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If you’re looking to invest when the odds are in your favour... where you can make life-changing gains… then look no further than a crisis. When asset prices> READ MORE
If you’re looking to invest when the odds are in your favour... where you can make life-changing gains… then look no further than a crisis. When asset prices> READ MORE
Over the past few days, I’ve been sharing insights from legendary investor Jim Rogers. Jim is a world record holder and best-selling author. His is a voice in> READ MORE
I’ve never met anyone who is closer to the Dos Equis beer guy – the “most interesting man in the world” who, for example, “The police often question just> READ MORE
One of the biggest risks to the global economy is the possibility of an all-out trade war between the U.S. and China. U.S. President Donald Trump has been> READ MORE
Jim Rogers needs little introduction. He’s the man behind the Quantum Fund – one of the most successful hedge funds of all time. Jim is an investing legend,> READ MORE
The basic business of banking hasn't changed a lot since the 18th century BC… when gold stored for safekeeping in temples of Babylon was loaned out by> READ MORE
For many people, there’s no place like home. But if that’s how you feel about your money, you’re doomed to a financial life of sub-par returns. It’s> READ MORE
Editor’s note: Today’s Asia Wealth Investment Daily is written by Brian Tycangco, who recently joined us here at Stansberry Churchouse Research. Brian has more> READ MORE
If you’re looking to invest when the odds are in your favour… where you can make life-changing gains… then look no further than a crisis.
When asset prices collapse, it creates life-changing opportunities to buy (the right) assets on the (very) cheap.
But investing in markets or companies in crisis requires leaving what you know… overcoming your “home country bias”… and running towards the fire. (That’s part of what I do in my investment research service… I travel to off-the-radar – and big-upside – destinations around the globe. Find out more here.)
What follows are three of my favourite examples of markets in crisis that were fortune-making for savvy investors. The exciting thing is that the “before” part of each of these situations exists today – in some market or sector or company… it’s just a matter of finding it – before it becomes the “after” of the examples below.
Today, it’s strange to think of Spain as a fascist dictatorship. However, from the 1930s through the 1970s, its markets and economy were largely isolated from the rest of the world. Europe effectively ended at the Pyrenees, the mountain range separating Spain and Portugal from France.
When Spain’s longtime dictator, Francisco Franco, died in November 1975, the country’s future was up in the air. For several years, civil war and chaos looked like a real possibility. (I lived in Spain at the time… and though as a pre-adolescent I didn’t realise it, the country was at a true crossroads.)
But Spain slowly evolved into a democracy. It adopted a new constitution in 1978, and the government put down a coup attempt in 1981.
The 1982 elections solidified Spain’s transition to democracy and its eventual position in the western military alliance, NATO.
In 1986, Spain joined the European Economic Community – now the European Union. (People rang in the new year, marking the official entry into the EEC, with the cry, “We’re Europeans!” I was living there then… and it made a big impression on me.) At the time, new EEC members received massive infrastructure investments in order to help lift their standard of living to be on par with the rest of the union. These funds fuelled a two-decade economic boom in Spain that only ended with the 2008-2009 global economic crisis.
Investors who saw the opportunity for enormous positive change in Spain in the 1970s could have made returns of 4,300 percent in subsequent years.
In 1983, Sri Lanka, a small island nation south of India, entered a prolonged civil war. The conflict between the Sinhalese ethnic majority and the Tamil ethnic minority lasted 26 years. (It was one of history’s more brutal conflicts… the Tamil Tigers reportedly invented the suicide vest – and pioneered suicide bombing as a war tactic.)
The long war stunted the country’s economic growth and created political uncertainty. Suicide bombings and other terror tactics by the Tamils posed an ongoing threat to the rest of the island. This fueled a steady migration out of Sri Lanka and strongly deterred foreign investment.
Meanwhile, excessive government spending fostered high inflation and constant budget deficits (when governments spend more money than they take in). As a result, Sri Lanka’s stock market suffered low turnover and minimal foreign interest. Sentiment toward the country was overwhelmingly negative.
(In fact, to much of the rest of the world, Sri Lanka’s civil war is what they know of the country… I’ve often been asked, “Oh, are they still at war?” after I mention that I lived there for a few years.)
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In 2002, Sri Lanka’s economy began to slowly improve, and the country made some progress toward political harmony. The turnaround was strong enough to trigger a sharp rally in the Sri Lankan market. In November 2005, the election of President Mahinda Rajapaksa, coupled with a strong public mandate to end the civil war, further fueled the rally.
Then the global economic crisis hit, along with the final and most ferocious chapter in Sri Lanka’s civil war, and in early 2009 the country’s stock market fell sharply.
The Sri Lankan stock market didn’t re-rate until the Tamils were definitively defeated in May 2009. The northern and eastern regions of the country – previously off-limits to investment and economic development because of the war – were gradually re-integrated into the economy, bolstering growth.
