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Elliott Morss | June 24th, 2017

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Investing in a Dangerous World

Investing in a Dangerous World
© Elliott R. Morss, Ph.D.

Introduction

The Federal Reserve’s low-interest rate policy has eliminated the retirement income of many. What to do? I don’t believe in picking stocks. I take to heart the hypothesis of Paul Samuelson that new information on companies is almost instantly reflected in their prices. And I am certain that others will get new information before I do. On top of that, single stocks are more risky than groups of stocks. With all this said, it is true that many financial sites succeed by recommending individual stocks. I only hope their audiences are well-informed and only buy individual stocks with “entertainment” money.

Peter Lynch’s track record was truly remarkable. As I have noted elsewhere, he beat the S&P 500 (^GSPC) in 12 of the 14 years he ran Fidelity’s Magellan Fund (FMAGX). And on average, if the S&P gained 5%, Magellan gained 22.5%! Even in the two years the S&P outperformed Lynch, the spread was very small. Lynch argues you should “Use your specialized knowledge to home in on stocks you can analyze, study them and then decide if they’re worth owning. The best way to invest is to look at companies competing in the field where you work. Someone with deep restaurant-industry experience would have predicted the success of Panera Bread Co. and Chipotle Mexican Grill Inc.” He notes further: “If you’re in the steel industry and it ever turns around, you’ll see it before I do.”

Most Dangerous Regions in the World

So following Lynch’s suggestions, what do I know? I know countries. I have worked in 45 of them. So what do I see? Four years ago, I listed the following three regions as the most dangerous in the world:

  • the Middle East;
  • India/Pakistan, and
  • the Eurozone.

Since then, the world has become more dangerous:

  • Putin, troubled by the West invading his “sphere of influnce”, has gone on the offensive in the Ukraine and Syria;
  • China is flexing its muscles in the South China Sea;
  • Terrorist acts, bolstered by social media “cells”, are occuring globally;
  • The Middle East has become even more unstable than it was four years ago;
  • Problems in the Eurozone have been compounded by Brexit, thereby raising questions about the future of the European Union.

In what follows, I review some of these danger spots in greater detail.

a. The Middle East

Things were not “good” in the Middle East (ME) four years ago. Why? Because Western nations tried to install democratic forms  of government. ME countries are controlled by tribal/religious powers and are not suited for democracy. Throughout history, organized religions and ideologies have been responsible for great death and destruction. In addition, as I have reported earlier, there is great animosity for the US’ coddling of an aggressive Israel. This is part of a pattern of warfare between religious sects in the ME. Table 1 indicates how ME countries “line up.”

Table 1. – Middle East Countries, Dominant Sects and Military Manpower

* While Lebanon is mixed, Hezbollah is in the Shiite camp so it is included along with other Shiite countries.

Sources: Wikipedia, Pew Forum, and the World Bank

Table 1 makes it clear that the Shia (Shiites) are an out-numbered group. However, the Shia military is now larger than the Sunnis because 5% of their population is in the military versus only 2% of Sunnis. The US invasion of Iraq ended a key balance of power standoff (Iran vs. Iraq) and effectively made Iraq a “partner” of Iran. And together, their oil reserves are greater than any single country’s.

Since 2013, the Middle East problems have spread. Its refugees try to enter other countries while the radical Muslim groups are providing support for terrorist acts worldwide.

b. India (and Pakistan)

India’s population will exceed China’s in five or six years. India is governed by a disfunctional democracy. In addition, it has serious problems with Pakistan, including water disputes. Both countries have nuclear weapons and dangerous events continue to occur.

c. The Weak Sisters of the Eurozone

Since 2011, I have argued that Cyprus, Greece, Italy, Portugal, and Spain should leave the Eurozone. These “weak sisters” will never be able to compete with Germany, Austria, and the Netherlands. Before the Eurozone existed, these countries had their own currencies. And that provided them with a built-in cost adjustment mechanism: the higher-cost countries’ currencies would simply depreciate agains the lower cost countries’ currencies. But in the Eurozone, with all countries using the same currency, there is no adjustment mechanism. The result is that the high cost countries will use up their Euros buying goods from other countries. In effect, that is what happened to Greece.

It would be one thing if the Eurozone countries understood the situation and were willing to make necessary accommodations. But that has not happened. Germany leads a group of “stronger” Eurozone members who continue to support “austerity” programs. And this is the case even though a Eurozone/IMF austerity program caused the unemployment rate in Greece up over 27%. There is little indication that things will work out. And Greece, in an act of defiance to the ‘austerity hawks”, gave pensioners a pre-Christmas bonus. In retaliation, the “European Stability Mechanism” suspended a deal to ease short term debt obligations.

