…
Find something that’s dirt-cheap… that no one else is interested in owning… and buy it once prices reverse.
My colleague Steve Sjuggerud calls this buying what’s “cheap, hated, and in an uptrend.” And it’s a powerful way to invest.
Today, I’ll share a market that meets two of these three criteria. It’s record-cheap, as I’ll show. And after a terrible 2018, investors aren’t interested.
Similar setups led to 20 percent-plus rallies. We’ll just need to wait for prices to rally. So read on… I’ll tell you one of the simplest ways to put money to work when the time is right.
Let me explain…
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This market has gotten so cheap that it’s one of the best values in the world today.
To find this fantastic value, we had to look outside the U.S. Specifically, we checked in on Asian markets. These stocks took a beating in 2018…
The “trade war” spat between the U.S. and China is mostly to blame for those big losses. And one of the worst-hit markets was Hong Kong.
The market fell roughly 24 percent from its peak early last year. Investors have no interest in buying after such a terrible year. And that means right now, this group of stocks is dirt-cheap.
We can see this through the price-to-earnings (P/E) ratio for Hong Kong stocks. The P/E ratio is a measure of valuation. It tells us immediately if a market is cheap (low P/E) or expensive (high P/E).
Today, as you can see in the chart below, the P/E ratio for Hong Kong stocks is near a decade low…
Not only has Hong Kong’s P/E ratio crashed, it’s now bumping into multiyear lows… and some of the lowest levels of the past decade.
Investors aren’t buying Hong Kong stocks today. They’re too spooked after a year of poor performance. But these ultra-low valuations mean big gains are likely from here.
Hong Kong stocks have only been this cheap two other times since 2008… in 2011 and 2016. Both of those were great times to buy.
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After the valuation extreme in 2011, Hong Kong stocks jumped 23 percent over the next year. And in 2016, Hong Kong stocks soared 29 percent after hitting dirt-cheap prices.
Now, this sample size is small. But you can look at just about any asset over time and know that buying cheap is a good idea. Hong Kong is no different.
The recent sell-off has set up a fantastic opportunity to own Hong Kong stocks. Investors hate them, and they’re near decade lows right now.
That’s the “cheap and hated” part of the equation. Unfortunately, the “uptrend” in nowhere to be found. So you’ve got to be patient before taking advantage of this opportunity.
I recommend you keep a close eye on the iShares MSCI Hong Kong Fund (EWH). It’s a simple fund that tracks the Hong Kong market. And it’s the easiest way to make this trade.
If EWH begins to break out, consider putting money to work. An uptrend is all we need to seize this fantastic moneymaking opportunity. And once prices reverse, history says we could see a strong rally of 20 percent-plus from here.
Good investing,
Brett Eversole
Editor’s note: Right now, Brett’s colleague Steve Sjuggerud is sharing a controversial prediction about the markets. He says over the next year or two, there’s going to be a massive panic – but not the kind of panic most people expect. “If you miss out on this development, it could be a huge, huge source of regret in the months ahead,” he says. Get the full story here.
How fast the Chinese economy is growing is a constant obsession of global markets.
But no country – especially one the size of China – can continue expanding at a rate that doubles every seven years. The law of big numbers means growth will eventually slow, and it has.
Since 2010, China’s economy has been slowing. Last year, its GDP grew “just” 6.6 percent – the slowest rate in 28 years.
The U.S.-China trade war is also pulling down China’s economy. And it’s been a headwind for stock markets.
But while China is slowing down, there’s another country that’s been quietly growing at twice the global average, doubling in size every 12 years. And its stock market has risen three times faster than the S&P 500.
I’m talking about Indonesia.
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Indonesia is Southeast Asia’s most populated nation, with 264 million people as of 2017.
It’s also the world’s 16th-largest economy, with a GDP of US$1 trillion in 2017 – similar in size to the economies of Mexico and Turkey.
