Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives
I have been studying ways of fighting major crises around the world for the last 30 years ever since I lived through one of the most devastating economic, social, and political crises in the history of the 20th century. It happened in Russia and other former Soviet republics after the failure of economic and political reforms in the late 1980s and early 1990s led to the collapse of the USSR in 1991. As the republics became independent, many economic links between them were torn and production plummeted. Russia’s GDP, for example, dropped by staggering 44.2% from 1989 to 1998 and recovered to its 1989 pre-crisis level only in 2007, or 17 years after the crisis started.1 During the crisis, prices of goods and services sky-rocketed and all of the republics experienced dreaded hyperinflation, or inflation of at least 50% per month or close to 13,000% on the annual basis.2
The crisis brought suffering to common people. The devaluation of pensions and rapid increases of prices of all products, including food, pushed many older people to the brink of death from hunger – some over the brink. Lack of employment opportunities forced women into prostitution. A crime wave during the period, which was later dubbed the “gangster nineties,” reduced male life expectancy to less than 60 years.
This suffering and hopelessness led to the rise of militant nationalism. In Russia, for example, Vladimir Zhirinovsky and his ultranationalist Liberal Democratic Party of Russia (LDPR) won more votes than any other party during the parliamentary elections in 1993.
I have seen the important role played by humanitarian aid from governments and non-governmental organizations, and charity donations in ending that crisis. However, that was eclipsed by the role played by institutional and corporate investors, both domestic and international. Their investments helped enterprises to forge supply and trade links with other companies within the former Soviet space and from far away. Those newly-formed links led to increased production by local companies. Prices of most goods dropped from their astronomical levels. Local enterprises started hiring people. Inflation and unemployment dropped precipitously.
Reasons for investing in economies of crisis-stricken countries
There are three major reasons for investing in the crisis-afflicted countries. They fall in the economic, social, and political spheres:
-
- Earning competitive returns for clients;
- Helping countries and their citizens recover from major crises; and
- Strengthening global security and stability
Even though this article focuses on reasons two and three for investing in countries during and after crises, let’s look briefly at reason one.
- Earning competitive returns for clients
The overwhelming majority of investment firms, regardless of their investment focus, have to earn competitive returns for their clients. When investors allocate funds to single-country equity ETFs, where stock markets trade at low valuations compared to their historical averages due to major crises, they aim to make money when those valuations revert to their long-term average levels. I have written several papers on financial and business aspects of managing portfolios built from single-country equity ETFs that traded at low valuations due to crises.3
In addition to earning returns from their investments, investors and their clients benefit from lower costs of goods and services driven by their investments. The global economy is integrated. Not a single country is totally dependent on its own services, natural resources, and manufactured goods. When a country experiences a major crisis, which affects its production and exports, consumers around the world feel it via increased prices of goods and services that are usually exported by the country in crisis. It is in the interest of the rest of the world to invest in the crisis-stricken country to restore production, increase exports, and ultimately lower prices of the exported goods and services.
- Helping countries and their citizens recover from major crises
Citizens suffering in crisis-stricken countries can be helped by investing in their economies. This is a worthy undertaking from a social and ethical standpoint. This is similar to aiding victims of automobile accidents, crime, or natural disasters. We do not expect anything in return except for the feeling that we did the right thing when we helped fellow human beings in trouble. By investing in the stock markets of countries during and after crises, investors can not only earn attractive returns, but help a large number of people resume their normal lives more quickly.
These investments help stabilize stock prices of local companies impacted by crises. Often, stock prices serve as a barometer of companies’ financial health and their ability to grow earnings. When stock prices are declining or depressed, it is difficult for the companies to raise capital, invest money in new expansion projects, and hire new employees. It is much easier for them to do these activities when stock prices increase. By investing in stock markets in crisis-sticken countries, investors help the prices stabilize and start increasing. This price action often results in higher consumption, and brings or contributes to economic recoveries. People spend more money when they see recovery of stock prices of companies where they work and/or stocks of which they own in their portfolios.
The higher spending by individuals helps to jump-start economic growth through the virtuous cycle of the income-multiplier effect. Even those who do not own stocks or work for the public companies (e.g. childcare professionals, taxi drivers, restaurant employees) are more likely to find or keep jobs when local economies recover. The higher spending by individuals often translates into higher expected and actual corporate earnings, which exerts upward pressure on stock prices.
