Jul

17

I don't have much knowledge of foreign exchange, although I admire and envy people like John Floyd who do. In 2017 I was interested in the idea of using PPP (purchasing power parity theory) to select countries that might be good prospects for stock investing over a 4-5 years horizon.

Looking at 2 different publicly available PPP rankings I noticed that SAR (South African Rand) was considered undervalued approximately 50% (!) on a PPP basis. In addition after several years of mismanagement the country seemed ready for a turnaround (bad policies cannot continue indefinitely). I purchased some shares of EZA (IShares South Africa ETF) in October 2017 at 59.36 usd a share.

Today, 7 years later, EZA is at 44.32 a share. More interestingly SAR is considered undervalued by 52.5% (on one of the 2 rankings, I can't find the other at the moment) and has been one of the most undervalued currencies throughout this period.

My mistake was not to do a thorough historical study of stock markets of countries that are undervalued on a PPP basis, and giving too much credit to the academic theory that PPP undervaluations are substantially corrected in 4 or 5 years time. Clearly some countries (eg Switzerland) can stay PPP overvalued more or less forever, and some like SAR can be consistently undervalued more or less continuously.

I learned my lesson.

Humbert H. writes:

I have been involved in raising private equity funds for emerging markets (Asia, Latin America, and Sub-Saharan Africa) since 2004. I have been specifically focused on Sub-Saharan Africa since 2017.

In my view and the view of others who I know that have been tasked with raising capital for these markets over the past 20 years, investors in these markets have not and do not get paid for the risk they are taking.

Nils Poertner responds:

maybe you are right on SA. am interested in the liquid stuff - and that is already a challenge in some of the EM markets.

Bruce Kovner used to say that most investors never really practise much imagination and test new ideas- they tend to go along with what others tell them - and then repeat the learned ideas (as their own). keeping this in the back of the mind everyday (even intelligent ppl forget that).

H. Humbert comments:

Investing in places where property rights are fundamentally not respected just isn't worth it because you can't calculate the risk. I've always considered Russia uninvestable, had one Chinese stock, would never buy any stock in a country led by a dictator. I do have a Mexican stock but in general avoid highly corrupt countries. SA is just too full of crazies to calculate the risk. The US love of sanctions and confiscations of Russian assets and the desire to impose wealth taxes endangers property rights and thus the overall level of attractiveness. At the moment, looking what happened in France, that makes it un-investable. When an Antifa leader leader on the national security watchlist gets elected to the National Assembly and and admirer of Hugo Chavez and Fidel Castro has a realistic path to be PM, watch out.

Henry Gifford responds:

Investing in places where property rights are fundamentally not respected just isn't worth it.

Indeed there is no need to look to outside the US to find examples. Just buy an apartment building in New York City and try to make a profit with the politicians telling you how much rent to charge. A politician looks at an apartment building and sees the owner as one vote, but the tenants as a large number of votes, thus the politician "buys" votes by "giving" low rent to the tenants. A few years ago the property owners in California lobbied for universal rent control on all properties, and got it, out of fear of a worse version passing into law.

In general avoid highly corrupt countries: In New York City it is impossible to get a gas or electric meter installed without a cash bribe to a utility company employee, and almost impossible to get any improvement to a building, including a single-family house, past inspection without a cash bribe to a city inspector. And the sanitation police who come fine store owners $250.00 for a cigarette butt or a leaf on the sidewalk (or on the street within 18" of the curb) have been reported paying their supervisors to assign them to areas with lots of stores, not single-family homes, so they can collect bribes for not fining the store owners $250/day.

Yes, it is possible to do honest business in New York, but it is very, very hard. I have never paid a bribe but don't make nearly the money I would if I did. Things are getting worse this way in New York City, which is perhaps the future of the US as the idea that our chair says has the world in its grip gets ever more popular.

I think Mr. Humbert's advice is very wise, but amounts of socialism and corruption are relative - find someplace completely free of both and I will move this afternoon.

Pamela Van Giessen suggests:

Wyoming might be the closest we get to corruption and socialist-free from what I can tell. Corruption, tho, is hard to uncover from a distance.


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