This will not end well. And on top of this, Britain has voted to exit the European Union. This action could generate a chain reaction leading to the Union’s demise.

d. North Korea

 Foreign policy experts view Kim Jong-un as a mad man who just might attack another country with a nuclear-armed missile. Relative to the other global dangers mentioned above, this one is quite clear-cut: Kim Jong-un should be prevented from launching a missile.

Searching for Investments: The Region and Country Perspective

Table 2 has GDP growth projections from the IMF for regions of the world. The “Unweighted” is the simple average for all countries in the region while the “Weighted” is the average weighted by GDP size. Asia leads with the growing middle classes of China and India being the driving force. Africa is showing considerable promise. And the steady growth of the Middle East attests to the fact that the world still needs oil. Latin America is hurt by problems in Brazil and Venezuela. The latter is a particularly sad case inasmuch as its proven oil reserves are greater than those of any other nation. Europe and the US are low because of problems in Europe and because these countries no longer have rapidly growing middle classes.

Table 2. – 2017 Projected Growth, By Region

Source: IMF

For country-specific projections, I turn to the consensus forecasts of FocusEconomics. These forecasts are a consensus of the projections of 10+ private financial and academic institutions. In Table 3, I have selected possible countries and investment vehicles for 2017. The projected growth rates of all Asian countries listed are impressive. I rule out any investments in India the Middle East and Europe for reasons discussed above. My favorite Asian country is Vietnam. It often is overlooked, but my sense is that the Vietnamese are the hardest working people in the world. Relatively few African countries have stock markets so I have listed an “all-African” ETF. The African growth rate does not match up to the Asian countries, but there is evidence that more rapid African growth is coming. To my mind, Peru is a bit like Vietnam – often overlooked but growing steadily.

I have included the US for comparative purposes. Some might not be aware of the Guggenheim S&P Equal Weight ETF. John Reese of Validea pointed that unlike most S&P ETFs, it gives equal weight to all S&P companies. And because the smaller companies tend to ones tend to be more volatile, the trading range on the Guggenheim ETF will be greater than than those that use the weighted ETFs. Reese points out:

“Since it began in 2003 through mid-December, 2016, the Guggenheim S&P 500 Equal Weight exchange-traded fund, which tracks this different measurement, is up 246 per cent versus a 145-per-cent gain for the SPDR S&P 500 ETF Trust, the fund that tracks the standard market-cap-weighted benchmark.

Table 3. – Investing in 2017

Sources: FocusEconomics and various ETF sites

I hasten to add that for all investors, Table 3 should only serve as a starting point for investment considerations. Investors should always be looking ahead and asking how foreseeable events will affect their holdings.

Conclusions and Investment Implications

The world is a dangerous place. There are many situations touched on above that could explode. Four years ago, I suggested as a hedge against the Middle East erupting, I suggested an oil ETF, either the United States Oil Fund LP (USO) or the ProShares Ultra DJ-AIG Crude Oil ETF (UCO). I was wrong on both counts because there was no Middle East event that cut into oil supplies. The lesson I draw from that? Betting on something bad happening is extremely risky.

Today, it is very easy to conclude that the US is the safest place for your money. Look for safe US investments with half-decent yields. And who knows, some of the President-elect’s growth ideas might bear fruit. But in 2017, I will also give serious consideration to investments in Peru and Vietnam.

Comments

  1. Carl Tretner

    What is an important danger for your investment ? – That you cannot withdraw your investment from a country. You forgot that, Elliott. – Others are, government regulations that are an obstacle for profitable operations. So evaluate countries according to these criteria and to what extent you can rely on political stability and you would prefer the US, Germany, the UK, Japan, Switzerland, Norway, Australia, New Zealand and all EU-member countries. But do not forget a forecast an major currency developments. In this regards the US was a good deal, but this is gone, since international US companies do not make much money anymore abroad in $-Terms.

    Decisive for your international investments is the currency which is your home country (this should of course be a major currency) where you incur your expenditure and which you use to measure the profitability of your investments. Even if the EU or the Eurozone would break up, most of the even unfortunate members would have a chance to recover after devaluating and the value of your stocks would be maintained. Do not forget Russia with its openness to foreign investors. You could have made enormous profits there on the stock market if you would have invested on the Moscow stock exchange in 2014/15 and even early 2016 in oil companies.

    Forget the rest of the world. You could have made enough money in those countries I quoted during the last couple of years.

  2. Carl Tretner

    By the way, Elliott, you never mentioned Russia for investment opportunities. Have you been brain washed by the propaganda machinery of president Obama and its Putin bashing ? – Russia was that crude oil exporting country that could easily survive the oil price shock because of its industrial base. Now Obama is gone and Mr. Tillison can implement his deal with Putin which he had planned for a long time.

  3. Investing in Russia? When Putin regularly seizes the assets of private firms or puts their leaders in jail for bogus reasons? Not for me.

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