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In my research and investing, I stress three things: people, structure and value. I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests, and trade at valuations that are below fair value if not outright cheap. This blog is somewhat aligned with valuation and yet another example of how investing in beaten down, unpopular and ugly markets can lead to better returns. Usually, valuations are low in markets that are not very attractive. Stocks can look very inexpensive, and prices seem to reflect all the negative news, but who knows when the news can get even worse? And it can take even greater will power to stay invested when nobody around you sees your point of view, friends and peers are calling you crazy, and well-educated, respected and slick I-bank analysts and traders are negative (think negative of your point of view?). It’s a lot easier to invest in markets when (where) there’s a lot of good news and the future looks very bright. The problem is that these markets tend to be expensive and future returns tend not to be as good. To contrast these two points, let’s look at two emerging market acronyms – BRICs and PITs that originated about the same time. BRICs stands for Brazil, Russia, India and China. The acronym is attributed to Jim O’Neill in a paper he wrote for Goldman Sachs in November 2001. In it, he argued that these four countries should be included in high-level government groupings such as the “G7” because their size and growth would make them increasingly influential. The acronym came out not long after the tech crash. Wall Street was ripe for a new story, and over the next few years, the term became more popular. Goldman Sachs and many others launched BRIC funds and ETFs. There are now over 200 of them, according to a very expensive database. The term took on a life of its own and the four appear to like the grouping. Just a few months ago the four countries and South Africa formally launched the BRICS Development Bank ( link here ). About the same time BRICs was coined, traders and analysts who survived the late 1990s Asian financial crisis were referring to the ASEAN countries as PITs. The term stood for Philippines, Indonesia and Thailand: the three of the hardest economies and markets. Unlike BRICs, I don’t think anybody has come forward to claim responsibility for it. Calling your home market a degrading term soon after your clients lost money would not likely make one popular. Investing in the four BRIC countries when the phrase was coined would have been smart. The four countries’ headline indexes are up 302% since late 2001 for a CAGR of some 10.5% (return figures are based on equally weighted headline indexes, in USD, dividends not included). In contrast, and despite the acronym’s negative connotation, one would have done considerably better by investing in the three PITs markets than the four BRICs markets. An equally weighted investment in the three grew by 675% over the same time period, which means the PITs investor would have made more than double the money than the BRICs investor. All three PITs indexes did better than even the best performing BRIC index. Thailand, the worst performing PITs country, rose by 229%, a bit more than the best performing BRICs country, which rose by 611% from November 2001 to November 2015. The outperformance of the PITs countries continued after the expression was coined. In July 2006, Goldman Sachs launched a BRIC fund. From launch to close, the fund’s performance was just under 20% and almost exactly in line the four countries’ equally weighted performance. Over the same time period, the three PITs indexes increased by 157%, meaning that one would have made almost eight times more money by investing in the markets that were unloved rather than the ones that were popular by investment funds and advisors. Are PIGS Today’s PITs? PIGS stands for Portugal, Italy, Greece, and Spain and was supposedly coined by traders. These are of the world’s worst performing economies and equity markets since the 2008 global financial crisis. Like PITs it is not a flattering grouping and member countries have reportedly renounced the term (more information on PIGS is here ). I suspect PIGS could be an up-to-date version of PITs. The origins of both are the same and they describe markets that are having problems and are out of favor. Also, like PITs, the countries in the grouping are geographically close and have a lot in common in terms of economic integration, language, and culture. This is more than can be said of BRICs. Except for their size, I don’t really see much that binds them like PITs and PIGS. Since July 2012, the four PIGS headline indexes are up 9% on average. Not very impressive for two-and-a half-years. However, these could be some of the better performing markets in the next 10 to 15 years if similar to the PITs. Back to BRICs Ironically, now may be a good time to consider investing in BRIC equities. Russia has some of the world’s least expensive large companies and is one of my biggest exposures. Brazil is starting to look interesting with its currency down some 40% in the last two years. There are some exciting and inexpensive companies in China, and at 7x PE, the Hang Seng China Enterprise Index does not seem very expensive. Weren’t US equities trading at the same level in the early 1980s just before that market’s 18-year bull run? There’s also a good contrarian signal. Big banks have a good habit of closing operations and products just when things start turning around. HSBC closed its South East Asian equity research offices in 2001 – just before those markets went on a multi-year bull run. Goldman’s closing of its BRICs fund may be a similar signal. Go Ugly This short piece is meant to show that going against the grain and doing what is uncomfortable and unconventional many times leads to higher returns. The best place to find value is typically in ugly sectors and geographies. Are there other places that appear to be ugly and warrant catchy phrases such as PIGS? How’s “RUKs”, for Russia, Ukraine and Kazakhstan, three ex-Soviet countries whose currencies are down and some of the highest interest rates in the world. Or “PCB”, for Peru, Columbia and Brazil, three of the worst performing equity markets this year for US dollar investors? Or “JOBQE”, for Jordan, Oman, Bahrain, Qatar and Egypt which are amongst the world’s least expensive equity markets likely due to the large amount of uncertainty in the Middle East? Scalper1 News
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