Investors who bought Sri Lankan stocks amidst negative sentiment could have made gains of 2,000 percent – though with plenty of volatility along the way.
The sugar industry experienced multiple price shocks throughout the 20th century. That’s not unusual for commodities, which tend to go through cyclical “boom and bust” periods.
Sugar boomed from 1962 to 1964, after the U.S. suspended imports of sugar from the Caribbean island of Cuba. (Socialist Fidel Castro led the Cuban Revolution that ousted President Fulgencio Batista in 1959, and the U.S. imposed a multi-decade economic blockade on the country, as part of its failed effort to undercut Castro.)
In 1964, the price of sugar started to fall. By 1966, the price had collapsed to close to a penny per pound. Finally, sugar was so cheap that demand started to rise. Then, in 1969, the U.S Food and Drug Administration banned cyclamate, a common sugar substitute, after researchers discovered it was carcinogenic. This pushed demand for sugar even higher.
Over the next four years, consumption outpaced supply, and inventories dwindled. This triggered a dramatic increase in sugar prices. Sugar hit a high of $0.64 per pound in October 1974.
Investors who got in at the 1966 low could have made just upwards of 5,000 percent through late 1974.
Today, many markets are close to all-time highs. But there are plenty of assets that are in crisis… or – maybe even worse – are unloved and ignored, and as a result are trading at crisis-like levels.
Finding high-upside opportunities like these are the reason I launched International Capitalist. I look all over the world for attractive investment opportunities with the potential for big – and even life-changing – profits. And for a limited time, we’ve opened International Capitalist to new subscribers… you can learn more about it here.
Publisher, Stansberry Churchouse Research
Over the past few days, I’ve been sharing insights from legendary investor Jim Rogers.
Jim is a world record holder and best-selling author. His is a voice in the investing world well worth listening to.
…Because it could turn every $50
you invest into $2,000 or more.
Today, I’m sharing Jim’s views on what he thinks are the most compelling opportunities in global markets today.
Jim has told me before that he’s interested in disaster… and he still is.
Kim: Jim, where do you see opportunity and good value today?
Jim: I have been shouting that North Korea and South Korea would soon merge for a few years now, and it looks like it’s finally going to happen. [Jim told us that he was bullish on North Korea in 2016.]
Not tomorrow. But unless Mr. Trump messes it up, and he might, that problem is being solved as we speak for many reasons. [North Korea’s leader and Trump are due to meet in a few weeks.] But that would certainly prevent American taxpayers from spending a lot of money… Korean taxpayers… it’d prevent everybody from spending a lot of money. So let’s hope it happens. I would be terrific. It would be a great opportunity for investors. In the North they need everything, they have nothing. Virtually nothing. So it would be a great opportunity for all of us.
You’re probably going to say to me, “What would you buy?” And there’s nothing to buy in North Korea, there’s nothing public I own. North Korean coins. I own Korean Air Lines (Korea Exchange; ticker: 003490) because I assume there’ll be a lot more air traffic. I own a South Korean ETF. [The iShares MSCI South Korea ETF (NYSE; ticker: EWY) is one ETF you can own.] But other than that, I don’t really know a way to invest.
Also, Russia is still hated by most investors, which is terrific, it means it’s still cheap. I am looking for Russian investments. I’ve bought more Russian government bonds recently in rubles because they have a very high yield and I’m optimistic about the ruble – certainly that the ruble is making a bottom, if it has not made its bottom already.
Vietnam is doing very well right now. I prefer the bad things that are hated. But there are big changes in the country, and it’s right on the Chinese border. It’s a country of 90 million people, educated, disciplined, hardworking. They call themselves communist, but take that with a grain of salt.
I’ve mentioned Nigeria and Kazakhstan before.
China. I’m looking for investments in China. China is 40 percent below its all-time high. Japan is 50 percent below its all-time high. I’d much prefer China and Japan to, say, America and Germany. You know, these are markets that are near all-time highs. And I know that watching you guys, you know to buy low and sell high.
Jim mentioned Japan. So I asked him… when we look at debt profiles and countries most likely to blow up from debt, wouldn’t Japan be at the top of that list?
Jim: Absolutely. Japan has staggering internal debts. They have a lot of external reserves, foreign-currency reserves, but they have huge debt and they keep running up debt after debt after debt. I can give you scenarios where there isn’t a Japan in 50 years. I mean, they have a declining population. Their debt is going through the roof. It’s a fantastic country, but it’s in serious, serious decline.
But that doesn’t mean that the stock market cannot go up for a few months, or a year, or two. So I’d rather buy Japan than many other countries.
Kim: It sounds like you’re talking about the disconnect between the fundamentals of a market or an economy, and the direction or trajectory of its stock market.
