Notes from the USA (Oct 2011) - a guest post

The Eurozone debt problems have been hanging like the proverbial sword of Damocles over global stock markets. Any deal eventually worked out by Eurozone leaders is likely to be a temporary relief for a deep-rooted malady.

In this month’s guest post, KKP chalks out a plan on how investors can benefit from the turmoil in global stock markets.

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Déjàvu All Over Again?

There are so many variables in the market including earnings, recessions, financing, trade imbalances, debt to GDP ratio and many others. A lot of these variables are focus elements in the media and weigh on our minds and portfolios, but US took the lime-light in 2008-09 and now Europe is about to take that seat!

So, what are these ‘economic bombs’:

1. Greece, and the in the bigger picture, PIIGS (latest group of countries in trouble
2. Recapitalization of Debt in Europe (and the valuation of each country’s bonds/rating)
3. Flexibility and affordability of EFSF (needs are far beyond EFSF capabilities)
4. ‘United we stand’ mentality amongst the EU nations (Germany, France, UK and others are not of the same opinion)

In the reality that ECRI (Laxman Achutan’s indicator) is painting, the USA is heading for a recession of sizable proportions. The time frame has not been specified, although many speculate six months. This means that USA will not be in any position to help Europe with trade balances or with any QE packages if they need more than what they can afford.

My personal view is that the US market is behaving as the “least ugly” and hence pushing upward. Think about the “least ugly vs. ugly vs. most ugly” concept and things will come to perspective. This push is really a total suckers rally with very low volumes on the Nasdaq and S&P500. None the less, it is still a rally and one where US investors should be cashing out of the equity positions, slowly but methodically, and yet more importantly without fail.

Stocks are dramatically over-valued based on the underlying business trade going on (in the US). Any gains are in complete defiance of the many identified headwinds that will show its mighty strength soon. Sales to and within US corporations are weak at best, but the comparisons made to last year make it look better.

Hence, it is going to get very unpleasant and possibly catastrophic at the first sign that EU cannot afford the outcome of one or more of PIIGS defaulting on their debts. If the sovereign debt crisis results in anything less than a deep and prolonged global recession, there are chances (albeit a low probability) that this rally will continue for a short time. We will see a lot of investors get sucked into the rally and feel very lonely at the top, when the correction resumes at 3 times the speed (typical bear move vs. bull moves of US markets) of the slow move up that we are seeing.

BRICS will feel the pinch for a while (corrective), but the only positive view of all this is that we will be able to see a US$ rally, and therefore a gold/silver correction. As with the current softness in gold/silver that I had predicted on ISG and IIF investor forums a few weeks ago, I think we will get a slightly lower price from the current levels (to the next support levels), and that will definitely be the last hurrah based on the current state of US$ and Euro. Resumption in the gold and silver rally (new money as a lot of people call it), will happen as Euro falters, and the focus returns on US issues.

Bottom line, keep your powder dry to buy at lower levels, and, from those purchases in 2012-13, we will get our eventual high of 2015-16 (8 year cycle) once all of this settles down. Buying at these deep corrective levels, building a solidly balanced portfolio will be the right thing to do for serious investors (not traders), and we will also have a good amount of gold and silver to show in our portfolios between now and the eventual high of 2015-16 (as predicted by Vivek Patil of ICICI).

(Note: At the time of posting this, Eurozone leaders seem to have worked out an emergency deal to resolve the region’s debt crisis. That may provide a boost to global stock markets.)

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (Feb 2011) – a guest post

Sitting in India, we tend to become obsessed with what is happening to the Sensex and Nifty. Specially when both indices start heading south. Part of the reason for the recent corrections in emerging markets, including India, is the flight of FII money.

Far away in the USA, KKP can be more objective about investing in global markets. In this month’s guest post, he looks beyond the BRIC (Brazil, Russia, India, China) nations to other markets on the growth path. May be it is time for Indian investors to start developing a global outlook as well, to improve the total returns on their portfolios.

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What Next After BRIC? 

So, we all feel that the organic and FDI (investments) in India and China is the end game, right? Wrong. We know that there are frontiers beyond that, and even though India and/or China will be the next super-power of the world, there will be growth in other regions of the world that we need to focus on to keep our investments earning higher returns. We have to, therefore, teach our children to be open minded not just to the ‘change’, but more importantly to the ‘rate of change’ going on in this world. This will move ‘preferred’ investments from one country to another, or one region to another, or as this article points out, from the favourite BRIC’s to the Frontiers! What does that mean? Lets look into it…

We all know the BRIC (Brazil, Russia, India and China) countries, and the tear that they have been in the last 10 years. Lets talk in CAGR terms (Compounded Annual Growth Rates), i.e. total return per year, compounded on an annual cycle.

