Investment Strategy

Take your investments on a “crisis vacation”

Twenty years ago this month, in July 1997, the Asian crisis got underway. Starting in Thailand, many countries were caught in a massive financial meltdown characterised by currency devaluations, debt defaults, and stock market crashes. But investors that bought stocks at the height of the gloom and doom went on to make huge profits. Today I explore the huge opportunities in store when you take your investments on a “crisis vacation”.

The term “crisis vacation” is one I’ve pinched from some good friends of mine and then applied to investing. These friends – let’s call them John and Anna to save their cheapskate blushes – often choose to visit places that have just had some kind of economic or financial crisis. As a result the currency may have collapsed, and hotels are usually pretty empty too.

John and Anna think this is the best time to visit somewhere. Hoteliers are extremely pleased to see them, rooms are often on special offer, restaurant and other prices are extremely low, and there are fewer people clogging up the popular tourist sites. Not only that, but by spending their money in such a place they’re doing their small part to help get the economy back on track again. It’s a win-win. (See more here.)

Investors can take a leaf out of my parsimonious friends’ book. Take your investments on a crisis vacation and you’ll also get a bargain, a big return on your outlay, and you’ll do your bit to get the distressed markets back on an even keel.

My first visit to Asia was in 1998 when I stayed with some other friends living in Hong Kong (You’ll be relieved to hear that I have more than two friends.). I went back on a business trip in 2001, and for three years from 2002 I lived there on a work posting. The 1997 Asian crisis was still fresh in many people’s minds, and I heard a lot about it.

Nowadays I live in Buenos Aires in Argentina. Over the years I’ve met plenty of people who have been wiped out by Argentina’s various financial crises, such as the hyperinflation of the 1980s or the massive crisis in 2001/2002 (currency implosion, debt default, property collapse).

In fact, just chatting to old time taxi drivers in these parts you’ll probably learn more about financial crises than from a room full of professional bankers and economists.

Even the guy who cuts my hair, when I can no longer bear it getting any…longer, explained to me how he survived hyperinflation. Each morning he cut hair. Each afternoon he bought groceries and swapped any spare pesos for US dollars. (Which is, of course, what causes hyperinflation: wholesale currency dumping due to a complete loss of confidence.)

Obviously loads of people suffer when there are economic and financial crises. But here’s the thing. Some smart people make a fortune. I’ve met several of them here in Argentina.

To be clear this is nothing to do with some sort of crazy conspiracy theory about the “new world order”, mysterious Rothschild bankers (Macron!) or similar. You know, supposedly malevolent forces that deliberately crash markets for their own advantage, or other wacky nonsense.

No. Crises are usually caused by something much simpler: the incompetence of governments and central banks (“independent” or otherwise).

Put another way, the pursuit of unsustainable policies for short term gain. You know, printing vast amounts of money, imposing populist price controls, uncontrolled borrowing (both public and private), market manipulation, that sort of thing. (Anything sound familiar?)

The people that profit from this are simply those smart enough to put their capital to work at the right time. They get out before crisis strikes, and they pile back in at, or soon after, the point of maximum pessimism.

As assets get oversold they buy them on the cheap with the expectation that things will get less bad in future. This is important. You don’t need great conditions to make a lot of money from investments. You just need an improvement from where things stand.

The “paradox of inflation”

One of my favourite investment books is “Tomorrow’s gold: Asia’s age of discovery”, written by well known market commentator Marc Faber (of Swiss origin but based in Asia for several decades). Despite the title, most of the book is taken up with market history, and investigation of various booms and busts.

Something Faber highlights is what he calls the “paradox of inflation”. Here’s his explanation:

“Most investors believe that inflation is bad for financial assets and good for real assets such as gold, silver, diamonds and real estate. However, what is usually overlooked is the fact that, in very high inflation economies, at some point, stocks become ridiculously undervalued in real terms and therefore provide outstanding buying opportunities. I call this phenomenon ‘the paradox of inflation’: instead of producing high price levels, hyperinflation tends to create extremely low prices as currency depreciation (due to massive capital flight) overcompensates for domestic inflation.”

One of the many examples Faber outlines is Argentina during the late ‘70s and ‘80s, when inflation was well into three digits in most years. He says he visited the country in 1988 when inflation was around 600% a year.