Jim: There’s a difference in a short term and a long term. I know Japan is going to disappear, but there’s still time to make some money if the world doesn’t fall apart in the next three or 10 months.
Jim has said before that he likes to buy things and own them forever. In his Adventure Capitalist book, he says:
“What success I have had in investing has usually come from buying stock that is very cheap or that I think is very cheap. Even if you are wrong, when buying something cheap you are probably not going to lose a lot of money. But buying something simply because it is cheap is not good enough – it could stay cheap forever. You have to see a positive change coming, something that within the next two or three years everybody else will recognize as a positive change.”
The perfect stock to buy is one that’s very cheap – and which appreciates steadily over time as the valuation becomes less cheap, and/or as the company grows. That might sound straightforward, but it’s not.
(A cheap stock is one that trades at a valuation level – for example, a price-to-earnings ratio or a price-to-book value – that is low, compared to the market as a whole, the sector, or a stock’s historical levels. Whether or not a stock is cheap has nothing to do with the absolute price of a stock. Shares that trade for hundreds of dollars can be very cheap – and a $3 share could be very expensive.)
There are a lot of ingredients to a stock’s valuation – and reasons why a cheap stock might be a value trap, and not be as cheap as its valuation suggests. Bad management, poor use of investment capital, assets that are delivering lower returns and a company operating in a sector that’s in long-term decline are just a few of these reasons.
A value trap can stop being a value trap – and become an attractive, under-valued investment – if there’s a trigger for change. A change in management, a big change in the industry, higher commodity prices, a regulatory change – all of these things can turn a value trap into a great investment. Until there is, they’ll continue to be value traps.
So no matter what markets you’re looking at – whether it’s Japan or Russia – make sure you’re avoiding value traps.
Publisher, Stansberry Churchouse Research
P.S. I look all over the world for attractive, under-valued investments in my newsletter International Capitalist. The returns in those places can be extraordinary. And for a limited time, we’ve opened International Capitalist to new subscribers… you can learn more about it here.
I’ve never met anyone who is closer to the Dos Equis beer guy – the “most interesting man in the world” who, for example, “The police often question just because they find him interesting” and who “learned to speak Russian… in French” – than Jim Rogers.
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Fellow Singapore resident Jim is an investing legend, a best-selling author and a Guinness World Record holder. He’s visited most countries on earth – many while traveling around the world on a motorcycle and by car (forming the basis of two of his books, Investment Biker and Adventure Capitalist). (If you haven’t read them… you should.)
In addition to his great investing insights, Jim is an authority on how to follow your passions.
(Dos Equis is a brand of Mexican beer… and the most interesting man in the world was an entertaining ad campaign they ran.)
I recently sat down with Jim for a chat… below are excerpts of our conversation.
A bit more than a year ago I spoke with Jim and asked him about this…. here’s what he told me:
Jim: Well, the most important thing for everybody is to only get involved with what you, yourself, know a lot about, or… figure out your own passions and pursue your passions. Don’t listen to me. Don’t listen to your teachers. Don’t listen to your parents. Don’t listen to your friends – especially your friends. They all want to do whatever is popular and hot at the moment, your parents too, and your teachers too, probably.
No. Figure out about your own passions. And if people laugh at you, you’re really onto a good thing. You’re really probably going to be very successful, if you pursue your own passions and figure out how you would like to spend your life and that way you never go to work. You wake up every day, you have fun… just start doing what you love, you don’t care about weekends, you’re just having too much fun to worry about work.
… Those are the people who are most successful, and of course they are the happiest people. And if they’re not successful they don’t care, because they’re happy. They don’t care if they’re successful or not, they are so happy having so much fun.
… I mean, Kim, if you want to be a gardener, you should be a gardener. Now, your parents are going to say “What is going on here? We didn’t spend all this money raising you and educating you to be a gardener,” and your teachers are going to say, “Why are you even here? Why don’t you leave and go be a gardener? What a waste.” Your friends… they’re going to laugh and giggle.
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But then someday you’re going to be the gardener at the White House, or Buckingham Palace, and someday you’re going to have a chain of garden shops, all across Asia. They’ll be listed on the Hong Kong Stock Exchange, New York Stock Exchange… Your parents are going to say, “Kim, we used to give you seeds because we could see. We knew you had it in you.” And your teachers are going to say, “We always used to encourage you, remember how we encouraged you to be a gardener?” And your friends are going to call up and say, “Kim, oh my God, it’s been a long time…”
… that’s how you become successful and happy.
In our sit down a few weeks ago, I asked Jim that if there was a message, a thought or idea, that he could put on virtual billboard that billions of people would see, what would it be?
Jim: Buy low and sell high. [He laughs.]
I’d tell them to learn a second language, especially Chinese… not get married too early… don’t have children too early… put your money somewhere safe… get a job when you’re young.
