Investment Strategy

Take a “crisis vacation” with your investments

Some friends of mine like to do something they call “crisis vacationing”. The idea is to go to interesting places where the currency has just collapsed and get a cheap holiday. That way they enjoy a great trip for little money. And they take their business to people who really need it. Everybody wins. Investors should also take a “crisis vacation” with some of their investment capital.

We seem to live in a world of perma-crisis. Developed country economies limp along, supported by the dual crutches of money printing and ever more debt. And given the nature of the global financial system, developing countries are often held hostage to the whims of central bankers and politicians on the other side of the world.

Most recently Greece has been grabbing the headlines. But it’s not alone. It’s just currently at the head of the crisis queue. There are two likely outcomes for Greece.

Firstly it could succumb to its crippling government debts (debt-to-GDP ratio 175% and counting…), and default. It would most likely devalue its currency at the same time. This would involve replacing the multinational euro with a new sovereign drachma, Greece’s previous currency. You could say they would be “making a drachma out of a crisis”.

Alternatively, the European bureaucrats, desperate to preserve their power, will cobble together a new financial fudge to patch things up. That will prolong Greece’s painful and longstanding depression (current unemployment 26%, youth unemployment 50%).

Whatever happens it won’t be pretty. It’s a choice between short term instability and chaos, most likely followed by a swift recovery, or controlled, but miserable, status quo for as long as possible.

Since politicians and other assorted bureaucrats prefer controlling things – or at least the illusion of control – to letting the chips fall where they may, their clear preference so far has been to keep Greece limping along. They still believe the debts can be paid and the euro preserved. In the meantime ordinary Greeks suffer.

Sooner or later things will have to change for Greece, either voluntarily or otherwise. I believe a debt default and currency devaluation would be the best outcome for the country, however painful in the short run.

It would be an opportunity to clear the decks and start anew. For example, low local prices in international terms would provide a major boost to the country’s large tourist industry.

After all, why sit on a relatively expensive Spanish beach if you could go to a much cheaper Greek one? Why visit monuments and museums in expensive Rome or Florence in Italy if Athens or Knossos are bargains?

In the meantime, until its dreadful financial position is dealt with, Greece remains too risky as an investment destination. This is despite the stock market falling more than 90% in recent years (see our April article on Greek stocks here).

Let’s switch from the Mediterranean sea to the Caribbean, and specifically Colombia (a place I visited in January). This country’s stock market has also been in crisis recently. See our article about it from 19th March.

At the time, Colombian stocks had fallen 56% since their February 2013 high, measured in US dollars. That looked like it could spell opportunity, although the market appeared to be in ongoing freefall.

As it turns out the timing of that article closely coincided with the market bottom, for now at least. The price of the Global X MSCI Colombia ETF (NYSE:GXG) has increased 17% since then, from US$10.46 to US$12.23 at the time of writing. This is largely because the local currency, the Colombian peso, has recovered 12% against the US dollar as the oil price has risen.

Colombia shows how a market panic, in this case outside the control of the country itself, resulted in a great buying opportunity. Chances are that it’s still not too late for investors to get on board for the recovery.

Before Colombia it was Russia that was in freefall, a place with a rich and long history. Both the local currency, the rouble, and the stock market collapsed last year. They were swept down by economic sanctions imposed by the EU and USA, and worries that the war in Ukraine could escalate.

Between the start of 2014 and February this year the rouble lost 55% against the US dollar. Russian stocks had already been extremely depressed for several years before this crisis happened. But because of the panic they fell hard during 2014.

For example the Market Vectors Russia ETF (NYSE:RSX) lost 52% between the start of 2014 and 15th December of that year, as the price went from US$28.87 to US$13.93.

But if you’d been lucky enough, or had the foresight, to buy RSX on 15th December you would have seen your investment rise 46% at the time of writing, up to US$20.34. A large part of that gain is because the rouble has strengthened by 25% since that date. You can still buy RSX for less than the liquidation value of the companies that it owns.

Let’s move to Asia. India was once described to me by an ex-colleague as the most “mind blowing” place he had ever visited (and he’d been to many). This huge and culturally diverse Asian country gives us another recent crisis example.

As I highlighted in the article about “collapsing Colombia”, the Indian rupee fell 31% between November 2010 and August 2013. Indian shares, measured in US dollars, fell 46% over the same period. But after that the stock market recovered, giving investors around 70% profit over the next year and a half, partly driven by a recovery of the currency.

Or there’s the USA. Buyers of the S&P 500 index in March 2009, at the height of the banking crisis, have trebled their money since.

Admittedly a lot of that price recovery was driven by extreme monetary policy, in the form of ultra low interest rates and massive money printing. Plus the US stock market is trading very expensively today (see here for more on why US stock investors are unlikely to do well in coming years).

But the USA gives us yet another example of how investors should never let a good crisis go to waste. The best profit opportunities usually present themselves when everything appears to be falling apart.

Some of you may think this approach is heartless. You may ask whether it’s moral to profit from the misfortune of others. But I see it exactly the opposite way around.

It’s just when a place goes into meltdown that it most needs foreign money to help get it back onto its feet. By investing when things are at their absolute worst you are doing your bit to bring stability to the situation. That helps to restore confidence. The fact that you also stand to make a handsome profit is nothing to be ashamed of. It’s a win-win.

When it comes to investing, take a leaf out of my friends’ crisis vacationing guide. They know that just because a country has been in financial meltdown doesn’t mean the sun won’t come out, or that the drinks won’t be served at dinner.

You can do something similar with your investments. By this I mean you should invest in crisis hit assets such as country stock markets shortly after the worst of the dust has settled.

Just because there has been a crisis doesn’t mean everything will stop functioning. Local people will still go about their daily lives. They will need to buy things and companies will carry on selling to them. The economy will recover over time. So will the stock market.

By investing in this way you will reap the profits of that recovery. As an added bonus you are doing your little bit to things to speed along, and easing the pain of those impacted by the crisis.

So, when the opportunity arises, as it surely will, remember to take a “crisis vacation” with some of your investment capital. Substantial profits are likely to follow.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.