At the time you could have bought the whole of a food company called Molinos (PINK:MOPLF) for US$20 million. But by 1994, when inflation had been tamed to 10% a year, the market capitalisation of Molinos had increased to US$515 million. That’s a gain of nearly 26 times in just six years. (It’s now worth US$1.4 billion.)

I happen to know someone who was trading on the floor of the Buenos Aires stock exchange during those hyperinflationary years. He made a lot of money there, and also from buying real estate at various moments of crisis. I know another person who turned US$250,000 into US$$1.5 million, which is a return of six times his outlay in just seven years.

That was from just two sequential property transactions, including refurbishment costs. Also the purchases were for cash and without any leverage from mortgage debt (which is rare and expensive in Argentina). The big profits were because he entered the market in 2002, in the depths of the last major Argentine crisis, and rode the recovery.

Have a look at this chart of how Argentine stocks performed against US stocks since the end of 1987, measured in US dollars and including dividends:

US stocks were left for dust, simply because Argentine stocks were dirt cheap in the late ‘80s. The same can be said for 2002, early 2009, and late 2012. Each of those were buying opportunities.

Back to Asia…(and some hypocrisy)

Now let’s get back to where I started: the Asian crisis of 1997. By the mid ‘90s, too much borrowing and a reliance on foreign capital inflows left many Asian countries exposed. This is what subsequently happened to a selection of their stock markets:

Most of those markets fell by over 90% from peak to trough. Clearly the crisis was brutal. And the remedies, as prescribed by the International Monetary Fund (IMF) and such like, were equally brutal. Interest rates were jacked up to stabilise currencies, public spending was slashed, and the economy / people / jobs be damned.

Which, of course, is completely the opposite of what Western policy makers prescribed for themselves in more recent years. Here’s how Peter Tasker of Arcus Investments, who’s lived in Japan since the 1980s, recently put it in an article for Japan Forward.

“The remedies that the West applied to its own crisis of 2007/8 were nothing like, in fact often the complete opposite of, the harsh medicine it had dished out to crisis-hit Asian countries a decade earlier.

Instead of fiscal tightening and higher interest rates, the U.S. deployed the Troubled Asset Relief Program (TARP) and limitless quantitative easing. Instead of enforced bankruptcies and record unemployment, we had bail-outs of auto companies and stitched-up financial mergers. Instead of deregulation and export booms, we had re-regulation and housing booms.”

Which is ironic and hypocritical to say the least. But either way, there were big profits to be had coming out of both crises for anyone that scooped up stocks at the bottom.

Here’s how Asian stocks (ex-Japan) have performed against the US since their low in September 1998:

Clearly – yet again – buying into a crisis was a great way to make money.

The opportunity most people missed

Those of you with a long memory, or a good knowledge of market history, will remember that there was another market crisis in the late 1990s. That was the Russian crisis of 1998, which involved another currency collapse and debt default.

(It was also the death knell of the over sized, over hyped and over leveraged US hedge fund known as Long Term Capital Management, or LTCM. The fund was full of brainiacs, so it’s a reminder that excessive leverage will always defeat any amount of investor ability, eventually.)

So let’s throw together stocks from all the places I’ve talked about – Argentina, Asia and Russia – and compare them to US stocks since September 1998. That was both the Russian and Asian market low, although Argentina wouldn’t fully collapse for another three years.

Here’s the chart:

Russia clearly stands out a mile, and that’s despite the commodity bubble and bust of 2005 to 2008 and a really bad run between 2010 and 2015. Russian stocks were so cheap in 1998, and things have improved so much since then, that its stock market has left almost everything else for dust. In fact, the only country stock market that I’ve found that’s beaten it is Indonesia, which was one of the countries that suffered most in the Asian crisis.

It’s clear that taking at least some of your investments on a “crisis vacation” can be a highly profitable strategy. Many would see it as “risky”, but in fact it’s usually the opposite.

Despite perceptions, it’s after the collapse when the risks are lowest, and the rewards are likely to the great. It’s before the collapse, when assets are pricey and investors are complacent, where the real risks lie. (US stocks, anyone? Tech bubble?)

Next time I’ll look at where the crisis vacation opportunities are today, places to watch, and also where it’s still too early and uncertain to take the risk.

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.