My daughter turned 14 recently. I told her she had to get a job when she was 14, because it’s good for children.
I thought she would go to McDonald’s and make US$8 an hour. Instead, she’s teaching Mandarin at US$25 an hour. I mean, this kid’s smarter than I am, a lot smarter than I am. And she complains because the grownup teachers make US$80 an hour. She thinks she should be making what they make. So having a job when you’re young is very important.
Another piece of advice Jim has given me in the past is to talk to everybody you can…
Jim: I’m trying to teach my children – they’re still very young – to get information from five or six different sources, preferably contrasting sources, left-wing, right-wing, call them what you will, from different countries and then you figure out what’s really happening. If you read the Communists and the fascists and the Nazis and the capitalists or the religious, if you read them all, you get all sorts of different views, but it’ll help you figure out what really happened.
Sometimes, I get interviewed by different kinds of people. A few will say, “Well, why are you talking to them? They’re nuts, they’re crooks, they’re blah, blah,” whatever they have to be. And I try to say, “No, no, first of all, the one problem in the world right now is we don’t talk to each other. We should be talking to everybody, no matter what you think of them. And second, that’s how you get your message out. If you talk to them, they have to listen to you no matter how nuts they are. And also, you can help possibly change the world.”
So talk to everybody. The weirder the better.
Again, Jim Rogers isn’t just an authority on investing… he’s a great resource for how to live your life to the fullest. So when he talks, I listen.
Publisher, Stansberry Churchouse Research
P.S. I also write International Capitalist, where I focus on investment opportunities in markets that are even of interest to the Most Interesting Man in the World. I focus on out-of-favour stocks in out-of-favour markets… or else places that you’d just never think of looking at. And the returns in those places can be extraordinary. You can learn more here.
One of the biggest risks to the global economy is the possibility of an all-out trade war between the U.S. and China.
U.S. President Donald Trump has been demanding that China make trade concessions to cut the U.S. trade deficit with them by $200 billion – more than half the current annual trade deficit of $375 billion. (A trade deficit is the amount by which the value of a country’s imports exceeds its exports… the common perception is that they’re bad, but the reality – as with a lot of things – is a lot more nuanced.)
And over the weekend, U.S. Treasury Secretary Steve Mnuchin and China Vice-Premier Liu He came to a “consensus” about trimming the U.S. trade deficit with China.
Markets will likely cheer this on Monday. But as we’ve written before… it’s not over. The reality is that China – not a country to act counter to its own best interests – hasn’t made any meaningful concessions.
Since becoming U.S. president, Donald Trump has strong-armed – and cajoled – others to come to the negotiating table.
At the onset of his term, he threatened to slap 40 percent tariffs on U.S. manufacturers who wanted to keep their factories in Mexico.
So a number of companies, including Ford and Chrysler, revisited their cross-border expansion plans and instead opted to increase jobs in Michigan.
He later threatened North Korea’s Kim Jong-Un… and now, talks between Trump and Kim Jong-Un about the denuclearisation of the Korean peninsula are set to happen on June 12 in Singapore.
He’s also made good on promises to pull out of existing deals that his administration viewed as detrimental to the U.S. economy and national security. He pulled the U.S. out of the Trans-Pacific Partnership, a 12-country deal that would encompass around 40 percent of total global output.
And after more than a year of threatening to withdraw from the Iran nuclear deal if it was not renegotiated, he scuttled it last week.
But China is an 800-pound gorilla that’s the world’s rising – soon to be pre-eminent – superpower. With a $14 trillion economy and a population four times the size that of the U.S., China is not going to be pushed around.
China is also the United States’ largest single creditor, holding $1.19 trillion of U.S. treasuries. And China has actually been increasing its holdings recently – up by $100 billion over the last 12 months.
Expecting China to immediately reduce exports to, and increase imports from, the U.S. by a figure that’s as big as the economy of Greece is like hoping that an 800-pound gorilla is going to shave off its hair and put on a tutu… just because you ask it to.
It’s not going to happen.
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One of the key takeaways from the trade talks over the weekend in Washington was that China agreed to significantly increase purchases of U.S.-made goods – goods that will support the development of its own growing economy.
In particular, Vice-Premier Liu He agreed to increase imports of U.S. agriculture and energy products.
Interestingly enough, these are two segments where China is already a major net importer – and where it will undoubtedly continue to be for decades to come.
According to the U.S. Department of Agriculture, China is set to import a record 103 million tonnes of soybeans this calendar year, up 6.1 percent.
Soybeans account for the vast majority (90 percent) of U.S. agriculture exports to China, worth $12.4 billion a year. Even if China increased its imports of US soybeans by 10 percent, it would only make a $1.2 billion dent in the $375 billion-a-year deficit.
