BRICs, PITs, And PIGS: Go Ugly by Michael McGaughy, Minority Report
In my research and investing I stress three things: people, structure and value. I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.
This blog is mostly about valuation and yet another example of how investing in beaten down, unpopular and ugly markets can lead to better returns.
Usually valuations are low in markets that are not very attractive. But who knows when the news can get even worse? Uncertainty and negative news flow keep most of us out of markets just when we should be buying.
And it can take even greater will power to stay invested when nobody around you sees your point of view, friends and peers are calling you crazy, and well-educated, respected and slick investment bank analysts and traders are negative.
It is psychologically easier to invest in markets when there is a lot of good news and the future looks very bright. The problem is that these markets tend to be expensive and future returns tend not to be as good.
To contrast these two points let’s look at two acronyms that surfaced about the same time.
BRIC stands for Brazil, Russia, India and China. The acronym is attributed to Jim O’Neill in a paper he wrote for Goldman Sachs in November 2001 (found here). In it he argued that these four countries should be included in high-level government groupings such as the “G7” because their size and growth would make them increasingly influential.
The acronym came out not long after the tech crash. Wall Street was ripe for a new story and over the next few years the term became more popular. Goldman Sachs and many others launched BRIC funds and ETFs. There are now over 200 of them according to a very expensive database.
The term took on a life of its own. Leaders of the four appear to like the grouping. Just a few months ago they and South Africa formally launched the BRICS Development Bank (link here).
About the same time BRICs was coined, traders and analysts who survived the late 1990s Asian financial crisis were referring to the ASEAN countries as PITs. The term stood for Philippines, Indonesia and Thailand. These were three of the hardest hit economies and markets. Unlike BRICs I don’t think anybody has come forward to claim responsibility for it. Calling your home market a degrading term soon after clients lost money would not likely make one popular.
Investing in the four BRIC countries when the phrase was coined until now would have generated decent returns. The four countries’ headline indexes are up an average of 302% since late 2001 for a CAGR of 10.5% (this and other return figures in this article are based on the average return of each country’s headline index, in USD, dividends not included).
In contrast, and despite the acronym’s negative connotation, one would have done considerably better by investing in the three PITs markets. An equally weighted investment in the three grew by 675% over the same time period, which means the PITs investor would have made more than double the money of the BRIC investor. Even the worst PIT outperformed the best BRIC. Thailand, the worst performing PITs country, rose by 629%, a bit more than India, the best performing BRIC country, which increased by 611% from November 2001 to November 2015.
In addition to being weary of investment fads, investors should also be skeptical of what the big banks are pushing. In July 2006 Goldman Sachs launched its BRIC fund. From launch to close, the fund’s performance was just under 20%. Over the same time period the three PITs indexes increased on average by 157%, meaning that one would have made almost eight times more money by investing in the markets that were unloved rather than the ones that the big banks were marketing.
Are PIGS Today’s PITs?
PIGS stands for Portugal, Italy, Greece, and Spain. These are some the world’s worst performing economies and equity markets since the 2008 global financial crisis. Like PITs it is not a flattering grouping and member countries have reportedly renounced the term (link here).
I suspect PIGS could be an up-to-date version of PITs. The origins of both are the same and they describe markets that are having problems and are out of favor.
Also like PITs the countries in the grouping are geographically close and have a lot in common in terms of economic integration, language, and culture. This is a stronger grouping than the BRICs. Except for the large country size, I don’t really see much that binds them like the PITs and PIGS.
Back to BRICs
Ironically now may be a good time to consider investing in BRIC equities.
Russia has some of the world’s least expensive large companies and very impressive management. Brazil is starting to look interesting with its currency down some 40% in the last two years. There are some exciting and inexpensive companies in China and at 7x PE the Hang Seng China Enterprise Index does not seem very expensive. Weren’t US equities trading at the same level in the early 1980s just before that market’s long bull run?
There’s also a good contrarian signal. Goldman Sachs recently closed the above mentioned BRIC fund. Big banks have a habit of closing operations and products just when things start turning around. HSBC closed its South East Asian equity research offices in 2001 – just before those markets went on a multi-year bull run. Goldman’s closing of its BRIC’s fund may be a similar signal (more here).
This short piece is meant to show that going against the grain and doing what is uncomfortable and unconventional many times leads to higher returns. The best place to find value is typically in ugly geographies and sectors.
Are there other places that appear to be ugly and warrant catchy phrases such as PIGS?
How about “RUKs”, for Russia, Ukraine and Kazakhstan, three ex-Soviet countries whose currencies have fallen and have some of the highest interest rates in the world. Or “PCB”, for Peru, Columbia and Brazil, three of the worst performing equity markets this year for US-dollar investors Or “JOBQES”, for Jordan, Oman, Bahrain, Qatar, Egypt and Saudi Arabia which are among the world’s least expensive equity markets likely due Middle East uncertainty. Or “GETOUt” for gold, energy, telcos, oil and utilities, five out-of-favor sectors that dominate my global value screens.
Making Ugly Fun
“Average investors are fortunate if they can avoid pitfalls, whereas superior investors look to take advantage of them”, wrote Howard Marks in his very good book, The Most Important Thing.
Psychologically it is hard to put one’s hard-earned money into unattractive and out-of-favor stocks and markets. It’s not easy or very enjoyable to try and catch a falling knife. But buying quality companies at knock-down prices is likely a good way to limit downside and hopefully generate superior long-term returns.
To help ease the way, I silently sing the chorus of a song from my youth. Perhaps it will help you also. It’s sexist, corny and elementary, but with a catchy pop-hook its also very memorable, so make sure to click on the link below. I’ve changed some lyrics in the second version to make it a little more investment specific.
If you want to be happy for the rest of your life,
Never make a pretty woman your wife,
So from my personal point of view,
Get an ugly girl to marry you.
If you want to be happy for the rest of your time,
Never make a pretty stock your life,
So from my personal point of view,
Get an ugly market to carry you.
“If You Want to Be Happy”, by Jimmy Soul (link here),
(Based on “Ugly Woman”, by Roaring Lion (link here)
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