The world is filled with intelligent people in finance. Unfortunately, being intelligent doesn’t always mean you are smart. To make sound investments, you need to be looking forward and constantly coming to rational conclusions. One has to avoid sheltering oneself in a herd of backward focused investors taking comfort in performing in line with the masses. Patting yourself on the back as all markets are trending higher and wallowing in ignorant pity as markets drop lower saying “who would have saw that coming” is shamefully common and accepted. I bring this up because mainstream financial news constantly encourages the belief that markets are void of opportunity. Investors must accept 5% expected returns on equities in the long-run, right? Start thinking for yourself and you can see some broadly diversified country specific equity markets still hold astronomical return potential. You just have to look where most have been conditioned to avoid.
Markets move with asymmetric skews. Markets seem to slowly grind higher for a protracted cycle as investors begrudgingly invest at higher highs hoping for pullbacks that do not materialize. This is due to hyperactive central banks doing all they can to keep economic cycles extending longer and high-volume traders and others front running longer focused investors. This is a short-sited byproduct of political pressure to keep the good times rolling on for current politicians. What this means is that when there is a downturn or recession, it will be a dozy. Shorter economic cycles ensure the upswing and downswing are mild as excesses have difficulty building up. But these long protracted economic cycles lead to many excesses being subsidized. When the downswing comes, the market is in for a protracted difficult period. Therein you can find significant upside potential when a market leaves this protracted down cycle and turns for a long ascent higher.
When these asymmetric down cycles hit, they can be devastating and take a long time to form a bottom. But when those markets do find footing, the upside is enticing. Most developed markets hit their downside in 2009 and stayed near those levels for a while. But as money from central banks started to flow and percolate in the system and the wounds from the downturn turned to scars and finally forgotten, many of these markets have gone on to reach new highs. If you invested in these markets at the lows, such as the Dow Jones Industrial Average in 2009, you would have made a 300% return. If you talk about making a 300% return today, you’ll be dismissed as a traveling snake oil salesman.
Now I ask you to think of a market that had a similar downside to the Dow Jones in 2009 but has not recovered. The conclusion is obvious: PIIGS! Yes, that lovely acronym that so negatively and recklessly contributed to such a deep correction represents none other than Portugal, Italy, Ireland, Greece and Spain. Lambasting such negativity with a cheeky acronym encouraged limited liquidity and deep recessions. Traders and investors had to evacuate those markets or pay the price of public humiliation when simply making a value trade. When negative media lasts for so long, investors figure it will last forever, forgetting the potential upside embedded in these markets.
This is where you have to think for yourself. Instead of avoiding a market because other investors have no interest or being influenced by the onslaught of negative media constantly singing the same tune of dire conditions, take a deep look. This comes back to my point of intelligent people. Intelligent people can make a deeply analytical and compelling argument why to invest in or avoid a market. Careers have been made with articles and speeches about the problems of these countries. For over a decade, there has been a plethora of negative news and a dearth of positive news. But as these markets finally turn and overcome the last of their economic hurdles, first a few, then many intelligent people will come out of the woodwork expounding the positive virtues of these markets. And taking a deep dive into these markets reveals abundant reasons to be ecstatic. One glaringly compelling reason is that many companies trade at deep discounts to book value – some as low as 20% of book value!
Taking a look at these countries, the potential returns if the main benchmark equity indices revert to their prior high water mark are:
Portugal 160%
Italy 250%
Ireland 160%
Greece 1,000%
Spain 160%
These countries have overcome their deepest economic hurdles and are now positioned to begin their ascension to a long and protracted upswing. Even Greece seems to be less than a month or so away from finalizing their debt financing from the Eurozone and IMF and having their debt included in the ECB’s quantitative easing program. Greece is starting to experience and expected to continue to experience what is considered robust GDP growth. The latest Industrial production for January 2017 showed growth of 7.2%! This is hardly the dire conditions priced into the market. Yes, the proverbial punching bag that everyone likes to beat has turned the corner. I’m not sure what negative news the media will focus on next, but soon these countries will be out of vogue. Just remember: when nurtured and cured for a prolonged period, like making prosciutto from a pig, great price appreciation can occur. After curing for almost a decade and as these indices recover and show some stellar returns that we have been relentlessly told don’t exist, just hang in there. Those stellar returns are just the beginning. So keep being intelligent, smart and invest looking forward with a PrOGRessive SPIRIT (my positive, cheeky acronym - hope it catches on!).
by Michael Carino, 3/1/17
Michael Carino is the CEO of Greenwich Endeavors, a financial service firm, and has been a fund manager and owner for more than 20 years. If you are smart, you have surmised correctly he is invested in Greek equities.
Investment veteran and published author, Michael Carino, prophetically called the timing and amplitude of the recent move in global bond markets publishing “Global Bond Markets – Skydiving Without a Parachute.” Michael has spent the last 25 years managing fixed-income hedge funds and trading of over a trillion dollars of investments. He is the CEO of Greenwich Endeavors, a financial service firm. He feels compelled to get his unique and under-reported views on the markets out to the public. He hopes to assist your readers’ creation of wealth and limit your readers’ destruction of wealth. It's time a voice contrarian to other self-interested, behemoth Investment Managers’ voices are heard.
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