Single-country equity ETFs allow investors to gain exposure to virtually all large and medium-sized public companies in these countries. The ETF investors are not investing in only few companies that they consider to be worthy, as many individual stock pickers do. The stock pickers’ contribution to the country-wide economic recovery is much more limited. Also, exposure to dozens and even hundreds of companies per country protects investors from idiosyncratic risks of individual companies, which is especially important in the risky crisis or post-crisis environment.
Below are “top 10” impact advantages of investing in crisis-stricken countries via single-country equity ETFs:
1) Impact of investing via single-country equity ETFs of economies of crisis-stricken countries is widely diversified since funds are allocated to all large and medium-sized companies;
2) Recovery benefits spread to large parts of the countries’ populations via the income-multiplier effect;
3) Long-only investors, who do not short-sell ETFs, align their interests with those of the countries;
4) Most people in crisis-stricken countries prefer business partnership with investors to receiving charity donations or humanitarian aid;
5) Compared to humanitarian aid, investments in shares of public companies are not easily stolen;
6) Compared to charity donations and humanitarian aid, investments via ETFs is an efficient way to inject funds in the economies of the crises-afflicted countries;
7) Equity is preferential to debt financing for companies during or after crises;
8) Equal opportunity investing is key to returning economic prosperity and social stability;
9) Transparency of investing via single-country ETFs serves to counterbalance corruption; and
10) Impact goals of investors in single-country ETFs of crisis-stricken countries are aligned with the United Nations’ sustainable development goals.
- Strengthening global security and stability
Countries where people see no way to overcome difficult economic circumstances are much more likely to start wars or support terrorism. By helping countries recover from crises, investors increase wellbeing and reduce militant nationalism that can lead to wars or terrorism. Below are two historical examples where investments in economies either could have reduced or reduced militant nationalism.
The hyperinflationary crisis in Germany in the 1920s and 1930s led to the Nazi Party taking control of the country. People support charlatans with crazy ideas when they are scared or see no way out of a difficult situation. If international investors of the day had invested in Germany, and helped the country’s economy to recover, the Nazis might have continued as a small-time bunch of thugs. However, as history shows, the German economy was unable to recover from the weight of the post-WWI reparation payments, and the people elected the Nazis, who promised a way out of the dire economic straits.
The situation was similar in Russia when Vladimir Zhirinovsky and his nationalist LDPR party almost came to power after the collapse of the USSR in the early 1990s. Humanitarian aid and much more efficient investments in public and private companies were among the important factors that led to the end of the economic crisis. The nationalists never got the same high percentage of votes that they received during the parliamentary elections in 1993.
Building portfolios from single-country equity ETFs of crisis-stricken countries allows investors not only to make money but to improve economic conditions in the countries where they invest. Their investments may also prevent countries from “exploding” from economic, political and social tensions, and from spreading wars and terrorism to other countries. Even on days when portfolio prices do not increase, investors still know that they contribute to making the world a better place!
Vitaly Veksler, CFA, is the CEO and portfolio manager at Beyond Borders Investment Strategies, LLC (BBIS), a boutique Boston-based investment firm that he founded in 2014. Vitaly founded BBIS with the goal of earning attractive returns for the firm’s investors while contributing to ending crises around the world. Prior to BBIS, Vitaly worked for such companies as State Street Research & Management (now BlackRock), Fidelity Research & Management, and BNY Mellon Asset Management. Vitaly received his MBA degree from The MIT Sloan School of Management, Master of Arts (MALD) degree with concentration in international finance from The Fletcher School of Law and Diplomacy at Tufts University, and Master in Sciences degree (Diploma) in Management Information Systems and Artificial Intelligence from Moscow Technical University (MIREA).
The views and opinions expressed in this article are those of the author. The information, opinions, and other materials contained in this article are the property of Beyond Borders Investment Strategies, LLC and may not be reproduced in any way, in whole or in part, without express authorization of the firm in writing.
1 World Bank. GDP measured in constant (adjusted for inflation) 2010 US dollars.
2 Steve H. Hanke and Nicholas Krus, Cato Institute, World Hyperinflations, Working Paper, August 15, 2012.
3 For the publication titles, see Part 3 of the original unabridged white paper that can be found here.
Read more articles by Vitaly Veksler, CFA
