Every year, I go to the Agora Financial Investment Symposium in Vancouver, both as speaker and attendee. It’s jampacked with people from all over the world who gather at the Fairmont Hotel to share ideas. As soon as I walk into that grand old railway hotel, I know there will be some surprises. This year was no different.
Ideas were not in short supply, but some ideas were more common than others. More than a few speakers spoke well of gold and oil. Most had dim views of the economy and the stock market. And there were at least a handful whose best ideas hailed from some emerging market.
A couple of my favorite ideas came from investors based in Dubai and Moscow. Whole markets rarely go on sale, but here we have two examples of stock markets trading for about 6 times earnings.
Peter Cooper is our man in Dubai, as you may remember, and a friend of mine. From his perch in Dubai, he writes an interesting investing newsletter called ArabianMoney. He is also a self-made millionaire who made it in the Middle East. He sold out near the top. But now, Peter says Dubai is a buy again. In fact, Peter says, the whole United Arab Emirates is a buy.
Dubai, to help with the geography, is one of the seven emirates that make up the UAE. It had a spectacular boom, festooned with palm-shaped islands, tall towers and a ski resort in the desert. Of course, it all went to pot, as these things do when they get ridiculous. But Dubai and the UAE are not going away.
“Dubai is still the trading hub of the Middle East,” Peter tells us, “and the UAE is its Switzerland, a safe haven in a troubled region.” It still has one of the fastest growing airports in the world, as well as one of the fastest growing and largest marine ports at Jebel Ali. The latter has no rival in the Middle East. And I can tell you from personal experience that the infrastructure in Dubai is world-class.
Abu Dhabi is also an incredibly rich place. The per capita wealth is $18 million. That means a family of four is well on its way toward $100 million. Abu Dhabi sits on $3 trillion of proven oil reserves. It has a sovereign wealth fund of over $1 trillion. It has zero debt. As Peter says, “This might be officially classified as a frontier market, but actually, the UAE is more first-world than third-world and has stronger finances than any developed country.”
So why now? Peter says there are many signs of a bottom. The UAE stock market trades for six times earnings. Big positive announcements have no impact on stock prices. There have been 11 brokers that have closed up shop in 2010, as stock market volume is down 90%. It’s the classic example of a bombed-out market in which people have given up. “Even the Swiss bankers are very negative,” Peter says, “so you know it’s time to buy.”
As long as oil holds up, the UAE will return. Peter suggests buying the UAE exchange-traded fund from the National Bank of Abu Dhabi. It’s easy to buy through an HSBC online trading account. This is a good idea, but a bit of a pain to implement. This next idea, though, is much easier to put in action.
Eric Kraus is our man in Moscow, where he is a money manager. We’d only swapped e-mails before, so I was glad to finally meet him in person in Vancouver. I also liked his presentation, which included some surprising ideas on Russia.
For instance, of all the ballyhooed BRIC countries – Brazil, Russia, India and China – do you know which market has done the best over the last decade? Russia.
Now, lots of people – including your editor, actually – have some worries about investing in Russian companies. They are not paragons of disclosure, for one thing. And we all remember what happened to Yukos, which collapsed in the blink of an eye as the government went after it for political reasons.
Our Western sensibilities, though, cloud our vision on Russia, says Kraus. A big part of his message in Vancouver was to say that the Western orthodoxy of free markets, democracy and transparency has little to do with picking winners in the market. The chart above makes that clear. As Kraus puts it, “Ideologically driven disinformation can cost you a fortune.”
Still, Kraus used a lot of words you don’t normally associate with Russia. Kraus describes Russia as “very low risk” with “stable macroeconomics and politics… where reform is going on far faster than Europe, but slower than Asia.” Russia is “by far, the wealthiest of the BRIC countries,” Kraus says.
He called it “a middle-income, moderately high-growth (5%) middle European country with the world’s largest resource base.” It has abundant oil and gas, but also lots of farmland and fresh water and hydropower. Once one of the world’s largest grain importers, it is now a top exporter. (Well, before very recent events…)
Russia also has plenty of cash – the world’s third largest foreign currency reserves. Poverty has been cut way down. So things actually look pretty good for Russia. “Of course, the Western press hates it!” Kraus says. “If you have a long-term time horizon, Russia is a no- brainer. It is the cheapest stock market in the world, at less than 5 times earnings… Cheaper than Pakistan!”
The easiest way to buy Russia is to buy the Market Vectors Russia ETF, which trades under the ticker RSX on the NYSE.
Kraus is particularly bullish on Russia not only because it is cheap, but because he believes the price of many commodities will rise. “Peak Oil is a mathematical certainty,” he says. Not in the sense that we are going to run out of oil, but that prices will rise as we reach for more expensive sources of oil.
“And it’s not just oil,” he continues. “Grades of copper, and nickel and bauxite ores are now being mined, which no one would have bothered digging up a couple of decades ago… Peak water! A lot of places are running dry, and this will have scary effects upon agricultural prices.
“The predominance of the West is an anomaly in history,” Kraus goes on. “It ended with the turn of the millennium.” It is now a “multipolar world” – in ideas and commodities. Instead of the traditional New York- London axis, the economic world will spin on different poles from Beijing to São Paulo.
I think he’s right. It will be a far more complex and interesting world over the next several years as the emerging markets emerge. In the meantime, the market offers up two very cheap emerging markets – the UAE and Russia!
for Markets and Money