In energy, China has already been making a lot of U.S. oil and gas companies very happy. Imports of crude oil and petroleum products from the U.S. into China grew by 120 percent year-on-year in February.
So in reality, China had already been doing what it just said it told the U.S. over the weekend that it would do to help reduce the trade deficit.
That suggests that the trade deficit isn’t going to shrink the way Trump wants it to.
We should be prepared for more trade war rhetoric from both sides once Vice-Premier Liu He returns home to China from his trip to his nation’s biggest debtor. And that is virtually assured to result in more volatility in the markets.
So just because markets might exhale in relief, it’s no reason to think that things are all OK.
We’ve been suggesting that you take some simple steps to take to prepare for a crisis – such as a meltdown of US-China trade relations. For starters…
Don’t borrow too much to invest. Investing with borrowed money will make big losses even worse.
Hedge. Understand correlation in your portfolio. Try to have some holdings with prices that usually move in opposite directions.
Prepare for opportunity. Keep some cash on hand so you’ll be ready to invest at cheap prices when everyone else is running away. If you’ve been expecting the unexpected, you’ll be prepared to take advantage.
Editor, Stansberry Churchouse Research
P.S. And there’s also a great way to profit from the possible outbreak of a trade war… see our presentation here about an asset that could rally sharply if, and when, things heat up.
Jim Rogers needs little introduction.
He’s the man behind the Quantum Fund – one of the most successful hedge funds of all time. Jim is an investing legend, best-selling author and Guinness World Record holder. So when he speaks, smart investors listen.
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I’ve had the pleasure of sitting down with Jim a few times to get his thoughts on the markets… life lessons… and where investors should put their assets today.
What follows are a few excerpts from our conversations…
Kim: If you were buying assets to put into the retirement accounts of your two daughters, what would you invest in? In other words, how do you see markets unfolding over the long term?
Jim: If you sold U.S. stocks in 1916, you’d have looked smart for a year or two. But over the past century, of course, the U.S. has been the big story. And in coming decades, China will continue to emerge. It’s going to be the big story. So with that kind of time horizon I’d be looking to buy shares of Chinese companies, and looking past the challenges that China is facing now and will continue to face in coming months.
Kim: What about, when we’re speaking of China, the One Belt One Road Initiative? When you look at that, do you see it as this enormous investment opportunity, or do you see it as a geopolitical black hole that China is just shoveling money into?
Jim: It may be both, but it’s certainly a great opportunity.
It’s rare that geography changes. Five hundred years ago, the Spanish and the Portuguese started sailing around the world, changed geography. Two hundred years ago, we found the railroad, changed geography. In America, there’s a city called Chicago, everybody’s heard of Chicago. But Chicago is only there because of the railroad. Denver, a big city in Colorado, is only there because of the railroad. The railroad, for example, totally changed world geography.
The Chinese are doing the same now with One Belt One Road. Some people are going to make vast fortunes. If you’re left out, you’re going to disappear and nobody will ever hear of you.
I live in Singapore. And Singapore’s going to have problems because much of what will be transported is going to go around Singapore. Part of Singapore’s key to success in the past 50 years is its port. As Asia started booming, this port became the most important port in the world.
Well, now it’s not going to be the most important port in the world. So some people are going to suffer, some people are going to boom. Kazakhstan, Central China, many places are going to actually boom now because of this. Figure out where and you’ll get rich. You get the wrong places, nobody will ever hear of you. There are cities in America that nobody ever heard of because they disappeared – because the railroad went the other way.
Kim: All right – China. Where else should people put their pensions?
Jim: Beyond that? Maybe gold. It’s preserved its value over long periods of time.
That, and a farm in North Korea. I’m a big believer in agriculture and farmland. And at some point North Korea will join the rest of the world.
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Agriculture is probably going to do well, even if the world comes to an end, because agriculture has already been going down the tubes for 35 years now. Agriculture has been terrible. I would suspect that’s a place to rescue yourself.
Probably the best thing to do is to become a farmer. I’m not going to become a farmer. But if people want a new life outdoors, especially in China, the Beijing government is doing everything it can to help farmers and to help the countryside. So agriculture, especially in China. And Russian agriculture because of what’s happening with sanctions. But agriculture worldwide.
Kim: You mentioned farmland, being a farmer. What about real estate more generally?
Jim: Well, Kim, it’s a big world out there. I wouldn’t buy a property in New York or Hong Kong. But I might buy a farm in Central China or in the agriculture part of China.
There are bubbles in Qinghai, certainly there are other Chinese bubbles. New York has already started going down, London has already started going down. These were bubble cities.
If you want to buy a property, what I suggest you do is go to China and buy a farm. Get yourself a Chinese wife who’s a farmer and you’ll be very, very happy.
Kim: What other markets are on your radar?
