Well, the Sayce family has finally arrived in London after just over three days in Hong Kong.
Flying to the other side of the world on a commercial airliner is hardly the most fun thing in the world. Although, it’s probably not the worst. At least we didn’t have to do the same trip on a cattle boat.
But that’s all by the by.
Earlier this week I said that instead of seeing rich Chinese splashing cash on the streets of Hong Kong, I expected to see rich Russians splashing their cash on the streets of London.
The reality is that it’s not just rich Russians. There are plenty of ordinary Russians about the place too. The hotel where I’m staying appears to have sourced half of its staff from Russia.
Perhaps it’s not surprising to see so many Russians here. After all, why would they feel the urge to stay in Russia, facing the prospects of the slow erosion of their wealth?
As the Financial Times reports:
‘Russia lurched towards a financial crisis evoking parallels with its 1998 crash, as the rouble plunged more than 11 per cent on Tuesday despite a dramatic midnight interest rate rise by the country’s central bank.
‘The rouble turmoil showed signs of spreading to global markets, as investors piled into haven assets and German bond yields dropped to a record low.’
So far this year the Russian rouble has fallen 44.1%
And there was me thinking I had something to complain about, with the Aussie dollar around 24% lower than it was in early 2013.
Russia’s fortunes have clearly changed this year, especially in the past couple of months as the oil price has slumped. Investors now worry that if Russia’s oil revenues fall, the Russian government will find it hard to balance its budget and pay debts — especially foreign currency denominated debt.
I know how they feel. I booked our holiday accommodation months ago, planning to pay the bill when we check out of the hotel.
But now, thanks to the lower Australian dollar against the British pound, it could cost be 5–10% more that if I had paid in advance.
But that’s small potatoes.
Besides, the falling Russian currency isn’t bad news for everyone. It certainly isn’t bad news for the Russians I’ve come across even in my short time here in London.
So when one was foolish enough to strike up a brief conversation with me, I asked for his take on it. His simple answer was, ‘That’s why I’m in London.’
You can hardly blame them.
A lower Russian rouble will inevitably lead to higher prices in Russia. That will naturally devalue savings and the value of wages.
So it’s no surprise that as the rouble falls Russians are heading to the shops to offload currency, in exchange for real goods. As the FT reports:
‘The dramatic collapse in the rouble in recent days has not triggered outright panic, but it has prompted a rush to change currency and to stock up on durable goods such as furniture, cars and jewellery before they become even more expensive.’
This isn’t a modern phenomenon. This is how inflation works. When a currency loses value, it causes consumers and investors to dispose of the currency in exchange for real goods.
That can cause the currency to fall further…leading consumers to offload the currency even more. It can develop into a spiralling problem.
This is the story that Adam Fergusson tells in his 1975 book, When Money Dies. He retells the events of one of the most famous periods of hyperinflation — Weimar Germany.
But the same story played out in 1920s Europe in Austria and Hungary.
When the hyperinflationary spiral begins, it’s darn hard to stop it. That doesn’t mean Russia is inevitably heading towards a hyperinflationary death spiral, but it’s something to which investors should pay close attention.
That’s why the savvy Russians have spent years transferring their wealth from Russia to London and elsewhere.
Does this explain why wealthy Chinese are transferring their wealth outside of China too? Better to own a $500,000 watch than have the equivalent of $500,000 in a bank and at the whim of inflationary policies…perhaps.
Food for thought.
Russian stocks haven’t yet made it to emerging markets analyst Ken Wangdong’s recommended buy list.
Ken’s focus has been Chinese stocks. Although he has also tipped an Indian and Indonesian stock. Other emerging markets are also gradually appearing on Ken’s radar.
But the cheaper Russian stocks become, the more they will become the target of interest for speculators.
As the Russian rouble has fallen heavily this year, the Russian stock index has fallen too. So have exchange traded funds (ETFs) tied to the index.
One of the ETFs I’ve monitored this year is the Market Vector Russia ETF Trust [NYSEARCA:RSX]. Despite a decent rally from the low last week, it’s still down more than 43% since the start of the year.
From a high of US$28.97 earlier this year, it closed Friday at US$16.24.
At the Grant’s Interest Rate Observer Fall Conference in October, one of the presenters insisted that Russia was good value. That was before the oil price collapse.
Only a brave investor would dive into Russia now. But that doesn’t mean it or other emerging markets should be off your radar.
As always, it’s just a case of allocating a risk profile to each market. Would I recommend that you make Russian stocks your first bet on emerging markets? No.
For that I still believe China should be your first bet. As I’ve said on many occasions, even if China’s growth rate slumps to an average of 5% per year, it would still result in the economy doubling in size within the next 15 years.
That would be an extraordinary feat…and it’s something every speculator should consider punting on with a small part of their portfolio.
As with all investments, it’s not risk free. But that’s the point. Usually, the best time to invest in a stock is when there is risk. That allows you to buy the stock at a discount and enjoy the rewards as the company or sector grows.
That’s where China is today. It’s where Russia could be a few months from now…
for Markets and Money
Editor’s Note: This essay originally appeared in Port Phillip Insider.