For successful investing it is necessary to realise, that any country where the government protections are so bad that their own citizens are leaving, there is no place for foreigners to be going the other way
To pick a good restaurant the expression goes, find a place with a full parking lot or a line out the door. This is also true of investing. The proven concept of momentum is always a good way to make money. Finding a hot stock that everyone wants and then going with the flow for a short time is an excellent strategy. It is also wise to ask the locals. They invariably know the best places. This is true for investing in countries as well. Sadly no one does it.
Most investors believe the BRIC (Brazil, Russia, India and China) countries are great places to invest. There are no less than 340 BRIC investment funds sold in different markets around the world. Although in the past six months these funds have fallen about 15%, in the two years prior to April 2011, these funds have increased over 100%. This is supposed to be evidence of the vibrant growth of emerging markets until you contrast it to the US market which increased 75%.
Still if we look at the turbulence in Europe, the BRIC countries do seem to be an attractive place to invest in the long-term. Economists and analysts have other good reasons. Certainly the European sovereign debt crisis is an excellent example that the developed world has too much debt. The second reason is that the developed world is too old. There are too many retirees for each worker. Third, the developed world has too few natural resources. These are all good reasons, but they miss the most important ingredient of economic growth. It is not important that economists believe in it. For the forecasts to be accurate, the local people have to believe in them. In places like Russia and China the locals don’t.
In Russia many people just want to leave. According to a recent survey the number of people, mostly young people, thinking of leaving has risen to 44%.The well-educated readers of the Novaya Gazeta, a newspaper famous for its investigative coverage, were even more adamant about getting out, 62% wanted to go. For good reason, it takes 10 to 20 years to buy a flat and five years to buy a car. There are no chances for promotion. It's very hard to set up your own business and loans cost 20% to 30% a year. A half a million Russian citizens have moved to China including businessmen, students and even pensioners.
It is not just the young. The rich want out too. The price for high-end London real estate in September of 2011 was 4.5% higher than the last price peak reached in March 2008 due to purchases by wealthy Russians. Cypriot banks have a tonnes of off shore Russian money which they sadly invested in Greek debt. So much so that Moscow is negotiating a 2.5 billion euro loan to Cyprus to shore up its banking system.
But it is not just the Russians. The Chinese and their money are leaving too. According to a real estate agent of expensive international real estate, “The primary motivation for Chinese buyers is to export wealth out of the country… They prefer luxury properties because they can transfer large amounts in one go.” According to a survey taken by the Bank of China about 60% of rich Chinese people, wealth in excess of $1 million, have already begun the process of emigrating or are considering doing so. They cannot even keep the corrupt officials. They have exported an astonishing $123 billion over the last 10 years.
The reason is simple, poor governance. China is plagued with institutionalised corruption that infects every part of society. The food is often poisoned. Doctors have to be bribed to get good treatment. According to one mom, “Nine out of ten of my friends complain that they have to bribe their children’s teachers or schools in order to get proper or better education”. The real problem is the lack of any protections for rights, both human and property. In China there is no security for wealth or possessions. They can be taken away at any time.
The leaders of Russia and China have powerful security services. They routinely spy on all aspects of their citizen’s lives. One would think that equipped with this power they could crack down on corruption. They can’t, for the simple reason that they would be arresting themselves.
What these leaders along with western economists, investors, and commentators do not understand is the economic cost. If your best and brightest are heading toward the exits in droves, they will take with them capital and expertise necessary for economic growth. For successful investing it is necessary to realise, that any country where the government protections are so bad that their own citizens are leaving, there is no place for foreigners to be going the other way.
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).