Jim: Well, Vietnam. I don’t know if I mentioned it last time. Vietnam is doing very well right now. I prefer the bad things that are hated. But there are big changes in the country, and it’s right on the Chinese border. It’s a country of 90 million people, educated, disciplined, hardworking. They call themselves Communist, but take that with a grain of salt.
I’m trying to figure out about Korea. It’s a place that’s going to be very exciting soon, if it’s not already starting. Nigeria, Kazakhstan.
Again, China. I’m looking for investments in China. China’s market is 40 percent below its all-time high. Japan is 50 percent below its all-time high. I’d much prefer China and Japan to, say, America and Germany. You know, these are markets that are near all-time highs. And I know that watching you guys, you know to buy low and sell high.
Publisher, Stansberry Churchouse Research
The basic business of banking hasn’t changed a lot since the 18th century BC… when gold stored for safekeeping in temples of Babylon was loaned out by priests.
Today, depositors give banks their money, and banks pay interest to depositors. In turn, banks lend most of those deposits at a higher rate of interest. A bank’s profits are the difference between these two.
So the higher percentage of its deposits that a bank can lend out, the bigger the profits.
However, central banks generally require that banks set aside a certain portion of their deposits as reserve. That reserve is often placed with the central bank, earning a very low rate of interest.
Additionally, a bank has to keep some cash for depositors who want to withdraw their cash. If a bank lent out US$100 million and only had US$2 million of capital on its books, all it would take for the bank to go under is for 2 percent of those loans to go sour… or for depositors to demand just US$2 million back. Then the bank would need to ask the central bank to help them out.
Depending on the banking system, commercial banks are required to keep anywhere between 3 percent and 10 percent of their deposits (called the reserve requirement ratio) in the central bank safe, to account for potential bad loans, or depositors who want their money returned.
In addition, they have to maintain capital equivalent to about 15 percent of their assets.
That means that out of deposits of (say) US$100 million, banks actually only have about US$85 million to lend out and make money from.
This means that how efficient banks are at managing costs is a big driver of profitability.
When prevailing interest rates are high, as set by each country’s central bank, banks are happy.
A bank that pays out depositors 2 percent (which is what I’ve gotten used to seeing over my lifetime) is happy when they can lend out at 8 percent.
But when interest rates come crashing down, as they have been over the past eight years, banks’ margins dwindle.
The piddling 0.05 percent you’ve been earning in your savings account also means that your bank is lending out at only 4 percent.
They’ve lost around 2 percent of interest margin, because they just about hit the floor in terms of interest paid on deposits.
So as interest rates fall, banks compete against each other for loans. They are forced to be more efficient. They have to come up with new ways to make money from their customers. And their profits get squeezed like a lemon.
That’s where innovation matters.
Now if you want to see an example of banks that are slow to innovate, I’m sure many of you will agree with me that U.S. banks definitely qualify.
For example, for many U.S. banks, including Bank of America, it still takes two or three full days for cheques to clear. Electronic transfers are equally slow.
That’s because many U.S. banks still rely on decades-old infrastructure for their backroom operations. They either haven’t gotten around to upgrading their systems, or simply won’t spend the money.
Now, I’ve been all over the Asia region, and I keep accounts with banks in Singapore, Hong Kong and the Philippines.
And based on my experience – and following the sector – I can say that Singapore is home to the most innovative and profitable banks in the region, if not the entire world.
In Singapore, technology allows your bank to clear a cheque within 24 hours, as long as you deposit it before the cutoff time. Overseas transfers are just as fast.
Meanwhile, payments and transfers using online bank accounts to local companies are instantaneous.
Singapore’s top three banks are DBS Group, Oversea-Chinese Banking Corporation (OCBC), and United Overseas Bank (UOB).
They have a combined market capitalisation of US$135 billion – which is less than half the size of Bank of America.
They’re still minnows in terms of market capitalisation when compared with U.S. banks, but they’re more profitable. The return on equity of Singapore’s banks is far higher than that of the biggest U.S. banks.
Not surprisingly, they’re also way ahead in terms of efficiency, as measured by their cost-to-income ratio. This is basically the bank’s operating expenses divided by its operating income. The three big Singapore banks spend about US$4 for every US$10 in income; for the biggest American banks, it’s between US$5 and US$6.
During the lows of the interest-rate cycle sometime in 2016, Singapore’s three biggest banks were lending out between 85 percent and 90 percent of their deposits.
That compares with a loan-to-deposit ratio of between 65 percent and 85 percent for the five largest banks in the U.S. That means that the rest of the money from depositors – from 15-35 percent in the U.S. – isn’t generating revenues for the banks… compared to just 10-15 percent in Singapore.
But that doesn’t come at the expense of safety. The average capital reserves of these Singaporean banks was 16 percent – double the 8 percent required by the Monetary Authority of Singapore.