BRIC in general have done 14.75% CAGR as of Dec 31, 2010. India has done 17.19% CAGR if you were wondering, but you know what – Indonesia did 26.74% CAGR in that timeframe. This is staggering. Being in the US, we have a choice to invest just about in any country through vehicles called ETFs/ETNs. These are a collection of stocks put together by one of the large brokerage houses or fund managers that invest in a basket of stocks following a particular index. So, now, consider Frontier Country ETFs to capture explosive growth in what I calling ‘new markets’. By the way, there are a slew of countries that we (as investors) have ignored for a long time…..although, the countries are not new at all. But the time has come, and that time is now. Here are the current list of countries that belong to this ‘general’ Frontier Country list with the ETF symbols (valid for US investors and informational for Indian Investors):

1. THD - Thailand
2. ECH - Chile
3. TUR - Turkey
4. VNM - Vietnam
5. IDX - Indonesia
6. EPU - Peru
7. ESR - Eastern Europe
8. GXG - Colombia
9. FRN - Diversified across frontier markets (one of my customers)
10. FFD - MS Frontier Emerging Markets Fund

These ETFs have been performing really well since Mar 2009, and it’s all been one way and hence it has been hard to find the best entry point. On any pullbacks, I personally will be interpreting it as a buying opportunity and starting to put some money (in SIP mode in USD) for long term investments. Keeping in mind that India used to belong to this group once upon a time, there are risks associated with each of them. They possess risks such as illiquidity, non-transparency, inadequate regulation, substandard financial reporting, and similar hazards. They are at the very edge of the investable public securities universe and along with high potential rewards, come high risk.

MSCI, which is a prominent builder of indices, recently announced their list of the frontier universe which includes the countries listed below. FTSE classified their list of countries slightly differently, but both lists overlap quite a bit.

FTSE classification, frontier markets list as of September 2010:

Argentina; Bahrain; Bangladesh; Botswana; Bulgaria; Côte d'Ivoire; Croatia; Cyprus; Estonia; Jordan; Kenya; Lithuania; Macedonia; Malta; Mauritius; Nigeria; Oman; Qatar; Romania; Serbia; Slovakia; Slovenia; Sri Lanka; Tunisia; Vietnam.

As of May 2010, MSCI Barra classified the following countries as frontier markets:

Argentina; Bahrain; Bangladesh; Bulgaria; Croatia; Estonia; Jordan; Kazakhstan; Kenya; Kuwait; Lebanon; Lithuania; Mauritius; Nigeria; Oman; Pakistan; Qatar; Romania; Trinidad and Tobago; Serbia; Slovenia; Sri Lanka; Tunisia; Ukraine; United Arab Emirates; Vietnam; Bosnia and Herzegovina; Botswana; Ghana; Jamaica; Saudi Arabia.

Here is the performance of the Guggenheim Frontier Equity ETF, which is one of the few choices available today. Since this concept of Frontier countries is new, there are not too many funds out there that do this investment, although many ETFs include them in their Asia funds or Latin America fund or even Eastern European funds/ETFs. I happen to like Guggenheim investments since they have been a good customer of mine in the technology world, and have done a lot of technology upgrades within their infrastructure to enable the fund managers to do their job well. Now, that does not necessarily mean good investment results, but they also happen to have great investment results relative to their peers. Guggenheim services a set of private clients who we would call the filthy rich families, i.e. ones with more than $10M in Net Worth!

As you can see from the performance, I rest my case, and even though I have woken up a bit late to these investment type, I think these are young, dynamic, and real-growth-engines that will see their middle income earners grow within their own countries, and provide some real contributions to their own GDPs. Where there is return, there is risk, so while bearing that in mind, one has to invest only a portion of the portfolio and manage the overall risk. When the overall geography turns sour in a bearish environment, I am sure these markets will go down faster, bearing a higher volatility factor than the average. Just another chink in the armour that I am now providing to you to include and manage as you think about future-proofing your portfolio with an ultra positive return kicker!

What do you think?

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.