Since 2001, Indonesia’s economy has grown between 4 to 6 percent – through the global financial crisis, political uncertainty and currency fluctuations. Even during the global economic crisis, the country posted GDP growth of 4.7 percent in 2009.
That kind of performance – see the graph above – is unusual.
Indonesia was able to achieve this because it’s less dependent on the global economy than others. Its exports account for only 17 percent of GDP. That compares with 71 percent for Malaysia and 173 percent for Singapore.
It has an enormous domestic market that supports the economy. The country’s small and medium-sized businesses account for about 60 percent of Indonesia’s gross domestic product and create employment for nearly 108 million Indonesians.
Moreover, Indonesia has favourable demographics characterised by a large, young labour force (42 percent of its population is 24 years old or younger) that supports growth in its local industries.
It helps that Indonesia is a major producer and exporter of natural resources and agriculture. It sells things like crude oil, natural gas and coal to China, the U.S. and Singapore.
Some of the world’s largest mines can be found in Indonesia, including Freeport-McMoRan’s Grasberg mine – the largest gold mine and second-largest copper mine in the world.
It’s also the world’s largest palm oil producer, the second-largest rubber producer and a top 10 natural gas producer.
So Indonesia generates a substantial amount of revenues from exports of natural resources, giving it a good balance of trade (the difference between imports and exports) with other nations.
And because Indonesia has historically exported more than it imported, the country has a high level of foreign currency reserves (US$120 billion) – enough to pay for nearly an entire year’s worth of imports.
All this makes Indonesia more resistant to external shocks – like a global financial crisis.
This is showing in its stock market.
Indonesia’s stock market has performed exceedingly well over the last 20 years, gaining an average of 23.2 percent per year.
That compares with 7.2 percent average annual gains in the S&P 500, 15.9 percent annual gains in China and 6.8 percent for the MSCI World Index.
Over the last 10 years, Indonesia outperformed the other markets with a 21.2 percent average annual gain.
And while the Indonesian market fell 6.7 percent in 2018, it still fared better than many other markets. The Hong Kong market fell 10.8 percent, and China declined a 26.9 percent.
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Indonesia has a lot going in its favour.
For instance, the country’s household debt-to-GDP ratio is just 17 percent – one of the lowest in Southeast Asia.
That’s compared with 50 percent in China, 59 percent in Singapore, 76 percent in Hong Kong and 77 percent in the U.S. That means that Indonesians, in general, have little debt.
So the potential for Indonesia’s consumers to increase their spending is significantly higher than the other nations.
Indonesia’s consumer spending has been growing at a compound annual rate of 4.7 percent over the last eight years.
That’s nearly double the growth rate of consumer spending in the U.S. and Hong Kong. It’s also growing faster than other economies of similar size, like Mexico (2.7 percent) and Turkey (4.5 percent).
In short, Indonesian households are not overburdened with debt and their spending is sustaining growth in the economy and the stock market.
The U.S. trade war with China is also favouring Indonesia. The country offers low cost and abundant labour, easy access to raw materials and competitive electricity rates (cheaper than Thailand, Singapore or the Philippines).
Companies producing textiles, footwear and even electronics looking to move out of China will likely have Indonesia in their sights. Major iPhone assembler Pegatron (Exchange: Taiwan; ticker: 4938), for instance, announced in December that it was relocating from China to Batam Island in Indonesia.
In short, Indonesia is one market to keep your eye on.
One way to gain exposure to Indonesia is through the iShares MSCI Indonesia ETF (Exchange: New York; ticker: EIDO). It’s managed by BlackRock and its top holdings include the country’s largest listed banks, telecom service providers and automotive companies.
|
Brian Tycangco
Editor, Stansberry Pacific Research
“What could go wrong?”
It’s a question I always ask myself when I look at investing in a stock or company. What stands in the way of a strategy working out? Why would forecasts not be achieved? What are the most important assumptions that could be wrong?
It’s a question that anyone who owns (shares in) or runs a business should always be asking.