Meanwhile, Singapore’s banks maintained one of the lowest non-performing loan ratios (the ratio of delinquent loans to total loans) in the global banking industry.
So Singapore’s biggest banks are extremely well capitalised. They’re also very efficient in lending out their deposits when the interest rate- cycle goes down. Recent earnings for Singapore’s biggest banks have also been strong, reflecting higher interest rates – as well as Singapore’s economic strength, and low unemployment.
Right now, the overall sentiment in the U.S. banking industry towards blockchain and cryptocurrencies is one of fear.
Some of the biggest financial institutions and investors in the U.S. have come out openly to chastise and lament blockchain and cryptocurrencies.
JP Morgan Chase CEO, Jamie Dimon, famously said “If you’re stupid enough to buy it [bitcoin], you’ll pay the price for it one day.”
Robert Shiller, Nobel laureate and the namesake of one of the most widely cited stock market valuation measures, thinks bitcoin will “totally collapse.”
But in Singapore, the attitude towards blockchain and cryptocurrencies is very different.
Their biggest banks, as well as the central bank, see it becoming an important and indispensable technology and tool for enhancing efficiency in banking and a host of other industries.
For example, OCBC has been using blockchain technology for local and cross-border payment funds transfer services. I’ve used it… It’s fast, easy and efficient.
And Singapore has become a hotbed for blockchain and cryptocurrency startups. It’s home to CoinGecko, one of the world’s biggest cryptocurrency data providers, as well as DigixGlobal, which allows users to exchange cryptocurrency into physical gold on demand.
But the most obvious beneficiaries – and the most accessible to ordinary investors – of the acceptance of blockchain and cryptos right now are Singapore’s biggest and most innovative banks.
While banks in other markets see blockchain and cryptocurrencies as threats to their traditional business model, Singapore’s banks are pouring billions of dollars into developing new services to exploit the time and cost savings of blockchain.
A great way to invest in Singapore’s three banks is through shares of the SPDR Straits Times Index ETF (Exchange: SGX; ticker: ES3).
Its top three holdings, comprising 41.5 percent of its total assets, are Singapore’s three largest banks. The ETF also pays a 2.9 percent dividend yield.
Another way to gain exposure is through the iShares MSCI Singapore ETF (NYSE; ticker: EWS).
It also counts Singapore’s three largest banks as its three largest holdings, with a 42.3 percent total weighting.
Editor, Stansberry Churchouse Research
For many people, there’s no place like home. But if that’s how you feel about your money, you’re doomed to a financial life of sub-par returns.
It’s natural to want to invest at home. If you live in Singapore, for example, you see the Straits Times Index quoted every night on the news. You drive by the DBS building every day. If you’re based in Hong Kong, you’re used to watching the Hang Seng Index. And if you’re American, U.S. markets are probably your first investment stop.
But thinking that investing at home is safer is a dangerous investing myth. If you’re only investing at home you’re putting your portfolio at risk… and more often than not, you’re missing out on big gains.
That’s why we believe everyone should have some international exposure in their portfolio. So today, we’re debunking three of the biggest myths about international investing…
Stock markets around the world have been rising over the last decade…
For example, the MSCI All Country World Index (which reflects the performance of global stock markets) is up 201 percent since global market lows in March 2009. The S&P 500 is up 303 percent over the same timeframe. And now, by many measures, U.S. equities are overvalued.
So you’d be forgiven for thinking that stocks around the world are expensive.
But there are lots of markets that are still cheap…
One of the best ways of measuring market value is to use the cyclically-adjusted price-to-earnings (CAPE) ratio. It’s a longer-term, inflation-adjusted measure that smooths out short-term earnings and cycle volatilities to give a more comprehensive, and accurate, measure of market value.
As you can see in the chart below, it’s true that stocks are expensive in the U.S., Denmark, Ireland and other markets based on CAPE.
But there are plenty of cheap markets too. The below chart shows the 10 cheapest markets by CAPE ratio.
Russia, the Czech Republic, Turkey and Poland are considered the cheapest countries based on CAPE. So there’s still value out there.
As I said earlier, people invest mostly in their home market. This is called “home country bias” and it refers to the tendency of investors to have a portfolio weighting bias in favour of their local market. And as we’ve written before, investing in what you know – which is generally what you see around you – is generally smart.
For example, as shown in the graph below, the average American with a stock portfolio has 79 percent of her money in U.S.-listed stocks. Investors in Japan put about 56 percent of their money in Japan-listed stocks. People in Australia have around two-thirds of their portfolio in local shares.
The ugly truth about the crypto market is that most people will not get rich — for a very simple reason.
That might be what they’re comfortable with. But from a portfolio diversification perspective, it’s like juggling live dynamite.
As the graph below shows, American stocks account for only 53 percent of total global market capitalisation (that is, the value of all stock markets in the world). So American investors are a lot more exposed to U.S.-listed companies than – based on a breakdown of the world’s markets – they should be. Japanese investors are even more lopsided in their home preference – Japan accounts for only 8 percent of the world’s stock market, yet they invest 56 percent of their money at “home”. And Australians put 64 percent of their money into their own market – which is just two percent of the world’s markets.
Why is this a problem?
Home country bias can put investors’ portfolios at risk if their local economy suffers a downturn.
If all of your assets are in American stocks, bonds and dollars, what happens if the banking sector goes bust… the dollar massively devalues… the real estate market crashes… or the government starts searching for ways to plug a massive budget deficit, to the detriment of your retirement portfolio? Your U.S. assets are just cherries for the picking.
So one of the best ways to protect yourself against a domestic downturn – or worse – is to have some exposure to foreign stocks.
Many investors think big, developed markets like the U.S., Europe and Hong Kong tend to perform the best. But if you’re only investing in markets like this, you’re missing out on big gains.
Just take a look at this chart…
As you can see, in 2017, the S&P 500 was up 21.3 percent. The Singapore Straits Times Index returned 31.9 percent. And the MSCI World was up 24.6 percent. But other markets did done a lot better… like the 55.6 percent return from the MSCI China Index or the 43.1 percent return from the MSCI Asia ex Japan Index.
My point is that diversification is critical… you might do well for a while with being overweight in your home market, but over the long term you’ll perform better (and catch the outperformers) by diversifying.
Publisher, Stansberry Churchouse Research
Editor’s note: Today’s Asia Wealth Investment Daily is written by Brian Tycangco, who recently joined us here at Stansberry Churchouse Research. Brian has more than two decades of experience analysing Asian companies and stocks – and he’s incredibly good at it. From his base in Manila, in the Philippines, Brian has wandered all over the continent in search of exciting investment ideas. I’m thrilled that he’s joined our team – and I’m sure you will be too. This is Brian now…
This urgent briefing reveals why we could be just days away from seeing multiple “ten-bagger” gains. Learn more here.
Car sales in the world’s two biggest car markets, China and the U.S., are big news.
Together, these two markets account for over 47 million cars sold worldwide. That’s nearly 60 percent of the global car market.
But they’re big news for the wrong reason.
After years of growth, car sales in China increased just 3 percent in 2017. Meanwhile, in the U.S. they fell by 1.8 percent.
Declining U.S. car sales are a result of banks tightening lending standards on auto loans for seven straight quarters.
Meanwhile, Japan, the world’s third-largest market, had a good year with 5.3 percent higher sales than 2016, thanks largely to consumer excitement over new models, and the popularity of electric vehicles and hybrids.
During a recent visit to Japan, I noticed far more Teslas, Nissan Leafs and Priuses than ever before.
Even the car rental company that I used had a long list of hybrids and all-electric cars to choose from.
As for Germany, the fourth-largest car market, growth there clocked in at a modest 2.7 percent.
What is clear is that the global car industry has hit a peak after five to seven years of breakneck growth.
However, one country is bucking the trend…
I’ve been skeptical of India in recent years, because of its inability to carry out much-needed reforms.
But under the leadership of Prime Minister Narendra Modi, the world’s largest democracy seems to be making marked progress.
Of 30 major reform programs initiated by Modi since he took office, he’s delivered on nine of them, including four focused on infrastructure.
These include removing most restrictions on foreign investment in construction projects, as well as allowing 100 percent foreign direct investment in India’s decrepit railway sector.
Road construction is booming, with the Ministry of Road Transport and Highways looking to expand the national highway network by 20,000 kilometers (66 percent) over just the next two years.
With all the new roads and highways popping up, it’s no surprise more people in India are catching motor fever.
And with a household debt-to-GDP of just 9.7 percent, they have the financial wherewithal to buy new cars. That compares to 80.1 percent in the U.S., 58.6 percent in Japan, and 48 percent in China.
Indians just needed a good reason to buy cars – like having enough roads to drive on. And now, increasingly, they do.
Last year, India’s growing middle class pushed passenger car sales up 8.8 percent, to 3.27 million.
That put India ahead of the United Kingdom to become the world’s fifth-largest car market.
While India’s car market is still a far cry from China and the U.S., it will likely be the single brightest spot in the global car industry over the next three to five years.
That’s because India’s car penetration is still a fraction of its global counterparts.
At only 50 cars per 1,000 people, India will have to sell 104 million new cars (that’s more than 30 times last year’s sales) just to reach the same level of penetration as China.
I’m already seeing the same kind of takeoff growth in India that I saw happening in China in the early 2000s.
In March alone, Indian passenger car sales grew 12 percent year on year.
That puts the country on track to surpass Germany to become the world’s fourth-largest car market by the end of 2018.
This is clearly one market to keep an eye on.
Editor, Stansberry Churchouse Research
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