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So the World Economic Forum asked over 12,500 businesses in 140 economies about the global risks they expect to present an operational challenge in the next 10 years. Specifically, they sent executives around the world a list of 30 global risks and asked them to select those that they believe represent the biggest challenges to doing business in their country over the next 10 years.
The biggest risks for everyone
The table below shows the five biggest business risks globally, in North America, Singapore and China.
As you can see, unemployment or underemployment is considered the top business risk. But it’s important to note that unemployment may reflect different challenges in different countries – such as weak growth, talent shortages or labour-market disruptions caused by automation. But as the World Economic Forum says in its report, the fact that unemployment and failure of national government take the top spots should ring alarm bells about the strains on global political and economic systems.
The World Economic Forum also notes that cyber-attacks have moved up from the eighth spot to the fifth spot this year. This followed several massive cyber-attacks in 2017 – which have been an even bigger problem in 2018.
What about North America?
After several high-profile breaches in 2017, cyber and data risks are the top concerns among businesses in North America.
For example, the WannaCry ransomware attack affected 300,000 machines in 150 countries. And the NotPetya malware attack caused huge corporate losses for Merck, FedEx and Maersk. Each reported losses of around US$300 million in the third quarter of 2017, according to the World Economic Forum.
And cyber-attacks are increasing rapidly. According to the World Economic Forum, in Canada, 87 percent of businesses reported being the victim of a breach in 2017. And in early 2018, the U.S. Director of National Intelligence cited cyber vulnerability as a top risk for government and businesses.
Meanwhile, data breaches are also becoming a big problem. In the U.S., 65 percent of the population has experienced a personal data breach, according to the Pew Research Center. And in 2017, consumer reporting agency Equifax was hacked, with 143 million U.S. consumers having their personal information stolen.
Cyber-attacks also took the top spot in Singapore
With Southeast Asia as the fastest-growing region in the world for internet connectivity, it’s no surprise that cyber-attacks are the main concern in Singapore. According to the World Economic Forum, the Southeast Asian region has a projected 3.8 million new users each month. And its online economy is expected to reach US$200 billion by 2025.
In mid-2018, the prime minister of Singapore, Lee Hsien Loong, warned of cyber-attacks by terrorist groups. And in June, during the summit between the U.S. and North Korea, Singapore became the number one target of cyber-attacks in the world.
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Meanwhile, natural catastrophes are the top concern in China
China has long been subject to various natural disasters – from earthquakes to flooding and typhoons.
For example, China’s ministry has reported that in May 2018, earthquakes, floods, strong winds and hail affected 11.1 million people, forced 66,000 to relocate and killed 82 people. The natural disasters also had enormous direct economic consequences.
Deflation is also a big concern in China – with economic growth slowing.
Earlier this month, China reported slower than expected growth in exports and imports. And inflation declined by 0.3 percent in November – suggesting that this concern is unfolding.
The fall in imports was due to weakness in demand from Chinese consumers and investors as trade war fears continue. The fall in exports, on the other hand, can be attributed to the seasonal decline in overseas demand now that orders meant for the peak holiday season have already been delivered.
Deflation is often associated with weak economic growth. That’s why it takes the second risk spot in China right now.
In short, the first step to managing risks is to have an idea of what they are (though that doesn’t always help).
So investors would do well to take note of the top five risks they see facing businesses they own shares in heading into the New Year. It may or may not happen, but it’s never a bad idea to have a good sense of where risks may be lurking.
Good investing,
Kim Iskyan
Publisher, Stansberry Pacific Research
Editor’s note: We’ll be rebranding to Stansberry Pacific Research on November 26. This won’t impact you as a subscriber… but look for our new website branding on that date. If you have any questions about the upcoming rebrand, please don’t hesitate to send them via email at: feedback@stansberrypacific.com.
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.
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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.
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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…
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.
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.
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.
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.
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.
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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.
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.)
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.
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.
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